On January 21, 2025, President Trump signed an executive order titled “Ending Illegal Discrimination And Restoring Merit-Based Opportunity”, which relates to the termination of diversity, equity and inclusion preferences and policies in government agencies, while encouraging similar measures in the private sector.
The Trump Administration’s Executive Order revokes several executive actions and orders “… all executive departments and agencies (agencies) to terminate all discriminatory and illegal preferences, mandates, policies, programs, activities, guidance, regulations, enforcement actions, consent orders, and requirements.” President Trump also called on agencies to “combat illegal private-sector DEI preferences, mandates, policies, programs, and activities.”
This Executive Order implicates the private sector, particularly those companies that have contracts with the U.S. federal government. The Executive Order states, “the head of each agency shall include in every contract or grant award: (A) A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and (B) A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.” The Executive Order also requires recommendations by the Attorney General on measures to encourage the private sector to “end illegal discrimination and preferences, including DEI.”
Form 10-K requires disclosure with respect to “any human capital measures or objectives that the company focuses on in managing the business (such as, depending on the nature of company’s business and workforce, measures or objectives that address the development, attraction and retention of personnel)” under Item 101 of Regulation S-K. Some companies have interpreted this disclosure requirement to note that they measure diversity statistics of their workforce or have certain targets or goals related to diversity.
The proxy statement requires disclosure under Item 407 of Regulation S-K regarding “whether, and if so, how the nominating committee considers diversity in identifying nominees for director. If the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented and how the nominating committee assesses the policy’s effectiveness.” Additionally, Item 401(e) of Regulation S-K requires companies to describe briefly the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Question 116.11 of the SEC’s Regulation S-K Compliance and Disclosure Interpretations states that “any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.”
While there are limited rules requiring the disclosure of DEI matters, many companies have voluntarily included extensive disclosure on DEI matters in recent years in response to interest from shareholders, proxy advisory firms and other stakeholders. Whether it is appropriate to remove DEI-related disclosure from a company’s Form 10-K or proxy statement should be based on the company’s specific facts and circumstances while taking into account the disclosure requirements discussed above.
First, a company should consider its shareholder base and consult with its internal Investor Relations team to assess whether investors value this disclosure and whether any shareholder would be concerned if the DEI disclosure was scaled back or removed. Companies should pay careful attention to the proxy voting guidelines of their shareholders and proxy advisory firms to determine the range of perspectives on DEI-related disclosures.
Second, a company should consider its exposure to the policy shift arising from the existence of its contracts with the U.S. federal government, and be sure to consider whether existing disclosure needs to be revised to adequately address any risks or uncertainties arising from the government’s new approach to such contracts pursuant to the directives in the Executive Order.
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