Skip to content

23 March, 2023

Subscribe Advertise About Us
  • My Account
  • Register
  • Log In
  • Log Out

Board Agenda

  • Governance
  • Strategy
  • Risk
  • Ethics
  • News
    • Categories

      • View All
      • Board Moves
    • ethical decision-making

      Call for FTSE 100 companies to give guidance on ethics

      Most top firms have a published code of ethics, but many lack the framework to...

    • BlackRock Larry Fink Larry Fink puts focus on finance and inflation

      Although BlackRock’s CEO does not mention the term ‘ESG’ in his annual letter, he highlights...

    • woke silicon valley bank News round-up: this week in governance

      GOP declares SVB ‘woke’; banks slow to sustainability; fund managers accused of dodging voting risks;...

  • Insight
    • Categories

      • View all
      • Governance
      • Strategy
      • Risk
      • Ethics
      • Board Expertise
      • finance
      • Technology
    • data decision

      How to boost decision making

      Innovative digital tools can help boards to deliver against strategic objectives, but it is the...

    • remote working

      Navigating the new world of work

      Firms need to focus on building an inclusive environment and a culture of trust to...

    • digital transformation

      Digital transformation: Get the basics right

      Board involvement at the get-go will boost the chances of a successful digital transformation for...

  • Comment
      • View all
    • uncertainty in 2023

      Being a CEO in 2023: how to navigate uncertainty

      Agility, planning in the shorter term and bravery will all stand chief executives in good...

    • A week of business moving to the centre of human rights

      A week of events signals the initiatives underway to have companies play a central role...

    • audit reform IIA Why we need audit reform right now

      There is an "urgent need" for reform to the audit landscape as well as internal...

  • Interviews
      • View All Interviews
      • Podcasts
      • Webinars
    • life sciences podcast Reform of NHS levy ‘harms UK competitiveness’

      Boards in the pharmaceutical and life sciences sector face increasingly difficult decisions, according to a...

    • Board priorities 2023 Board priorities 2023: tact, trust and transparency

      We asked key figures what would help boards this year. The answers ranged from 'smarter...

    • Group of investors/shareholders in glass building Climate issues likely to figure prominently at next year’s AGMs

      A recent webinar heard that say-on-climate voting is expected to rise, while ESG remains a...

  • Careers
      • View all
      • Selection
      • Board Moves
    • female ceo Less than a third of FTSE 100 executives are women

      In Europe as a whole, only 7.7% of top companies’ chief executives are female, gender...

    • board size Performance declines as boards grow in size

      Researchers found that investment dropped by 2-3 percentage points as companies passed from 12 to...

    • Silicon Valley governance Silicon Valley improves its governance

      Big technology companies are stealing a march over other top corporates when it comes to...

  • Resource Centre
      • White Paper Downloads
      • Book Reviews
      • Corporate & Advisory Services
    • Gender diversity barometer

      Barometer of Gender Diversity in Governing Bodies in Europe

      The 2023 Barometer of Gender Diversity in Governing Bodies in Europe looks at the 16...

    • geopolitical risk airmic

      Navigating geopolitical risk

      Today, the future feels less secure, and optimism is more restrained. Taking decisions in an...

    • Edelman Trust Barometer 2023

      2023 Edelman Trust Barometer

      The report is the result of the Edelman Trust Institute's research, which sampled more than...

  • Events
  • Search by topic
    • Governance
    • Strategy
    • Risk
    • Ethics
    • Regulation
    • ESG
    • Investor Relations
    • Selection
    • Board Expertise
    • finance
    • Technology

How Nasdaq’s board diversity rule creates potential for real change

by Felicia A. Henderson, Zoe Kinias and Claudia Zeisberger

New Nasdaq rules requiring qualitative and quantitative disclosure about board diversity will better inform investors—and spur progress.

Nasdaq logo on website

Image: Dennis Diatel/Shutterstock.com

On 6 August 2021, the United States Securities and Exchange Commission (SEC) approved rules, collectively dubbed Nasdaq’s Board Diversity Rule, relating to the demographics of boards of directors of Nasdaq-listed companies. In the few months since, commentary has focused on the supposed need to grow the pool of qualified directors from diverse backgrounds, the belief that these directors will need special training in public company board norms and the logistics of allocating board seats to new directors.

We have noted two trends among business and legal writers in examining the impact of the Rule. First, analyses often include implicit assumptions that overlook important realities. Second, they largely omit discussions of how to leverage the changes the Rule will create to most effectively generate the benefits of board diversity.

