Improving Diversity Disclosures

Omari Simmons

Atinuke Adediran’s insightful article, Disclosing Corporate Diversity, advances the contemporary discussion by examining the legacy and limitations of extant and proposed corporate diversity disclosure approaches. She proposes an alternative diversity disclosure regime based on more comprehensive statistical and forward-looking elements to inspire tangible changes.¹

Over 50 years ago, Ralph Nader and a group of Washington lawyers challenged General Motors Company (GM) over such critical concerns as product safety, environmental impact, and diversity.² The 1970 Project on Corporate Responsibility sought shareholder approval of several resolutions. One would have expanded the board to include three directors nominated by constituent groups of employees and consumers. Another would have required GM to publish information on its auto safety, pollution control, and minority hiring policies.³

This campaign followed the social upheaval of the late 1960s: the assassinations of Martin Luther King Jr. and Robert Kennedy, riots and fires that devastated US urban centers, recession and deep skepticism about leadership generated by the Viet Nam War. In response to this confluence of events and pressures, GM Chair and CEO James Roche actively recruited Reverend Leon H. Sullivan to join the GM board of directors, and in 1971, Sullivan became the first Black person to serve on the board of a major US public company. He would serve on GM’s board for over twenty years.

Sullivan was a synergistic choice—a human capital expert with a multifaceted skill set—but it surprised many observers; as a civil rights activist, he had successfully organized boycotts to compel companies to change their discriminatory hiring practices. He soon moved beyond the antagonism of boycotts, collaborating with the private sector to develop a path-breaking vocational training program, Opportunities Industrial Centers, which created a pipeline for minorities, immigrants, Native Americans, and the poor.⁴ Envisioning a more inclusive free enterprise system, Sullivan worked to convince the federal government and large companies like GM to invest in people on the margins of society and to link corporate America’s success and growth to its ability to harness human potential, especially in inner cities. Since the 1970s, we have witnessed some progress on the broader front, yet diversity remains one of corporate America’s most complex and pressing deficiencies.

The Paper’s Central Findings and Claims

Historically, CSR/ESG (corporate social responsibility/environmental, social, and governance) disclosures mostly focused on companies’ environmental, community-based and philanthropic efforts with limited engagement with diversity. (P. 5.)⁵ Adediran shows that for the past five years, public companies have incorporated more diversity disclosures into their CSR/ESG reports. (Pp. 6, 22-30.)⁶

The paper makes three central claims. First, disclosure can function as an instrument to prompt diversification of corporate boardrooms and workplaces. Second, diversity disclosures are important to a wider range of stakeholders than shareholders. Third, legislative reform is necessary for diversity disclosure effectiveness. (Pp. 3-4.) This review focuses largely on the third claim, in support of which Adediran examines the limitations of extant and proposed approaches to diversity disclosure and proposes potential enhancements.

Limitations of Extant Approaches
SEC/Nasdaq Diversity Disclosure Mandate. Adediran cites three shortcomings of the recent Nasdaq SEC-approved diversity disclosure mandate. First, the rule’s comply-or-explain approach requires companies merely to explain why they lack diversity and may not result in an increase. Second, the disclosures are limited to board diversity. The rule does not require diversity disclosures related to employees, executives, or managers, which are equally, if not more important according to academic research. Third, the scope of the rule’s application is too narrow, applying only to public companies listed on Nasdaq’s stock exchange, and excluding large private companies with high valuations and NYSE companies. Nonetheless, despite its tentative footprint, the SEC/Nasdaq rule has faced significant court challenges.

Proposed Legislation: ESG Simplification Act. The ESG Simplification Act, introduced in the US House of Representatives in February 2021, mandates a range of CSR/ESG disclosures related to climate-related risk, executive compensation, and diversity.⁷ This proposed legislation would standardize what many companies are already disclosing voluntarily. Its scope extends beyond board composition to a broader proportion of the workforce. However, diversity-related disclosures under the Act are quite limited; that is, “companies need only disclose whether they have adopted any policy, plan, or strategy to promote racial, ethnic, and gender diversity among board members and executive officers.” (P. 43.) Under the Act, the SEC would provide oversight and enforcement.

