Board diversity and how (and whether) to try to achieve it is a topic that has certainly appeared on a lot of corporate governance agendas in the last few years. Institutional investors have applied pressure on corporations, shareholders have submitted precatory proposals for shareholder votes, investment banks have insisted on diverse boards as preconditions for taking companies public, and California and a number of other states have adopted legislation, whether it be a board diversity mandate, a soft target or simply a disclosure requirement. Most recently, Nasdaq filed with the SEC a proposal for new listing rules regarding board diversity and disclosure, adopting a comply-or-explain approach. According to Nasdaq’s President and CEO, Adena Friedman, “Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies….Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.” Interestingly, however, the NYSE has not followed suit. In fact, in an interview on Bloomberg TV in December, NYSE President Stacey Cunningham said, when asked about the Nasdaq proposal, that it was not something that they were considering adopting at the NYSE: “When we use exchange listing standards to require things like diversity profiles or others, we’re defining the investable universe…. We just don’t think we should be using our listing standards because that forces our views on investors and prevents them from being able to make the choices that they want to make and that they are making.” In contrast to the SEC, whose remit is largely disclosure, the exchanges regularly impose corporate governance requirements. Should board diversity be one of them?
As you may recall, the Nasdaq proposal set a “recommended objective” for Nasdaq-listed companies to have at least two diverse directors on their boards; if a company did not meet that objective, it would need to explain its rationale for not doing so. The time allowed to satisfy the board composition “expectations” would depend on the company’s listing tier. In response to public comments, Nasdaq subsequently amended its proposal to, among other things, provide that companies with five or fewer directors may satisfy the recommended objective with one director from a diverse background rather than two and to provide a one-year grace period in the event a vacancy on the board brings a company under the recommended diversity objective. The rule would also require listed companies to provide annually, in a board diversity matrix format, statistical information regarding the company’s board of directors related to the directors’ self-identified gender, race and self-identification as LGBTQ+. (See this PubCo post.) Nasdaq also proposed to provide Nasdaq-listed companies with one-year of complimentary access to a board recruiting solution to help identify board-ready diverse candidates. Under the proposal, companies that did not provide the required disclosure on a timely basis would ultimately be subject to delisting. However, companies that did not meet the expectations for board diversity on a timely basis would “not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.” [Emphasis added.] (See this PubCo post.)
The debate between the exchanges is not the value of diversity—both exchanges agree that diversity enhances performance. In its 271-page filing, Nasdaq presented an analysis of over two dozen studies that “found an association between diverse boards and better financial performance and corporate governance.” And in her interview, Cunningham emphasized that diversity was “such an important issue. The data is very, very clear that businesses perform better when there is more diversity on boards.”
How to achieve that goal is where the exchanges part company. According to Cunningham, “markets are designed to balance investor choice with investor protection. We need to maximize that investor choice.” In her view, using diversity quotas to define exchange listing standards “means we are limiting investor access and we are limiting investor choice.” Instead, Cunningham said, “at the NYSE, we’re using our power, our strength, our brand, our community, our network to drive meaningful change on issues that we are extraordinarily passionate about, like diversity. So we’ve launched the NYSE Board Advisory Council that taps into the network of NYSE CEOs to actually source diverse board candidates for other companies that are looking to diversify their boards. We’re seeing a lot of progress.” If the issue is left to investors, Cunningham contended, investors “will demand diversity. They are demanding diversity.” Looking at the NYSE-listed companies on the Russell 1000, she argued, “99% of them have a woman on their board, 91% have two or more women on their board. That’s very different than it was before because investors are demanding diversity.” But, some might ask, are those changes attributable only to investor demand or have other actions, such as legislative quotas or targets contributed as much or more?
Friedman has insisted that, most importantly, the Nasdaq proposed rule “is not a quota: the only requirement for companies that don’t meet this new objective is to provide an explanation to shareholders.” Rather, it is simply “regulatory impetus”: in its proposal, Nasdaq stated that it had “conducted an internal study of the current state of board diversity among Nasdaq-listed companies based on public disclosures, and found that while some companies already have made laudable progress in diversifying their boardrooms, the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.”
The move is designed to speed the pace of change in a way that has been effective in other jurisdictions: “While gender diversity has improved among U.S. company boards in recent years,” Nasdaq argued, “the pace of change has been gradual, and the U.S. still lags behind other jurisdictions that have imposed requirements related to board diversity. Moreover, progress toward bringing underrepresented racial and ethnic groups into the boardroom has been even slower.”
In that regard, Nasdaq looked at legislation that has been adopted in in other countries. Outside the U.S., Nasdaq identified mandatory quotas in Norway, Portugal, Germany, Belgium, Austria, Iceland, France and Italy, with varying minimum percentage requirements. And these mandates appear to have been effective in translating talk about diversity into an increasing the proportion of women directors. The WSJ reported that “the number of women on big-company boards in Italy, Germany and several other European nations has tripled and, in some cases, quadrupled in recent years as mandates have forced corporations to boost the share of female directors to as much as 40%.” Other countries, such as Sweden, the UK and Australia, have provided “soft targets,” setting objectives for board diversity. In considering adoption of its proposal, “Nasdaq observed that women account for at least 30% of the boards of the largest companies in Australia, Sweden and the United Kingdom, and in three other countries that have implemented disclosure requirements or suggested milestones on a comply-or-explain basis: Finland, New Zealand, and Canada. Nasdaq considered that countries that have implemented mandates have also seen progress in women’s representation on boards, including, for example, Austria, Iceland, Belgium, France, Germany, Italy and Portugal. On average, women account for 31% of board seats in countries with gender mandates.”
Nasdaq also looked at state laws, identifying eleven states that had passed or proposed board diversity legislation. For example, California has adopted two board diversity statutes, SB 826 (see this PubCo post), and AB 979 (see this PubCo post), which imposed a mandate on public companies headquartered in California to have at least one woman director by 2019 and at least one director who is a member of an “underrepresented community” by 2021 (with increasing minimums in each case in future years). Nasdaq reported, citing the California Partners Project (see this PubCo post), that, since the passage of S.B. 826, 669 women have joined public company boards in the state, and the number of public companies with all male boards has declined from 30% in 2018 to 3% in 2020.
Certainly, critics have taken issue with the concept of hard or soft board quotas as potentially leading to a proliferation of “token” board members, but some that have historically opposed quotas have come around. As reported in The New Republic, Christine Lagarde, then-managing director of the International Monetary Fund, commenting on gender quotas at the 2014 World Economic Forum, “admitted that while she had objections to gender quotas initially, she is now an advocate of them: ‘I soon realized that unless we had targets, if not quotas, there was no way we were going to make the right step.’”
The Nasdaq proposal received a mix of comments. As discussed in this PubCo post, Senators and Represenatives expressed views pro and con. Surprisingly, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness wrote largely in support of the proposal, commending Nasdaq for “promoting a private sector-based solution to foster greater diversity among boards of directors. The Proposal encourages companies to think critically about how to incorporate diversity into their corporate leadership, which is a goal that the Chamber shares. The Chamber supports efforts to increase gender, racial, and ethnic diversity on corporate boards of directors. It is clear that board diversity is valuable.” Conversely, Republican Senators on the Senate Committee on Banking, Housing, and Urban Affairs essentially agreed with the position of the NYSE on this issue, contending that Nasdaq was, among other things, acting outside its proper scope as an SRO: “it is not the role of NASDAQ, as a self-regulatory organization, to act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets and investors.”
In the meantime, the SEC has delayed action on the Nasdaq proposal, seeking further comment (see this PubCo post). As a result, we’ll have to wait to see how the SEC views this debate.