Even in the private equity sector there has been a demand for women by investors as the performance of more diverse companies has been steadily increasing relative to those with no women on their boards. Similarly, having all-male all-white boards is a common sign of bias within the appointment process signifying a lack of corporate responsibility.
Studies have long confirmed the clear business case for board diversity–heterogeneity allows boards to better identify and manage risks due to the range of skill sets and experiences that diversity brings to boardroom discussions. Furthermore, a diverse board leads to a better understanding of customers and provides better goods and services for the customers.
Goldman Sachs CEO David Solomon has told CNBC that the investment bank would not take companies public unless they had at least one “diverse” board member.
“Starting on July 1 in the U.S. and Europe, we’re not going to take a company public unless there’s at least one diverse board candidate, with a focus on women.”
As the economic and social significance of board diversity becomes more widely recognized, some U.S. state legislatures have taken initiatives to address the rising concerns for demographic variety in the corporate boardroom. Listed below is the run-down of each state that has introduced and/or passed bills regarding diversity.
Laws
California (2018) Senate Bill 826
By the end of 2019, every publicly held domestic or foreign corporation whose principal executive office is in California is required to have a minimum of 1 female director on its board. Further, by the end of 2021, each one with 6+ board seats must have at least 3 women, those with 5 seats must have at least 2 women, and those with 4 or fewer seats must have at least 1 woman.
Illinois (2019) HB3394
Though initially introduced with specific representation requirements for every corporation to have a minimum of 1 female and 1 African-American director on its board, this bill now only requires that all publicly held domestic or foreign corporations whose principal executive offices are in Illinois must annually file public disclosures regarding the racial, ethnic, and gender demographics of their board.
New York (2019) S.4728
This bill is amending the state’s current Business Corporation Law to conduct a “women on corporate boards study” aimed at collecting data about board diversity in companies in the state. Domestic and foreign corporations authorized to conduct business within New York are required to report the number of directors and the number of women on their board on their Biennial Statement Filings. By February 1st 2022 the Department of State will publish these findings and will repeat the process every 4 years.
Maryland (2019) HB1116 SB0911
This bill outlines annual data reporting requirements for corporate boards that will last through September 30th 2029. Effective October 1st 2019 tax-exempt domestic nonstock corporations with operating budgets exceeding $5M and domestic stock corporations with total sales exceeding $5M will have to include number of women and total members on their annual reports to the State Department of Assessments and Taxation to be reported online on January 1st2020. Private companies where at least 75% of shareholders are family members are exempt from reporting.
Washington (2020) RCW 23B.08.120
Requested by the Washington State Bar Association to amend the Washington Business Corporation Act, the 23B RCW requires corporations that are organized under Washington law and that file public reports with the Securities and Exchange Commission (SEC) to satisfy gender diversity requirements with respect to their boards of directors, among other revisions. By Jan. 1, 2020, the law requires a public company to maintain a board of directors that is composed of individuals at least 25% of which self-identify as women or to alternatively provide its shareholders a discussion and analysis concerning its approach to board diversity in advance of its annual meeting.
Nasdaq (2021)
When the SEC approved the Board Diversity rule in August 2021, it became part of Nasdaq’s corporate governance requirements as Rules 5605(f) and 5606. Subject to certain exceptions, the Rule requires each Nasdaq-listed company to 1) publicly disclose diversity statistics regarding its board of directors, and 2) have, or explain why it does not have, at least two diverse directors, including at least one who self-identifies as female and one individual who self-identifies as an underrepresented minority or LGBTQ+.
Past Resolutions
Past resolutions are written motions that cannot progress into a law, but instead function as signifiers of the legislature’s position on certain issues and encouragements for certain actions to be made.
Massachusetts (2015) Resolution S.1007
By the end of 2018, all publicly held domestic or foreign corporations whose principal executive offices are in Massachusetts with 9+ members should have a minimum of 3 female directors. Boards with fewer than 9 members should have at least 2 female directors.