To achieve the full potential of the Rule in promoting demographically diverse boards of public companies that have a positive impact, the business community must understand exactly what the new rules mean and for whom.

Comply more inclusively—or explain honestly

Nasdaq considers a director to be from a diverse background if the director is a woman; an underrepresented minority; or LGBTQ+.

Despite its name, Nasdaq’s Board Diversity Rule does not de jure compel Nasdaq-listed companies to have diverse boards. Rather than a mandatory board composition regulation, the set of Nasdaq rules should, instead, be viewed as a move towards more robust requirements for public disclosure about board-level diversity.

These requirements take two forms. First, beginning in August 2022, Nasdaq-listed companies will have to disclose annual statistics about their board’s diversity using a “matrix” prescribed by Nasdaq. This simple format has versions for US and foreign companies, and both include board members’ self-disclosed gender identity, relevant underrepresented racial/ethnic/religious identities and LGBTQ+ status. Although Nasdaq will permit some variability in the style of presentation, the standardisation of substance should allow for greater comparability within individual companies and industries over time and across companies and industries.

Despite its name, Nasdaq’s Board Diversity Rule does not de jure compel Nasdaq-listed companies to have diverse boards

Second, for board composition, Nasdaq sets phased-in targets, the focus of much commentary. The initial objective for all Nasdaq-listed companies is to have one director from a diverse background by August 2023. For the largest Nasdaq-listed companies, the final objective is two directors from diverse backgrounds (meaning, for US companies, one woman and one underrepresented minority or LGBTQ+ individual) by August 2025. Smaller companies have an extra year to meet the two-director target, and for those with small boards, the target remains one director from a diverse background.

These objectives are not, however, mandates—unlike those for gender parity in several jurisdictions including Norway and a half dozen European Union countries, India, Malaysia and South Africa and for gender and underrepresented minorities in the state of California (currently facing a legal challenge). Instead, Nasdaq relies on a “comply or explain” framework, meaning that companies can either meet the applicable board diversity objective or include disclosure of the reasons they do not. The Rule is explicit that providing this explanation will suffice to avoid delisting.

This Nasdaq graphic details the phase-in periods for the listing tiers (and for smaller boards) and makes clear that companies always have the option to provide an explanation. While acknowledging that progress towards diversity may be slower than with mandates, Nasdaq indicated that it preferred this framework based on consultations, suggesting the US business community would find a disclosure-based approach “less controversial”.

More inclusive compliance

Companies seeking to meet the board diversity objectives can truly leverage the power of board diversity if they are mindful of considerations beyond numerical targets. In proposing the Rule, Nasdaq reviewed dozens of academic and industry studies and concluded that compelling evidence exists to establish a correlation between diverse boards and better economic performance, investor protection and board decision-making.

The mere presence of directors from diverse backgrounds is not, however, a magic token that automatically triggers these positive outcomes. Research demonstrates, instead, that increased demographic diversity can lead teams to be better prepared, more rigorous and more innovative. In turn, improved board governance and decision-making are linked to changes in board behaviour such as greater oversight, willingness to hold officers accountable and less groupthink, thanks to improved examination and integration of available evidence. Rather than preparing new directors to conform to the traditional dynamics of public company board service, companies seeking to maximise the benefits of diversity should be concerned with preparing sitting directors to collaborate effectively in a diverse decision-making team.

How new directors are brought in to the boardroom may affect both their own and others’ views of their legitimacy

Although our suggestions deviate from current board norms, they are well-grounded in robust research evidence on innovative performance. This body of research has shown how creating more opportunities for dissenting views to be shared and thoughtfully examining mistakes (viewing them as opportunities for collective learning and growth) improve team and organisational performance. For members of underrepresented groups, these practices and the culture they create also foster feelings of being included and being heard, and enable individuals to share their expertise.

Additionally, how new directors are brought in to the boardroom may affect both their own and others’ views of their legitimacy. In interviews with African-American public company directors, Henderson found that even when they knew that diversity was a primary consideration in their selection, these directors felt accepted and respected when the announcement of their election or appointment emphasised the substantive knowledge and skills they brought to the board and when committee assignments matched their expertise or allowed for meaningful contributions.

Such onboarding circumstances can naturally enable self-affirmation that shifts attention away from potentially threatening identities marked by underrepresentation. Consistent with this thinking, after joining a board in Singapore, a woman director with a background in banking shared with Kinias her sense that her voice became meaningful after she was placed on the board’s finance committee.

