Atinuke Adediran at Harvard law School Corporate Governance Forum:
In my paper, Disclosing Corporate Diversity, I use machine-learning techniques to analyze 3,461 CSR/ESG reports for 1,288 public companies listed on Nasdaq Stock Market LLC (Nasdaq) and the New York Stock Exchange (NYSE) for the five-year period between 2017 and 2021. I provide empirical evidence that in the last five years, public companies have firmly integrated diversity disclosures into their CSR/ESG disclosures.
I argue that these disclosures are important not only for shareholder transparency, but that they can be used instrumentally to increase corporate diversity for other stakeholders, including employees, suppliers, customers, community members, advocacy groups of various types, activists, reformers, and the public. I note that scholars and others have underappreciated this possibility for two reasons. The first is that scholars routinely write about disclosures in the context of CSR/ESG, but not often in the context of corporate diversity, even though diversity is part of CSR/ESG. The second is about the limits of the securities laws. Like other forms of disclosures under the securities laws, diversity disclosure rules often focus on shareholder transparency rather than to address concerns about the lack of diversity in corporations for all stakeholders.
Maybe disclosures focus on shareholder transparency because that is the purpose of disclosure. The purpose of corporate disclosure rules is to inform investors, not to remake the world in Gary Gensler's image.
What Professor Adediran is advocating is known as therapeutic disclosure. In other words, she proposes using disclosure requirements not to inform shareholders, but to affect substantive corporate behavior.
Therapeutic disclosure requirements undoubtedly affect corporate behavior. Therapeutic disclosure, however, is troubling on at least two levels. First, seeking to effect substantive goals through disclosure requirements violates the Congressional intent behind the federal securities laws. When the New Deal era Congresses adopted the Securities Act and the Securities Exchange Act, there were three possible statutory approaches under consideration: (1) the fraud model, which would simply prohibit fraud in the sale of securities; (2) the disclosure model, which would allow issuers to sell very risky or even unsound securities, provided they gave buyers enough information to make an informed investment decision; and (3) the blue sky model, pursuant to which the SEC would engage in merit review of a security and its issuer. The federal securities laws adopted a mixture of the first two approaches, but explicitly rejected federal merit review. As such, the substantive behavior of corporate issuers is not within the SEC’s purview.
Second, in this case the SEC’s rules overstep the boundaries between the federal and state regulatory spheres. In Business Roundtable v. SEC, 905 F.2d 406 (D.C. 1990), the DC Circuit made clear that federal securities regulation has two principal goals. First, and foremost, it regulates the disclosures shareholders receive when they are asked to buy or sell or vote. Second, it regulates the procedures by which certain transactions such as tender offers or proxy solicitations are conducted. But the securities law's purposes do not include regulating substantive aspects of corporate governance. Questions such as the composition of the board of directors are properly the subject of state corporate law not federal securities law.
