The diversity of a company’s board of directors continues to face increased scrutiny, with Nasdaq, Inc. proposing a new rule that would require companies listed on its exchange to have at least one woman and one underrepresented minority. The board diversity requirements must still be approved by the Securities and Exchange Commission (SEC).

Increased Focus on Board Diversity

Diversity is becoming a more frequent topic of discussion when it comes to selecting board members, with shareholders calling on boards to include more women and racial minorities. While federal regulators have not yet established requirements regarding board diversity, states are beginning to take action. In California, boards must have at least one female member. Starting on January 1, 2021, companies based in Illinois must disclose the race and genders of their directors.

While significant strides have been made to increase board diversity in recent years, progress has been slow and significant disparity still exists. According to a Harvard Law School study, 66 percent of board members at Fortune 500 companies were white men in 2018. Another 17.9 percent were white women, followed by 11.5 percent men of color and 4.6 percent women of color. When it comes to executive leadership, as of May 2019, 6.6% percent of Fortune 500 CEOs are women, and there are similarly low numbers of people of color leading those companies.

Many companies have voluntarily established policies seeking to increase diversity and/or disclose their board makeup. According to studies, these efforts often pay off, with increased diversity shown to boost a company’s performance. For instance, a Mckinsey & Co study found that ethnically diverse companies are 35 percent more likely to have financial returns above national industry medians and gender diverse companies are 15 percent more likely to do the same.

Nasdaq’s Board Diversity Rule Proposal

If approved by the SEC, Nasdaq’s new listing rules would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors. Under the proposed listing rules, an “underrepresented minority” is defined as an individual who self-identifies in one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or two or more races or ethnicities.

According to Nasdaq, the changes are intended to provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors. “Diversity of experience, gender, race, knowledge, and perspective means that a company is more capable of seeing the full picture, assessing risk and overcoming challenges with forward-looking, innovative solutions,” Michael Splinter, Chairman of Nasdaq, said in a press statement.

The rule proposal would specifically require Nasdaq-listed companies to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The deadline for meeting the minimum board composition expectations would be determined by the company’s listing tier. All companies would be expected to have one diverse director within two years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market would have an additional two year (four total) to comply. Companies listed on the Nasdaq Capital Market would be expected to have two diverse directors within five years of the SEC’s approval.

Notably, companies that are unable to meet the board composition objectives within the required timeframes would not be subject to delisting provided that they provide a public explanation of their reasons for not meeting the objectives.

Goldman Sachs Board Diversity Policy

Startups hoping to go public may also have to consider diversity if they plan to use Goldman Sachs as their underwriter. Effective July 1, the bank will only underwrite IPOs in the US and Europe of private companies that have at least one diverse board member. Starting in 2021, Goldman Sachs will increase the target to two diverse candidates.

Goldman Sachs is the largest underwriter of initial public offerings (IPOs) in the United States. In support of the policy change, Goldman Sachs emphasized that companies with diverse leadership perform better. In a statement about the new policy, CEO David Solomon stated that “[i]n addition to the real commercial benefits, it’s clear that changing the stereotypes associated with corporate decision-making will have many positive effects for society as a whole.”

While Solomon acknowledged that board diversity has increased in recent years, he contended that progress has been too slow. In the last two years, more than 60 companies went public in the US and Europe without a diverse board member, according to the company. 

Key Takeaway

Board diversity is an issue that companies of all sizes should take seriously. When selecting new board members or considering a board diversity policy, it is imperative to address business and legal considerations. Given that this is a quickly evolving area of law, we also encourage businesses to stay on top of any new regulatory requirements.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Howard Bader, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.