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An expert's take on Nasdaq's diversity rule

The board diversity policy that Nasdaq will require from companies takes effect this month.

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Nasdaq's board diversity rule, which goes into effect this month, requires US-listed corporations to disclose the ethnic and gender composition of their boards.

Nasdaq, which has agreed to offer more flexibility in the case of small boards, companies new to the exchange or existing members with a vacancy that puts them out of compliance, also emphasized that these requirements are not a fee or mandate because companies that explain their lack of diversity on the board are not required to make changes.

It is a Positive Step, But There is Still a Long Way to Go

Although the application of the rule approved by the U.S. Securities and Exchange Commission (SEC) is a step in the right direction, this initiative does not offer a concrete plan to encourage companies listed on Nasdaq to increase diversity on its boards beyond two people per year.

Aracely Muñoz, director of corporate partnerships at the Children's Medical Center Foundation, Educational Opportunities’ board member, and president of the XIX Society at the Texas Women's Foundation, commented on the Nasdaq rule through Fortune magazine.

“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,” said Muñoz.

Legal Efforts for Diversity

Although a significant number of corporations in the U.S. have joined diversification efforts on their boards, some achievements in equity and inclusion that had been made have begun to be reversed in states like California. This after a Los Angeles Superior Court judge ruled as unconstitutional the 2018 state law that required public companies to diversify their boards of directors.

For Muñoz, the repeal of the law undoubtedly represents a setback in this fight, especially considering that between 2018 and 2022, the number of women directors on California boards increased significantly from 766 to 1,844.

But unlike the California case, Muñoz highlights how the SEC's decision facilitates the process so that companies can adapt without trauma to this new and necessary dynamic, pointing out that there is no associated monetary fine, and highlighting the period of time, of at least one year, that is given to companies to meet the requirements.

“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,” noted Muñoz.

Diversity Figures

Munoz quotes Deloitte's 2020 Missing Pieces Report, which notes that women and minorities are more likely to offer work experience in the areas of corporate sustainability and socially responsible investing, government, sales and marketing, and technology, compared to white men.

Nationally, only 27% of corporate boards have women on them, and only 17% of boards have minority members as of 2020, according to ISS Corporate Solutions.

Likewise, Muñoz refers to the average age of S&P 500’s directors of the board, which is 63 years old, according to a recent study by The Conference Board. But while a younger age range can be found within the diverse groups, Muñoz stresses that this does not necessarily imply a barrier, since “what someone lacks in experience or tenure is made up in their ability to give additional time and significantly more bandwidth to the organization,” highlights the Latina corporate leader.

Pushing on Diversity 

According to Price Waterhouse Cooper's 2021 Annual Survey of Corporate Directors, 71% of current directors reported that the board diversity issue "won't solve itself," while 45% expressed concern that the number of diverse qualified candidates is not sufficient.

Muñoz also points to the list published this year by Latino Leaders magazine, which included 364 Latino executives on boards, including 100 candidates to serve on boards.

Muñoz underlines:

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 entities supporting the initiative include chambers of commerce connected to like-minded groups like the Urban League, the United States Hispanic Chamber of Commerce, chapters of the Association of Latino Professionals for America (ALPFA), National ACE, and professional associations connected to underrepresented groups, like the Hispanic or National Bar Association.

“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 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,” ended Muñoz.

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