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In an effort to bring greater diversity to U.S. corporations, Nasdaq, Inc.. is “pushing to require the thousands of companies listed on its stock exchange to include women, racial minorities, and LGBT individuals on their boards,” said the Wall Street Journal, adding that Nasdaq has “filed a proposal with the Securities and Exchange Commission ... that would require listed companies to have at least one woman on their boards, in addition to a director who is a racial minority or one who self-identifies as lesbian, gay, bisexual, transgender or queer.”

Nasdaq Chief Executive Officer Adena Friedman said, “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.” She added that, “We are going to make it so that every company has a very straightforward way to meet the standards.”

Should the SEC approve the rule, Nasdaq companies will need to disclose their board diversity data within a year, and “will need to have at least one woman or diverse director within two years. Bigger companies will be expected to have one of each type of director within four years.”

How many companies would have to take action as a result of the new rule? At the moment, more than 75% of the approximately 3,200 companies listed on the Nasdaq don’t meet the requirements, as corporate boards remain overwhelmingly white and male; CBS News cited a study showing that women held “just 22% of Fortune 500 seats in 2018, compared to 20% a year earlier and 16% in 2010. White men held 66% of Fortune 500 board seats in 2018. Black people held nearly 9% of seats in 2018, compared with nearly 8% in 2010.”

Nasdaq stated its intention for seeking the diversity rule in a press release, saying it’s necessary 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, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.”

In the same release, Nasdaq referred to “over two dozen studies that found an association between diverse boards and better financial performance and corporate governance.” Others have pointed out that “a diverse workforce of women, people of color, and LGBTQ individuals confers a competitive edge when selling products or services to diverse end users.”

So, what are the consequences for failing to comply? According to the WSJ, “companies that don’t meet the standard would be required to justify their decision to remain listed on Nasdaq.” The National Law Review detailed that “any company failing to timely satisfy the ‘comply or explain’ requirements would be notified by Nasdaq that the company needs to address the deficiency by the later of its next annual shareholder meeting and 180 days from an event that caused the deficiency. The company could cure the deficiency by either electing any additional diverse director required to comply or providing an explanation for not having the diverse board representation.” However, “a continuing failure to ‘comply or explain’ would subject the company to delisting.”

The Society of Human Resources Management has cited a “confluence of forces moving boards toward greater diversity: activism and protests by women and people of color, including the Black Lives Matter movement; pressure from investors and shareholders; and state legislation.” Indeed, the Harvard Law Forum on Corporate Governance noted that Nasdaq’s effort “comes on the heels of new legislation adopted in California [AB 979] in September 2020.” As of January 1, 2021, publicly held companies headquartered in California are required to have board members from underrepresented communities. This includes individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or as gay, lesbian, bisexual, or transgender.

Put another way. “Board diversity, or rather the lack thereof, has never been under more scrutiny,” according to an article by Sophia Shaw, adjunct professor at the Kellogg School of Management. What’s to be done? Shaw suggests that “organizations need to reassess their goals for the board, including how to consider expertise and other factors unique to the organization, when creating selection criteria,” adding that “the more clearly bringing in new voices (in terms of race, economics, gender, ability, and LGBTQIA identity) can be tied to the organization’s mission, the easier it will be for other board members to create the necessary room” for a diverse board.

Companies would be wise to stay up to date on what’s in the works with regard to diversity, equity, inclusion, and access in 2021. Savvy employers can also conduct pay equity auditing and pay gap analyses, which serve as a measure (for employees, clients, and investors alike) of where a company stands, and where improvement is needed.

To find out more about how organizations can bolster their diversity and inclusion efforts with the help of an expert partner, click here.