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Sarah Lozanova headshot

Diversity Matters, As Nasdaq Tells Companies

By Sarah Lozanova

As of early August, companies listing on Nasdaq are now subject to a new rule that requires public disclosure of the diversity within their boards. In addition, such companies need to have, or explain, why they do not include at least two “diverse” members. Nasdaq defines this as at least one female director and one that is an underrepresented minority or LGBTQ+. In addition, smaller companies, foreign issuers and companies with five or fewer directors have greater flexibility in meeting the diversity objectives and can have two women instead.

The SEC approved the new rule on August 6, and to be clear, Nasdaq’s rule does not actually mandate having a diverse board. Instead, it merely requires companies to disclose diversity indicators annually or else provide an explanation. By contrast, California’s legislature passed a law in 2018 (SB 826) requiring boards of publicly traded companies to have at least one female member or face a fee of $100,000.

Proponents of the new rule believe it will force boards to become more diverse and inclusive. The idea is that transparency bolsters accountability. Currently, more than 3,300 companies are listed on Nasdaq, and 12 percent don’t have any women on their boards. Likewise, more than a third lack a director who is a person of color. This reality persists despite the amount of research that makes an economic case that companies with diverse boards often perform better – and that was especially true during the pandemic.

“The data shows clear evidence that there’s a small-cap company gap when it comes to diversity on U.S. boards,” Marija Kramer, head of ISS Corporate Solutions, said in an interview. “Listed companies, if they aren’t already, should think about how they’re going to recruit for more diverse directors.”

The lack of diversity is not limited to the Nasdaq alone. For example, of the Russell 3000 corporate board members, only 4.1 percent were Black directors and 21 percent were women in 2019. Yet, 13.4 percent of the U.S. population is Black. Likewise, Latino and Asian Americans were not proportionately represented on boards.

Increasingly, pressure has been mounting to eliminate systemic racism and promote corporate diversity. In June 2020, Reddit’s co-founder and executive chairman of the board, Alexis Ohanian, stepped down and said, “I’ve resigned as a member of the Reddit board, [and] I have urged them to fill my seat with a Black candidate.” His seat was, in fact, filled by Michael Seibel, an African American entrepreneur.

According to a study in Harvard Business Review, a few hurdles need to be overcome to lower barriers to and within the boardroom. Often the pipeline of candidates to boards tends to be white male executives. Director recruitment on all-white boards tends to consider fewer candidates that are racial and ethnic minorities. Also, when considering how Black board members were initially introduced to the board when they were already known, it is more likely to be by a Black director (54 percent) than a white director (35 percent).

If the same concepts apply to other racial minorities, it means that boards that the lack of diversity is likely to stay that way unless something causes them to change course. The good news is that once some diversity is achieved, it is more likely to continue.

The study also found that Black directors were less likely to serve board leadership roles as a chairperson or committee chair than white members, despite having higher levels of education on average. This raises the concern that the contribution of some members can be ignored or undervalued. Thus, it is critical to have minority members serving on boards and that the boards are open to their contributions.

The big question about the new rule for Nasdaq-listed companies is if transparency alone will lead to positive change. The California law mandating that at least one woman serves on the board is both a mandate and comes with a $100,000 fine. The good news is that more women are now serving on the boards of publicly traded companies in California.

Will merely requiring transparency generate the same results? It certainly will serve as an incentive for many companies to attract more high-quality minority and female candidates. Although this step might not solve the issue for Nasdaq-listed companies that lack director diversity, it’s a definite step in the right direction towards a more inclusive business community.

Image credit: Pixabay

Sarah Lozanova headshot

Sarah Lozanova is an environmental journalist and copywriter and has worked as a consultant to help large corporations become more sustainable. She is the author of Humane Home: Easy Steps for Sustainable & Green Living, and her renewable energy experience includes residential and commercial solar energy installations. She teaches green business classes to graduate students at Unity College and holds an MBA in sustainable management from the Presidio Graduate School.

Read more stories by Sarah Lozanova