In addition, the legislature urges these corporations to disclose the gender diversity on their boards and implement policies and practices designed to increase the number of female directors.
Illinois (2015) HR0439
By the end of 2018, all publicly held domestic or foreign corporations whose principal executive offices are in Illinois with 9+ members should have at least 3 female directors. Boards with 8 to 5 members should have a minimum of 2 women and those with 4 or less members should have at least 1 woman.
Pennsylvania (2017) HR273
By the end of 2020, all publicly held domestic or foreign corporations whose principal executive offices are in Pennsylvania should have boards comprising or at least 30% women.
Colorado (2017) House Joint Resolution 17-1017
By the end of 2020, all publicly held domestic or foreign corporations whose principal executive offices are in Colorado with 9+ members should have at least 3 female directors. Boards with 8 to 5 members should have at least 2 women and those with 4 or less members should have at least 1 woman.
Alongside, growing demand for greater board diversity in the corporate sector, NASDAQ proposed a rule requiring its thousands of companies to have at least two diverse directors on their boards.
In August 2021, the U.S. Securities and Exchange Commission (SEC) approved a new board diversity rule put in place by the NASDAQ exchange. This rule, requires all boards of companies in the exchange to have one director who identifies as female and one director who is a member of an underrepresented group, either as a racial or ethnic minority or as a member of the LGBTQ+, by the end of the year. If a company does not adhere to this rule, it must explain why it does not. Additionally, NASDAQ companies must now disclose their board diversity information every year. Companies that do not comply will have their shares delisted from the exchange. When this rule was originally proposed, people at NASDAQ believed that at least 85% of NASDAQ-listed companies were already in compliance.
Not long after the initial approval of NASDAQ’s rule, two groups, known as the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, sued the SEC, asking the 5th U.S. Circuit Court of Appeals to block the rule. The groups argued that the rule was in violation of the U.S. Constitution because it inhibited free speech and acted as a discriminatory law.
The attack on NASDAQ’s board diversity proposal relied on the idea that restrictions on the U.S. government are able to be applied to NASDAQ. This would mean that the SEC could penalize NASDAQ if it does not enforce the rule’s requirements. However, the SEC and NASDAQ have both stated that NASDAQ is a private entity and cannot be restricted in the same way that the government is. They also maintain that the diversity proposal is a disclosure requirement to provide information on board diversity, rather than a diversity quota for companies.
In October 2023, the U.S. appeals court upheld NASDAQ’s board diversity rule, rejecting the attempted block on the rule by the aforementioned groups. The court states that it was within the authority of the SEC to approve NASDAQ’s rule. Disclosing information about board diversity allows investors to make informed decisions and the SEC should be able to consider this.
Adena Friedman, the CEO of NASDAQ, stated that the board diversity proposal does not mean that NASDAQ seeks to create an optimal board composition, but rather that the exchange believes every board should have the minimum level of diversity that the new rule outlines.
When forming boards of directors, diversity, equity and inclusion has always been essential and necessary. Given the latest guidelines and growing expectations from shareholders, employees, and stakeholders, enhancing board diversity is of major importance. Diverse boards are associated with better decision-making skills, which leads to better outcomes and bigger profits.
Recently, board diversity has been making headlines, as the U.S. Court of Appeals for the Fifth Circuit just upheld Nasdaq’s board diversity rule. This rule was first approved by the SEC in August 2021, but it was challenged on the grounds of being unconstitutional, discriminatory and an attack on free speech. Nasdaq’s board diversity rule states that Nasdaq companies must disclose their board diversity statistics or disclose why they do not. These diversity statistics include having at least one woman director and at least one underrepresented minority or LGBTQ+ director.
