Nasdaq Moves to Require Board Diversity

By April Hall

Nasdaq has made history by asking the SEC to approve a proposal to require companies to demonstrate board diversity in order to be listed on the exchange.

The proposal, announced Tuesday, would require most boards to add a woman and a director who self-identifies as LGBTQ+ or as a member of another underrepresented community. (Foreign and smaller reporting companies would be exempt from the underrepresented community requirement but would need to have two women.) The move would also require consistent disclosure of board makeup.

One year after the SEC approves the proposal, companies must disclose their board composition; two years after passage, there must be one diverse director on every board; in five years, boards must have two diverse directors in place. Currently, 75% of the Nasdaq-listed companies do not fulfill the requirements.

Corporate governance diversity advocates applaud the proposal.

“Nasdaq’s call for diversity could not have come at a more critical time,” says Esther Aguilera, president and CEO of the Latino Corporate Directors Association.

The CEO of WomenCorporateDirectors Foundation, Susan Keating,  notes that Institutional Shareholder Services, Goldman Sachs and BlackRock  have also instituted diversity directives and sees this trend as “part of the journey.” She adds, “To have Nasdaq step in and take some action accelerates achieving more diversity on boards.”

Nasdaq’s guidelines are similar to a series of laws passed in California.  The first required public companies incorporated in the state to have a woman director on their boards.

Keating says the legislation worked. In 2018, 30% of public company boards were composed solely of men. That percentage has shrunk to just under 3%.

The second California mandate, signed into law in September, requires at least one director from an underrepresented community. Aguilera says the first law was groundbreaking and the second was a necessary follow-up.

Of women appointed to boards after the law was passed, 70% were white, she says. While Latinos make up 30% of the state population, only 3.3% of new women directors at California companies have been Latinas.

If Nasdaq-listed companies do not meet the proposed quotas in five years’ time, they must disclose the reason why if they want to stay on the exchange. The disclosure does not let companies off the hook, Aguilera says.

“At the end of the day, what gets measured gets results,” she says. “The call for disclosure, I think, is really important. Not just for boards and management, but for investors.”

And when those disclosures come out, both Aguilera and Keating say the inability to find diverse talent will not be a valid excuse. Their organizations were founded largely to build networks that showcase successful women and Latinos in business.

The announcement Tuesday included a partnership between Nasdaq and Equilar — in particular the company’s recruitment tool, BoardEdge — that will help corporations find diverse talent.

Now that Nasdaq’s application has been submitted, the SEC will hold a period of public comment on the proposal before making a decision.

“I don’t know what the SEC will do,” Keating says, but “think of where we are today. In the pandemic, companies have had to rethink and reimagine their future. We see companies that are innovative, emerging or bankrupt. The more diverse the boards, the better chance they have of getting through this.”

A Nasdaq respresentative was not available for comment.

Published date: December 2, 2020