How the SEC Can Harness Shareholder Power to Support Racial and Gender Equity Through a DEI Index

On its very first day, the Biden-Harris Administration made racial justice and equity, and principles of nondiscrimination and equal opportunity, top priorities on its agenda.  The first of the 17 Day One Executive Orders committed to advancing racial equity and support for underserved communities across the federal government.  The EO requires a review of federal programs and regulatory processes to incorporate equity principles – while rescinding the Trump Administration’s anti-DEI Executive Order. It also includes improvements to data collection, which is a key practice of accountability. Other actions include:

• An Executive Order for an “equitable response” to the COVID-19 pandemic that recognizing the disproportionate impact on communities of color and commits resources to address it.
• An Executive Order ensuring nondiscrimination on the basis of sexual orientation and gender identity in all federal regulations and programs.
• A series of orders restoring our immigration and border practices to longstanding legal principles and norms.

The Administration could bolster this by leveraging the SEC’s  power to regulate publicly traded companies. A Diversity, Inclusion and Equity Index could harness shareholder power to ensure our publicly-traded companies make good on their their commitments to equality. A standard set of disclosures about hiring, representation, leadership and pay would empower customers and investors to make informed choices about where to spend their money. Workers could use this information to find jobs at places that offer true opportunity for all. Companies would compete to show their progress and we could all have a clearer sense of who is living up to their stated values. Competition would be the engine behind genuine, long overdue progress.

All large publicly traded companies should disclose standard information on key measures of DEI performance.

First, demonstrate Board Accountability for DEI, by sharing Board representation, whether the Board uses key best practices to foster diverse membership, and whether the Board provides effective oversight of People and Culture programs to address workplace harassment and promote inclusive culture.

Next, provide data on Leadership Diversity, including how the top 200 highest compensated individuals identify (by gender, race, ethnicity, and if available, by disability and sexual orientation).

Third, disclose Workforce Diversity and Pay Equity metrics, including companywide EEO-1 representation data and standard pay equity benchmarks similar to those already reported in the UK, and corporate performance on its own diversity metrics over time. 

Lastly, share progress on Inclusive Workplace Practices, including whether the company has developed and implemented key best practices to address workplace harassment and promote inclusive culture.

We already recommended that the SEC impose this type of requirement, but there are plenty of other ways this could come about. Indexes could make this a listing requirement. Institutional investors could use it as a factor for their portfolio decisions and federal, state and local agencies could use it as a benchmark in awarding contracts. And companies could voluntarily commit to these disclosures as a way to demonstrate leadership. 

The biggest winners will be the companies themselves. The research we shared with the SEC supports the view that diverse teams can provide key benefits, like increasing productivity and innovation. Strengthening DEI can lead to stronger and more sustainable financial performance.

Indeed, that is exactly the reason that this information is material to shareholders. The traditional view of shareholder disclosure is only aimed at information relevant to short-term shareholder gain. But the modern view includes any matters material to other stakeholder long term interests including investing in employees and fostering diversity, inclusion, dignity and respect, an approach championed by the Business Roundtable.

Despite the benefits, too many companies have not made DEI enough of a priority. Reviewing a typical corporate annual report or 10-K will show frequent touting of corporate physical assets, new product lines, mergers and acquisitions, but see very few, if any, words touting new investments in people and culture, or new efforts to develop, retain and strengthen the workforce. Most annual reports to shareholders virtually ignore the companies’ most important asset: its workforce.

We learned that to create change in a company, someone has to own and drive the change, which means the Board should have a specific subcommittee focused on oversight of People and Culture programs, with regular reporting from management on goals and measures. Through increased transparency of key measures of leadership and workforce DEI, we can use the market to move stalled progress on glass ceilings and wage gaps for people of color as well as for women. 

We want to motivate companies to invest in diversity and inclusion, people and culture, growth and retention. It’s good business that can yield an enormous competitive advantage and allow companies to make good on their commitments to equity.

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Contact us to learn more about the services we offer.

Authors: Pam Coukos and Cyrus Mehri