This year, according to the 2023 S&P 500 New Director and Diversity Snapshot, the percentage of diverse new directors has slightly declined. In 2023, diverse individuals filled 67% of new director appointments, as opposed to 72% in 2022. Nonetheless, new director appointments are still significantly more diverse than 5-10 years ago. The percentage of diverse first-time directors has also decreased to 75% in 2023 from 82% in 2022. Additionally, 46% of new director appointments are women, meaning there is a 92% increase in new women directors in the past 10 years and for first-time director appointments, 56% of them are women. The percentage of self-identifying minorities filling new director appointments is down from the past two years. In 2023, 15% of new directors are Black or African American, 11% are Asian, and 9% are Hispanic or Latinx. Overall, diverse boards continue to thrive, despite some percentage decreases, compared to past years. Moreover, boards seem to be growing more transparent about their diversity composition statistics. Still, when it comes to board diversity and the advantages it brings, there is always room for improvement.
It’s important to note that diversity is more than just numbers. There are many types of diversity that coexist in the workplace. Internal diversity includes race, ethnicity, gender and sexual orientation. These are what often come to mind when one thinks of the term, “diversity.” But, we cannot overlook external diversity, which includes disability status, socioeconomic and educational background, religious beliefs, language, and nationality.
So, how do we build diverse boards? It’s clear that integrating diverse viewpoints in the boardroom ensures effective oversight of strategy and risk. To achieve this, boards must commit to fostering a culture of inclusivity, creating an encouraging boardroom where directors are able to speak freely.
Additionally, self-evaluation is necessary to understand the current makeup of a board, identify gaps in diversity and establish goals for inclusivity. A board’s annual assessment should be used as an opportunity to think about strategic direction, assess composition, and allow the board to evolve alongside its strategic needs. In order to properly take advantage of this opportunity, board leaders who are effective in and committed to facilitating board diversity, are necessary.
In addition to the importance of an annual assessment, a re-evaluation of recruitment strategies is often beneficial to approaching board diversity. It’s crucial that boards examine their current approach to searching for new directors and their current criteria for filling vacancies, in doing so, recognize the disadvantages of using traditional networking to build boards. It is most valuable to adopt a research-based approach to identify, assess, and select candidates for board positions, leveraging research tools to ensure a diverse, qualified selection of candidates. A longer recruiting period would also expand the range of candidates, allow time to adjust requirements, due to external factors, discourage rushed decision-making and further encourage the search for diverse individuals. Likewise, if the board is able to open the conversation and work directly with investors in recruiting, it is able to be consistent to corporate values, strengthen investor relations and respond to market demands and societal expectations. This avoids closed-off communication within the board and promotes accountability and commitment to diversity.
Ensuring board diversity is no easy feat. After diverse individuals have been appointed, the work isn’t over. It’s important to remember that, rather than just trying to fill in the gaps with more diverse individuals, a board should view achieving diversity goals as an ongoing conversation and commitment. Diverse boards must be adaptable, strategic, engaged and embrace change in order to reach their maximum potential. The potential to reach bigger and better company outcomes makes board diversity an extreme priority. Boards striving to work most efficiently must prioritize diversity in skills, experiences, and perspectives. By extending their influence to the company vision, leadership pipeline and inclusivity programs and by holding themselves accountable for providing accurate diversity statistics, boards are able to actively work towards and constantly improve diversity and inclusion within their organizations.
Jim Johnston
Managing Director
Executive Advisory, Inc.
NYSE Diversity for Listed Companies
On August 6th, 2021, The U.S. Securities and Exchange Commission approved the rule changes proposed by the Nasdaq Stock Market regarding board diversity. The rule stipulates that the boards of Nasdaq-listed companies must have one director who identifies as female and another who is a member of an underrepresented minority group or is LGBTQ+, reports BBC News. Otherwise, companies must provide transparency on their board selection process.
