Nasdaq's rule on board diversity is a good first step, not a gold standard

Nasdaq’s Board Diversity Rule goes into effect this month. Corporations listed on the U.S. exchange will be required to disclose the ethnic and gender makeup of their boards.

Companies will have one year from the time of submission to provide an explanation as to why they do not have at least two diverse board members currently serving on their board.

It is very likely organizations will be able to meet this new standard of just two diverse board members that identify as women and/or come from another underrepresented group.

The enforcement of the SEC-approved rule is a step in the right direction. However, the SEC does not provide a plan to encourage companies listed on Nasdaq to increase diverse board members beyond two individuals annually. There is room for improvement as revisions and addendums are added to this new rule.

While corporations across the country continue to make headway in diversifying their boards, some diversity, equity, and inclusion (DEI) efforts are being reversed in states such as California.

This year, a Los Angeles Superior Court Judge deemed a 2018 state law requiring public companies to diversify their boards “unconstitutional.” Between 2018 and 2022, the number of women directors on California boards had significantly increased from 766 to 1,844. Another California law that required corporations to add minorities and other underrepresented groups to their boards was similarly struck down.

Unlike the laws that were recently repealed in California, the SEC decision establishes a mere rule: There is no monetary fine associated with it, and it gives companies a full year to meet its requirements. Some companies have even more time depending on when they began their listing on Nasdaq.

Nasdaq does provide recommendations and resources, including firms, companies, and organizations that can be consulted to find qualified candidates to meet this new requirement. However, companies need to take a step back before just checking the box on this new rule.

Corporate leaders, shareholders, and current board members at these companies need to ask themselves what diversity means for their organizations. If this is new territory for the company, they must consider surveying their employees about the topic. Diversifying a board is a journey–and you can’t undertake it just to meet quotas.

Incorporating a variety of different skills and qualifications for consideration alongside these new minimum requirements is another way of finding qualified candidates.

According to the 2020 Missing Pieces Report by Deloitte, women and minorities are more likely to bring work experience in the areas of corporate sustainability and socially responsible investing, government, sales and marketing, and technology, compared to white males. Nationally, only 27% of women serve on corporate boards and only 17% of minorities are represented at the board level as of 2020, according to ISS Corporate Solutions.

The average age of S&P 500 board directors is 63, according to a recent study by The Conference Board. However, what someone lacks in experience or tenure is made up in their ability to give additional time and significantly more bandwidth to the organization.

Boards listed on Nasdaq have the opportunity to invite different perspectives and experiences from a variety of generations if they are open to bringing in board members whose tenures span one, two, or even more decades.

The Annual Corporate Directors Survey by Price Waterhouse Cooper in 2021, noted that 71% of current directors reported that the board diversity issue “won’t solve itself.” The discussion of having enough diverse qualified candidates is still ongoing, with 45% of corporate directors sighting this as a concern.

Earlier this year, Latino Leaders Magazine produced its 2022 list of 364 Latinos on boards including 100 candidates for board service. This list is endorsed by other Hispanic professionals that already sit on boards and is intended to fill a need for companies looking for candidates ready for board service.

Other examples include chambers of commerce connected with affinity groups such as the Urban League, the United States Hispanic Chamber of Commerce, Association of Latino Professional For America chapters, National ACE, and professional associations connected with underrepresented groups like the Hispanic or National Bar Association.

50/50 Women on Boards is another organization tackling the global conversation about bringing more women to corporate boards. Giving circles tied to women in addition to an underrepresented group like those found with Texas Women’s Foundation can be a resource for highly qualified and well-connected professionals.

The SEC and companies listed on Nasdaq are taking a step in the right direction–but companies must continue to proactively diversify their boards beyond the new rule’s minimum requirements.

Aracely Muñoz is the director for corporate partnerships at Children’s Medical Center Foundation, board member for Educational Opportunities, and chair for the XIX Society at Texas Women’s Foundation.

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