Chair Gensler spoke with Lloyd M. Johnson Jr., publisher of The Black In House Counsel Annual Report, to discuss Diversity, Equity and Inclusion (DEI) and its importance to the SEC’s workforce and agenda.
Thank you for taking the time to share some of your thoughts with our readers, Chair Gensler. Firstly, why is DEI a priority during your tenure as chair? And why is this so important to you personally?
If I can start with the SEC’s mission, it’s about investor protection; it’s about capital formation, and that which is in the middle – fair, orderly and efficient markets. To protect investors and to have fair markets, it’s also about inclusive markets. It’s important to ensure that across the 330 million plus people in America, they have access to the capital markets and that the information being shared is full and fair. Also, that this information is shared up and down the income and wealth spectrum and across our wonderfully diverse nation.
It’s also something we need to think about at the SEC internally. At the agency, we’ve got progress to make to get the benefits of people of all backgrounds – so they can bring their authentic selves to work, they can get promotions, they can get opportunities to be in senior leadership, and so that they can contribute to our mission, regardless of race or color, creed, ethnic background, gender or sexual orientation.
"We want staff who can bring their whole self to work and can contribute in all ways to the meaningful work of the agency."
Over the years, I have had an opportunity to work with some of the Directors of Enforcement, such as Linda Thomsen, and others. I think now may be the first time that both the Director of Enforcement and the Director of Corporation Finance are people of color. Is that accurate?
I’ll leave it to others to look at the history, but we've got terrific, talented people running various units. You mentioned our remarkable Director of Enforcement, Gurbir Grewal, who joined us from being the Attorney General of New Jersey. Renee Jones, our Director of Corporation Finance, joined us from a law professorship in Boston and is an academic and public policy minded. They're both terrific individuals that we’re proud to call colleagues.
Some say that the SEC’s focus on ESG [environmental, social and governance] and DEI is stepping outside of its jurisdictional authority. Is this just politicking? Or do you feel the role of the SEC – and the remit of its chair – is changing, and needs to change because of how priorities in society in business are changing, to focus on more than just financial profit as the main metric of success?
Our securities laws are based on policy decisions which were laid out in earlier times about how investors get to decide whether to buy or sell or vote a proxy. But there's a requirement for full and fair disclosure from issuers around basic concepts of anti-fraud and anti-manipulation and so on. Those are our core tenets embedded in the securities laws.
What does change over time is what information investors look at and, over the decades, this has shifted. We added disclosures around management discussion and analysis some 40 to 50 years ago; we added disclosures around the environment in the 1970s; we added disclosures around executive compensation, and so forth. What does that mean for the 2020s? There are tens of trillions of dollars of assets under management and investors are looking to companies to disclose information about climate risks and about cyber risk. Building upon work from predecessors in this job, we’re also looking at workforce or what one might call ‘human capital’ disclosures, building upon work that Chair Clayton had done during his tenure.
What remains consistent are these basic tenets of full and fair disclosure, anti-fraud and anti-manipulation. What does shift over time comes from the investors and the issuers. Now there is significant investor demand for information on climate risk disclosures.
Would it be an oversimplification to say that, in essence, what is more relevant in the 2020s should be part of what investors are able to have access to?
Right, so at the SEC, I like to say we’re technology neutral, we’re not public policy neutral; and the public policies about full and fair disclosures mean that investors get to decide on these key critical investment decisions. We have hundreds, if not thousands, of companies that are currently making some form of climate risk disclosures. At the SEC, we can play a role to help bring consistency, comparability for making decisions, and so doing that tends to bring greater efficiency to the capital markets. That's good for issuers as well as investors. When you’ve got so many companies making these types of disclosures, but their investors don’t know enough yet to evaluate properly – any comparability and consistency we can bring makes that information more decision useful.
One general counsel compared some of what their company is being asked to do with not knowing whether they’re playing soccer, or rugby or baseball: they’d like to have more clarity around what the rules are.
I haven’t heard that analogy but, using another sport-related analogy, let’s think of the Olympics. These have been around since 1896 in modern times – of course, you can go back to the Greek games in antiquity. But what you find is that every four years, there may be some sports added and some sports dropped. Similarly, for disclosure, for the 2020s, investors are really looking at climate risk disclosures, human capital and cyber risk disclosures, in a way they have not during earlier decades, and these are now really a part of their investment decision regime. Thank you for the sports analogy, but the Olympics is a more useful one in trying to bring some consistency and comparability to these potential new disclosures that are already happening.
I love the Olympics metaphor! How much room is there for regulators and companies to work collaboratively on defining standards and compliance to these around ESG issues?
The SEC has benefited greatly throughout its existence by looking at what companies are doing, and reviewing their disclosures around these areas, as they currently exist. We are also informed by similar policy discussions and debates globally. On climate risk, there are multiple frameworks – one of them called the Task Force on Climate-related Financial Disclosures (TCFD) – and we at the SEC are looking to be informed as to what companies are currently doing as well as what other jurisdictions are doing in this area.
The international collaboration that’s going on, particularly in climate risk, is very significant. We have similar discussions around cyber risk disclosures, which may not have been the center of your question. All these discussions are very helpful in our key aim, which is trying to help issuers as well as investors to have comparability and consistency. So, on the issuer side, they say, “This is what might happen here in the U.S., and this is what may happen here.” There might be some differences, but there’s a rationale and an understanding as to those differences.