In contrast, the New York Stock Exchange leads a different approach to increase diversity. Rather than setting a direct requirement for diversity, NYSE adopted a market-based approach, focusing on the power of networks between diverse individuals. The NYSE launched its Board Advisory Council (BAC) in 2019 to address the need for diverse, inclusive leadership on public and private company boards. The 19-member council is composed of distinctive CEOs who leverage their extensive personal networks to identify talented and diverse candidates to recommend to NYSE-listed companies. This method is supported by a publication by Vell Executive Search, Inc. on gender diversity within boards of technology companies, in which researchers found that 92% of those board seats are filled through personal networks. In conjunction, Vell also found that women have less access to those networks. As such, expanding personal networks to match talented and diverse candidates with boards looking for new board directors will create deliberate progress. BAC networking events have resulted in over 500 meetings between 64 company leaders and 144 candidates to date. In addition to educational and networking opportunities for the board candidates, the council hosts a series of live events designed to connect diverse candidates to NYSE-listed companies seeking to diversify their boards.
Despite being hesitant to require board diversity like Nasdaq has, the New York Stock Exchange still considers board diversity a critical issue. In addition to the BAC, the NYSE intends to create an online database, reports Executive Vice Chairman Betty Liu in a Barron’s commentary article on February 5th, 2020. The database would be a directory consisting of all diverse candidates nominated by the NYSE Board Advisory Council and will be available to all NYSE-listed companies. The directory will carry the influence of the CEOs that nominated them as well as each candidates’ qualifications.
Overall, regardless of differences in method, both stock exchanges agree that diversity improves board performance and listed companies on either are looking to improve the diversity of their boards. Ultimately, for women and members of underrepresented minority groups, now more than ever is the best time to search for board positions.
SEC Diversity Requirements
For the past several years, increasing board diversity has been a pressing item for public companies—and not without good reason.
In 2018, a Boston Consulting Group study found that companies, with diverse leadership, had higher revenues from new products and services (an indicator of successful innovation) as well as higher EBIT margins. That same year, McKinsey & Co. found that “diverse companies are 33% more likely to have greater financial returns than their less-diverse industry peers.”
Logically, one would expect a homogenous entity composed of individuals, with almost indistinguishable backgrounds, to be less than perfect at governance, a role which benefits from wider perspectives and the occasional respectful disagreement. In addition, public opinion favors boards that better reflect the American public.
Despite these actualities, progress has been slow. The New York Times finds that the share of board seats, filled with directors who were Hispanic, Black, Asian-American, Pacific Islander or Native American, only increased by 2.5% in the last five years. The ending percentage, 12.5% in 2020, heavily under-represents the 40% of the U.S. population who are a part of those minorities. Similarly, women make up only 21% of board directors.
Certain institutional investors have decided to take the diversity matter into their own hands, reports Kellogg Insight. Goldman Sachs, for example, announced in 2020 that they would refuse to take a company public if their board did not contain at least one diverse board member. The following year, Goldman Sachs increased that figure to two.
States have also acted. In 2018, California passed a bill requiring at least one female director on the board of every publicly traded company, whose chief executive resided in the state. Prior to this mandate, only 293 of 625 applicable companies fulfilled the requirement.
A week ago, the SEC approved the Nasdaq proposal for board diversity requirements. The rule stipulates that boards must have one person who identifies as female and another who is a member of an underrepresented minority group or is LGBTQ+, reports BBC News. The rule isn’t binding companies who don’t meet the objective can explain why they were not able to do so, says Forbes. Despite this leniency, the proposal was a big step. Even if companies decide not to meet diversity quotas, there will still be increased transparency into the board selection process and the company’s rationale behind the lack of diversity in their boardroom. This is especially important because the board positions in question are highly influential due to the size and finances of public companies.
In a survey, Nasdaq found that 75% of its over 3,000 listed companies would not meet the objectives. They decided to pass the diversity regulations anyway. With an average board size of nine members, requiring two diversity members means that upwards of 4,500 board seats will need to be filled with diverse members within the next year.
What does this mean for women and members of underrepresented minorities? It means that now, more than ever, is the best time to search for board positions.
