On December 16, 2009, the SEC enhanced its rules regarding disclosure of the backgrounds and qualifications of directors and director nominees.

As of January 2010, already we are seeing the chilling effect that enhanced director disclosure is having on the number of nominations of women directors.

Why? Because boards essentially are staring like deer caught in the headlights of oncoming proxy demands from a host of one-issue advocates. Boards are trying to figure out what they need to do next, beginning with proxy statements after February 28, 2010:

What do the new diversity disclosure requirements "mean?"
What procedural changes do companies and boards need to make?
What do Nominating/Governance Committees need to do differently?
Where do companies/boards look for diversity candidates?
What skills relate to diversity?
How does the company define "diversity?"
How much can the company legally say about "diversity?"

The specific SEC enhanced requirements now require companies to make the following additional disclosures in the proxy statements:

A. In light of the company’s business, for
    each sitting director and
    any director nominee:

  1. What are the particular experience, qualifications, attributes or skills that qualify:
    that person to serve as a director of the company?
    that person to serve as a member of any committee?

  2. What public company or registered investment company directorships did that person hold at any time during the past five (5) years?

B. In light of the company’s business, for
    each sitting director,
    any director nominee, and
    every executive officer:

  3. In what legal proceedings was the person "involved" at any time during the past ten (10) years?

C. Companies are also required to disclose (1) whether, and if so (2) how, a Nominating Committee considers diversity in identifying nominees for director. The SEC avoided defining diversity, per se, allowing companies to define it anyway they consider appropriate. Some companies could be "expansive" and include "differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity." Other companies could be "focused" and include "concepts such as race, gender and national origin."

D. Finally, if the Nominating Committee (or the board) has a policy on diversity in identifying director nominees, they would be required to disclose:

  1. how the diversity policy is implemented and
  2. how the nominating committee (or the board) assesses the effectiveness of its diversity policy.

These are not simple statements. Companies first will have to go to every sitting director and every new director nominee and document the board positions held during the past five years. They will have to identify and document any legal proceeding in which directors, nominees, and executives have been "involved" at any time in the past decade. Just defining what is meant by "involved" could be overwhelming.

Companies will need to assess (somehow, before their deadlines for printing proxy statements in the first/second quarter) the legal consequences of public statements regarding whether they do or do not have a diversity policy at the board level. Everyone has read the pabulum pages about corporate diversity on their web sites, but the new disclosure requirements state that if the company does have a board diversity policy, they must also provide affirmations that the company is implementing and measuring the effectiveness of those diversity policies. I doubt that any company has ever tracked the effectiveness of their "women’s professional networks," let alone was even aware of what goes on in most of those gatherings. It may be smarter for a corporate board to state that they choose not to define a separate policy for diversity outside of what they established internally as a corporation.

Companies will have to state what they mean by diversity -– an endeavor that risks offending any subgroups not explicitly named or included in the umbrella phraseology. Companies probably will do better to consider "expansive" rather than "focused" definitions. One-issue diversity advocates may not be happy with the new "vanilla" reporting they find.

Why the chill in the air? Because proxy advocates also will have to follow these guidelines should they desire to nominate a diversity candidate. They, too, will have to provide extensive information about background and prior directorships; ensure they know and document any and all legal proceedings in which their candidate was "involved" any time in the past 10 years. Proxy advocates will also have to match their candidate’s skills and qualifications to the new enhanced specifications that will be forthcoming from Nominating Committees.

It’s not getting easier to be a board candidate. The SEC just raised the bar for entry qualifications for each and every public company director candidate. And it is not entirely clear if the SEC accomplished its objective of increasing the intellectual variety and competency of different board candidates. Let’s keep an eye on the January 2010 number of women added to corporate boards. The SEC can’t say it wasn’t warned.

For another interesting view of the prospective impact of the SEC's disclosure requirements, see This Week in the Boardroom (January 14, 2010), sponsored by Corporate Board Member magazine. The suggestion here is that boards may want to avoid describing a specific diversity policy in order to avoid having to comment on its effectiveness.