How Comply-or-Explain Disclosure Regulation Can Improve Corporate Governance and Gender Equality

By Aaron A. Dhir, Sarah Kaplan and Maria Arabella Robles

In 2020, the Nasdaq stock market filed a proposal with the U.S. Securities and Exchange Commission seeking permission to adopt a board diversity-related disclosure requirement for its listed companies. In 2021, the SEC approved the proposal, making Nasdaq the most significant stock exchange to date to mandate listing rules that reflect the intention of diversifying corporate boardrooms.

Nasdaq’s support for diversity is not the first attempt to address homogeneous boards in the U.S. In 2009, the SEC adopted a rule requiring publicly traded firms to report whether they consider diversity in identifying director nominees. More recently, California mandated diversity quotas. Between these two approaches – the light touch of the SEC’s “pure disclosure” and the heavy hand of California’s quota – Nasdaq’s new listing rule reflects a principles-based philosophy that is implemented through a “comply-or-explain” formulation. It requires listed companies to state whether they adhere to a particular standard of behavior (“comply”) and, if not, they must provide reasons for their lack of compliance (“explain”).

Despite its increasing popularity, little is known about how comply-or-explain regimes work in practice. In a new article, we attempt to fill that gap and to inform policy conversations by providing lessons from the initial years of another jurisdiction’s experiment with this approach. Comply-or-explain disclosure requirements for gender diversity on corporate boards have existed in Canada since 2014. We discuss the initial findings from our on-going project to analyze the effects of Canada’s regulation. Our qualitative content analysis of the texts of Canadian corporate disclosures involves a four-year period and entails over 3,000 firm-year observations. With a focus on firms’ explanations for non-compliance, our results suggest that firms avoid the costliest actions, that they rely on obfuscation and other approaches to make it difficult for evaluators to interpret the disclosures, and that they offer thin, weak, or otherwise suboptimal explanations for failure to make progress that draw on tired tropes about meritocracy and pipeline limitations.

Full post from Columbia Law School Blue Sky Law here

Based on this research published in the Seattle University Law Review.