Similarly, to minimise resistance, when considering how to allocate seats for directors from diverse backgrounds, commentators and companies should be aware of terminology, perceptions and the potential impact of increasing board size. Use of the word “replace” may trigger implicit associations with the “great replacement” conspiracy theory currently resurging in far-right circles. Board “renewal” and director “rotation” are common terms and practices, and companies are invited to review or adopt policies in these areas to incorporate diversity considerations.

Expansion of the board to create new seats for directors from diverse backgrounds comes with a financial cost that may create the impression that diversity is dilutive rather than accretive. Board expansion may also subtly signal that these seats are set apart as a separate class, creating fault lines between sitting and incoming directors, again pointing to rotation and renewal being better approaches.

Pitfalls of insincere explanations

The opportunity to “explain” presents an alternative to meeting the board diversity objectives, and Nasdaq makes explicit that it will not evaluate the substance or merits of explanations. A company cannot, however, simply state that it does not meet the objectives but must put forward some “insight into the company’s circumstances or diversity philosophy”.  In a comment letter during the SEC’s review of the proposed rules, Nasdaq provided examples of cursory explanations that would pass Nasdaq muster.

“Comply or explain” does not force board diversity, but it does force companies to take a position on it publicly

The lack of Nasdaq scrutiny does not, however, preclude substantive review by investors or application of the anti-fraud provisions of US securities laws. If investors demand details about a company’s non-compliance (which Nasdaq expressly anticipates), then investor review can become a catalyst for meaningful discussion of perceived challenges to board diversity. The potential for securities litigation may also motivate companies to avoid explanations that are merely pretexts for a lack of serious effort to diversify their boards. For example, Nasdaq provides a sample explanation based on concerns about feasibility. The accuracy or sincerity of this explanation could be challenged by pointing out a robust pipeline of board-ready women and underrepresented minorities as well as the availability of Nasdaq’s free board recruiting services.

Companies unwilling to undertake serious efforts to meet the board diversity objectives may be better served by disclosing their disagreement with the Nasdaq approach or their use of director selection criteria other than diversity (both examples provided by Nasdaq).  Such explanations would convey the relative value the company places on board diversity. “Comply or explain” does not force board diversity, but it does force companies to take a position on it publicly.

Will investor pressure follow?

Together, the “explain” framework and the standardised matrix will increase the information about board diversity available to investors. “Explain” will provide qualitative insights about an individual non-compliant company’s philosophy, while the matrix disclosure will provide quantitative data about each Nasdaq-listed company, enabling investors to identify companies doing more than the minimum with respect to diversity goals. These disclosures create comparability, allowing investors who care about board diversity to invest in companies that show a similar commitment and to withdraw investments from those that don’t.

One potential outgrowth of increased and standardised disclosure is greater awareness of the significant underrepresentation of directors from diverse backgrounds globally. Even though non-US companies can meet the two-director target by having two female directors rather than one woman and one underrepresented or LGBTQ+ individual, the matrix requires disclosure of numbers for each category (where not prohibited by law). When framed against the numeric representation of women and underrepresented minorities in the societies that organisations are ultimately tasked with serving, observed gaps can motivate further progress.

Nasdaq rationale for the Rule includes arguments that investors increasingly care about diversity, and market reactions in the coming years will reveal to what depth. Investor response to the disclosed content and to the way firms frame the information will speak to this assertion.

Conclusions for companies and investors

The new Rule is a call to action for private companies before they undertake a listing. Venture capital and private equity investors, as well as founders with future listing ambitions, should plan wisely for the disclosure both to begin to enjoy the benefits of board diversity prior to their IPOs and to minimise board disruption after listing.

The Rule opens the door for input from socially conscious institutional shareholders as well as from activist investors. Equipped with accessible data, investors can press for a diverse slate of board candidates prior to the annual general meeting and vote (or withhold votes) at the meeting based on their stated preference. Smaller shareholders can also engage, showing the importance they believe diversity merits through their votes or through board diversity-related shareholder proposals.

Large asset managers should also consider the disclosures resulting from the Rule in their risk management frameworks and portfolio mandates. Moving from a single-minded financial target (clearly represented by one number) to a multi-targeted approach is a complex process, as shown by the industry’s struggle to include consistent and meaningful ESG guidelines.

Although integrating change to meet and effectively leverage the new Rule will require some effort and attention both from companies and their investors, we expect thoughtful strategies to pay back a different kind of dividend. The US population is 51% female and 40% underrepresented racial or ethnic identity. Combined, they make up over 70% of the total population. By expanding the pool of potential directors beyond the numeric minority and creating conditions for diverse boards to be effective, investors and Nasdaq companies as well as the societies they serve can all benefit from the Rule.

