By: Cassidy Eckrote
What image comes to your mind when you think of a Board of Directors? Let me guess—old, white men. Unfortunately, most boards looked that way not too long ago. But thanks to legal progress and social awareness, companies are taking strides to diversify the composition of their boards.
The murder of George Floyd in 2020 sparked national outrage. Amid public protests, companies issued statements condemning racial inequity and vowed to stand in solidarity with the Black community. While many of these promises went unfulfilled, Nasdaq-listed companies had to put their money where their mouth was.
Nasdaq Board Diversity ruLE
In August 2021, the U.S. Securities and Exchange Commission (SEC) approved Nasdaq’s new listing rules about board diversity. The rules apply to most Nasdaq-listed companies and require affected companies to:
1. Have, or publicly explain why they do not have, at least two diverse directors, and
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- To meet this requirement, the company must have at least one female director and at least one director who identifies as an underrepresented minority or LGBTQ+
2. Publicly disclose the diversity statistics of its board on an annual basis
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- Companies should use Nasdaq’s standardized disclosure matrix to satisfy this requirement.
Although the above requirements apply to most Nasdaq-listed companies, exemptions exist based on the type of entity or size. Notably, companies with five or less directors are only mandated to have one diverse director. Nasdaq published a helpful FAQ to provide additional details on how to comply with the board diversity rule. Nasdaq also compiled a tool kit to assist companies in recruiting diverse candidates.
sTATE dIVERSITY ruLES
In addition to the Nasdaq rules, companies must also be cognizant of their state’s board diversity laws. For example, public companies incorporated in Washington must have a board comprised of at least 25% females. And in Maryland, all business entities (not just publicly traded companies) with revenues over $5 million must disclose board diversity in their annual reports. Legislatures continue to recognize the importance of board diversity, so companies and their attorneys must stay up-to-date on pending and forthcoming legislation.
bENEFITS OF bOARD dIVERSITY
Implementing a diverse board has countless social and economic benefits. Below are a few advantages to consider when assessing whether your business should diversify the composition of its board.
Strengthen Business Relationships & Public Perception
Now more than ever, the public is paying attention to the behind-the-scenes operations of companies. The “Me Too” and “Black Lives Matter” movements demonstrated that this generation of consumers and investors are not simply concerned about the products or services a company is selling. Consumers and investors now demand gender, racial, sexual, and ethnic representation, and refuse to support companies that fail to meet these standards. This holds true for small and large companies alike. Whether or not the board diversity requirement applies to your business, it is wise to implement a diverse board to survive in the competitive business landscape.
Improve Company Operations & Promote Effective Decision Making
The benefits of a diverse board extend far beyond a favorable public image and strengthening relationships with investors and customers. A board with varying backgrounds, including race, gender, age, ethnicity, and sexual orientation, enhances the company’s operations. If everyone in the room shares similar qualities, their thoughts and viewpoints are more likely to align. Rather than developing an innovative solution, the group is likely to stick to the status quo. This concept is often referred to as “groupthink” and leads to decisions being made without critically assessing alternative solutions. Diversity combats the negative effects of groupthink by supporting differing viewpoints and perspectives. Diverse boards are more likely to discover, and subsequently address, challenges or risks within the company.
Increase Profitability
Research shows that companies with diverse boards experience greater financial performance and pay higher dividends than homogenous boards. Remarkably, companies with diverse boards are 43% more likely to have above-average profits.
Bolster Company Culture
The benefits of having a diverse board of directors will trickle down into all facets of the business. The board is the governing body and thus sets the tone of the company’s culture. Board diversity will lead to recruiting and retaining more diverse leaders, which will translate into more diverse mid and lower-level employees. The practice of fostering an inclusive culture will increase employee satisfaction.
Takeaway
Although companies are taking steps to diversify their boards, women and minority groups continue to be underrepresented in the boardroom. Women comprise just 30% of S&P 500 board members, with ethnic/racial minorities representing only 21%. Your company can become part of the solution by making a conscious effort to recruit and hire diverse candidates.
This post has been reproduced and updated with the author’s permission. It was originally authored on March 21, 2023 and can be found here.
Sources:
Https://corpgov.law.harvard.edu/2020/07/14/maximizing-the-benefits-of-board-diversity-lessons-learned-from-activist-investing/.
Nasdaq Final Rule 5605(f); https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-5600-series
https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Matrix.pdf
https://www.jdsupra.com/legalnews/sec-approves-nasdaq-s-board-diversity-9963032/
https://corpgov.law.harvard.edu/2022/06/22/meeting-expectations-for-board-diversity/#:~:text=In%20August%202021%2C%20the%20U.S.,their%20failure%20to%20meet%20the .
https://www.accaglobal.com/us/en/student/exam-support-resources/professional-exams-study-resources/strategic-business-leader/technical-articles/diversifying-the-board.html#:~:text=1.-,More%20effective%20decision%20making,benefits%20are%20further%20elaborated%20below.
https://www.linkedin.com/pulse/20141209150556-218468992-risky-business-homogeneous-boards-a-disadvantage-in-today-s-business-world/
https://www.forbes.com/sites/karstenstrauss/2018/01/25/more-evidence-that-company-diversity-leads-to-better-profits/?sh=5b553f481bc7
https://www.praxonomy.com/blog/the-impact-of-board-diversity-on-company-performance/.
Chaz Brooks, For More Black Corporate Directors and Fewer Corporate Opinions Excusing Their Absence (forthcoming).