Author’s Proposal for Involuntary Comprehensive Disclosures
After showing the deficiencies of extant and proposed diversity disclosure regimes, the article proposes an aspirational disclosure regime that includes the following components:

• descriptive statistical disclosures of the self-identified race, gender, LGBTQ+, and disability status of board directors as well as all top executives and employees;
• forward-looking provisions that require companies to disclose: (i) internal diversity assessments, hiring of diversity managers, and their specific roles; (ii) policies and programs to increase employee diversity, such as recruitment, advancement, and retention programs; and (iii) steps taken to increase board diversity;
• significant sanctions for noncompliance;
• expanding the scope of application to all public companies and private companies with large valuations; and
• oversight and enforcement by a non-SEC regulator (e.g., EEOC, Dept. of Labor), given the SEC’s limited investor protection mandate.

Adediran acknowledges that these proposals are aspirational and “[w]ithout a major shift in politics, it is unlikely that Congress would mandate diversity disclosures.” (P. 48.)

The Paper’s Implications for Scholarly Debate and Future Research

Diversity Disclosure Blind Spots
Too many legal scholars and policymakers have focused on board diversity and neglected other levels of management and employees. The importance of this blind spot is buttressed by social science research concerning effective mechanisms for advancing diversity. Researchers, such as Frank Dobbin and Alexandra Kalev, illustrate the importance of focusing on middle management, rather than simply the board, in advancing diversity.⁸ Adopting this wider lens is pragmatic because employee movement through an organization, entry into middle management, and ultimate ascent to the C-Suite is the traditional path and progression toward becoming a director of a public company. Hence, a laser focus on corporate boards to the exclusion of other employees and specific firm practices that affect them may prove ineffective in achieving sustained diversity on a broader scale.

Disclosure Expectations Gap
Disclosure is often not enough. By nature, it is a moderate form of regulation, relying on market actors to influence corporate behavior. Despite receiving considerable pushback from some corporate observers, disclosure burdens, such as those in a comply-or-explain format, often pale in comparison to prescriptive regulation. Adediran’s claim that diversity disclosures are important to a wide range of stakeholders beyond shareholders is correct. However, relying on a range of fragmented stakeholders to advance diversity and other issues implies coordination, strategy, and leadership. Leon Sullivan’s creation of the Sullivan Principles, a voluntary code of ethics applied to corporate operations to remediate racial inequity, particularly labor practices in Apartheid South Africa, illustrates this dilemma. The Principles’ key features included: (i) periodic reporting; that is, disclosure; (ii) third-party auditing by a public accounting firm; and (iii) stakeholder engagement; that is, informing stakeholders of the company’s annual rating and allowing them to respond.⁹ Stakeholders equipped with mandatory or voluntary disclosures must then determine whether to take extreme action, such as investor exit, or an incremental approach more focused on maintaining voice under the threat of exerting economic clout.

Voluntary regimes are often critiqued as an accommodation to business interests because they lack enforcement beyond largely looking-glass and reputational effects, but they also recognize the potential for legislative failure, political gridlock, scope and scale challenges, as well as the need for business buy-in and filling regulatory gaps. Attainable voluntary codes or disclosure regimes sometimes foreshadow future legislation. However, legislatively mandated disclosures may provide permanence, uniformity, and additional incentives to comply, among other things. Professor Lisa Fairfax explains that voluntary and mandatory disclosures are not necessarily at odds, but rather “inextricably” linked to a dynamic process and part of an interconnected feedback loop.¹⁰

Corporations and their leadership, whether passively or actively, have contributed to marginalization and exclusion for a significant part of US history. They are both part of the problem and the solution.¹¹ As the legacy of Leon Sullivan illustrates, raising the economic ante for companies with disclosure and other mechanisms assists in broader systemic and firm-level changes.

1. Here, the author uses the term “forward-looking” to describe “language that seeks to improve diversity or other CSR/ESG issues over time, usually on a year-by-year basis.” (P.43 n.204.)
2. See, e.g., Herbert Mitgang, G.M. Challenged on ‘Responsibility’, N.Y. Times (1970).
3. Id.
4. Leon H. Sullivan, From Protest to Progress: The Lesson of the Opportunities Industrialization Centers, 4 Yale L. & Pol’y Rev. 364-374 (1986).
5. CSR/ESG disclosures are often non-financial metrics captured in internal and external facing documents.
6. The article uses Natural Language Processing (NLP) methodology to show the uptick in diversity-related disclosures.
7. H.R. 1187.
8. Frank Dobbin and Alexandra Kalev, Getting To Diversity: What Works and What Doesn’t (2022).
9. Leon H. Sullivan, Moving Mountains: The Principles and Purposes of Leon Sullivan (2000).
10. Fairfax, Lisa, Dynamic Disclosure: An Exposé on the Mythical Divide Between Voluntary and Mandatory ESG Disclosure (2022), available at SSRN.
11. Tom C.W. Lin, Capitalist and Activists (2022).