Felicia A. Henderson is an independent leadership and equity, diversity and inclusion consultant, and founder of Henderson Advising. 

Zoe Kinias is an associate professor of organisational behaviour at INSEAD and the academic director of INSEAD’s Gender Initiative. She is the programme director for the INSEAD Gender Diversity Programme.

Claudia Zeisberger is a senior affiliate professor of entrepreneurship & family enterprise at INSEAD and the founder and academic co-director of the school’s Global Private Equity Initiative. 

This article first appeared on INSEAD Knowledge and is reproduced with permission. Read the original article.

  • Facebook
  • Twitter
  • Google+
  • LinkedIn
  • Mail

Related Posts

  • US boards slow diversity with poor retirement policies
    August 9, 2022
    US boards diversity

    Only 6% of organisations have term limits for directors, and there is reluctance around mandatory retirement policies.

  • Law experts defend Nasdaq in board diversity battle
    September 27, 2022
    Nasdaq diversity

    US academics point out that the proposed new requirements relate only to reporting and disclosure, not quotas.

  • Greater board diversity drives company climate action
    December 14, 2021
    Board members discussing ESG

    Research reveals that greater gender and age diversity on boards improves company engagement across all critical climate action indicators.

  • Women take 54% of FTSE 350 board roles but fail to win 'top jobs'
    May 30, 2022
    A group of directors in a boardroom

    Just 19% of chair, chief executive, chief financial officer or senior independent director roles went to women in 2021.

For thoughtful journalism, expert insights on corporate governance and an extensive library of reports, guides and tools to help boards and directors navigate the complexities of their roles, subscribe to Board Agenda

Board composition, board diversity, Claudia Zeisberger, diversity & inclusion, Felicia A. Henderson, INSEAD, INSEAD Knowledge, Nasdaq, US, Zoe Kinias

Search


Sign up to our Newsletter

Receive independent news, thoughtful journalism & expert insights about leadership, corporate governance & key boardroom issues straight to your inbox every week.

SIGN UP

Follow Us

 

 

 

 

Most Popular

  • ESG resilience requires leaders to manage without certainty
  • News round-up: this week in governance
  • Being a CEO in 2023: how to navigate uncertainty
  • Into the mind of white-collar criminals
  • How to boost decision making

Featured Partner Profile

Diligent

Diligent

Diligent Corporation, which was founded in 2001, is headquartered in New York, NY with a European HQ in London. Diligent’s modern governance platform empowers leaders and teams at every level of the organisation to digitally transform and create ...

Featured Partner Resources

2022 AGM Season Forecast: An Eye on The Horizon

To help prepare for AGMs in 2022, Equiniti (EQ) hi...

Stakeholder Engagement: A Roadmap for UK Plc Boards

This guide aims to provide directors and their col...

Digital Boards: How Technology Adoption is Driving Culture Change and Resiliency

Digital tools proved their worth to boards during ...
Leadership in AI report

Leadership in AI

This report from Board Agenda and Mazars, in assoc...
Creativity in a Crisis: a Boardroom Map for Innovation

Creativity in a Crisis: a Boardroom Map for Innovation

In the uncertain times at the height of any crisis...
Board Directors Guide to D&O Liability Insurance - November 2020 - AIG & Board Agenda

Board Directors' Guide to D&O Liability Insurance

Directors face liability over a range of new threa...
Leadership-in-Risk-Management-Board-Report

Leadership in Risk Management: Board Report

Board Agenda, in association with Mazars and INSEA...
Director's Guide to Internal Investigations

A Director's Guide to Conducting Internal Investigations

An internal investigation must be handled meticulo...

 


 

ADVERTISE – FREE CORPORATE LISTING

FREE - Add your company profile to our Corporate & Advisory Directory.
ADD

ADVERTISE – PROMOTE YOUR REPORTS & WHITEPAPERS

FREE - Add your company profile to our Corporate & Advisory Directory.
Add Resource

Register Free

Register to receive free article views, selected resource downloads, and all the latest news alerts straight to your inbox. Register


  • Editors & Contributors
  • Editorial Advisory Board
  • Corporate & Advisory Services
  • Media Marketing Solutions
  • Contact Us
  • Careers
  • Board Director Network
  • Terms & Conditions
  • Privacy Policy
  • Cookies
  • Sitemap
|