There are hundreds or even thousands of ESG raters, rankers and governmental standard setters. Recently, some enhanced coordination among some of them has given hope to those that believe that ESG integration is essential for real change. But others say that there cannot really be meaningful integration because different countries, regulatory regimes, and market practices vary too much. How much hope is there for ESG disclosure integration?
I take the nature of your questions about consistency across various jurisdictions. While we have different legislative authorities and different mandates as securities regulators around the globe, there has been a significant set of discussions that predates my being in this job. These discussions look at what qualitative and quantitative disclosures are being used and how these are relevant and helpful to investors in the climate disclosure area. Each of the major jurisdictions is currently embarked on a project of disclosure and there’s a lot of talking with each other.
The SEC still must, within our scope, work within our own chalk lines of authority and put something out. This will be subject to commission vote; to notice and comment; to get public feedback and then build what we will do here. But I would anticipate that many jurisdictions will be discussing and debating very similar issues around the qualitative and quantitative disclosures that have been discussed and outlined and the TCFD framework.
How much will the SEC be moving away from principles-based voluntary disclosure on DEI metrics to mandatory disclosure? Might this focus only on executive ranks or be extended to a whole company?
I don't want to get ahead of the work and recommendations coming from the staff and my fellow commissioners. If I can take it up a level and say that whether it's climate risk, human capital risk or cyber risk, the markets benefit from consistency and comparability that investors can then use to make decisions. That will tend towards having some potentially detailed disclosures. Going back to my Olympics analogy, people know if it’s a 100-meter dash, it’s not that some are running 110 meters and some are running 90 meters. There is a benefit to some standardization, to get to consistency, comparability and decision usefulness.
And I’m sure there are some general counsel and others inside companies that feel that they're running the marathon with 10 pounds on their back! Going forward, will human capital be reported in the same way as financial information? More specifically, if you make a false statement or mislead the market about your DEI numbers, will there be repercussions?
I can’t prejudge what course staff might recommend to us nor what a multi-member commission might vote out for proposal. But I would encourage your readers, if you're reading this interview, and we have already put a proposal out, to send us your feedback. We benefit from everybody’s feedback, wherever we come out on the issues just raised. We benefit from feedback and a robust comment file which covers what you are currently doing at your companies, and what the opportunities and challenges are with investors.
We have discussed the greater focus on reporting on DEI from companies, but what is the SEC doing to increase diversity through its own leadership ranks?
If I can zoom out a bit from disclosures from issuers, back to our overall mission for fair, orderly and efficient markets and to have investor protection: one of the things we are taking a very close look at now is the rapid change in technology around digital engagement practices.
In the financial sector, digital platforms are targeting us one by one; they are differentially marketing to each of us, based upon so much data about all of us, data which comes from our internet usage. We get differentially marketed, differentially priced based upon the algorithms and what underlying artificial intelligence and machine learning takes from that data.
Now what does that mean? That means that a robot-advisor might steer some people into products that are higher margin for the platform because the machine learning knows these people might be responsive to certain behavioral prompts based on their data. For example, a brokerage app could steer certain individuals to options for trading a riskier product that could deliver higher revenues to the platform. We’re looking at all this for multiple reasons; one, of course, is investor protection, but second is also bias. The reason is, if you’re basing your algorithms on today’s society, which already has inherent inequities and biases in its data, then that can be inadvertently transferred into how you market to people, in how you promote your product or price your product differentially. This is a very real public policy debate, not just for a securities regulator like the SEC, but also for other parts of our financial regulatory environment, and more broadly in society.
That focus on the way that inherent biases shape our society means that, internally at the SEC, we are looking at a lot of ways to ensure that each of us at the SEC can bring our authentic selves to work and contribute fully. This must also be about progression; we must ensure that if people want to raise their hand and get more challenging projects and move up the promotion curve, that they have those opportunities. We have set up several initiatives, some that predate me. One is called the Uncovering Task Force; it brings people together and asks what suggestions our employees have to ensure that we can enhance everybody's ability to contribute and bring their authentic self to work. We’ve got several initiatives like that and have three or four programs of training. In the hiring that I’ve been involved in, we are really focused on ensuring that this great agency, the SEC, reflects the wealth of diversity that we have in our nation.
I’m pleased to hear that. Our readers are potentially a beneficiary of that. We are going to be working on several programs to help tell Black attorneys, both partners in firms as well as people in legal departments, that the SEC is a great place to work.
Finally, a lot of inequality has a strong economic component. That is true for Black people and other minority groups in the U.S. How much will the focus on ESG and DEI reporting from the SEC extend to look at how companies treat their workers generally?
I hope your readers understand that I can’t, once again, prejudice a multi-commission project where staff are still feeding ideas up to us.
But I do see our mission as a three-part mission. Each of these disclosure initiatives or the work we're doing on digital engagement practices, or what we're doing on regulation best interest, are predicated to ensure that all parts of our society get that fairness, that inclusion across the basic protections of disclosure, across the securities markets. This is especially true in the context of new data analytics that can either inadvertently or purposely target certain people for some economic advantage, which may disadvantage diverse populations through those data analytics. We’re still in the middle of this project. We put out a request for comment last fall and got a lot of good input. We’re now sorting through that input, but that input can make a difference to how we approach inclusion and access throughout our society.
Thank you so much for taking the time today. I look forward to working with you and the SEC on future projects.
Modified: June 27, 2022