190316 nasdaq
The Nasdaq MarketSite in Times Square, New York. Hundreds of companies trading on the Nasdaq Inc. stock exchange may be forced to add diverse directors for the first time. Image Credit: Bloomberg

New York: Hundreds of companies trading on the Nasdaq Inc. stock exchange may be forced to add diverse directors for the first time or explain why they haven’t, after U.S. regulators cleared the way for new listing requirements.

More than a third of companies trading on the Nasdaq lack a racially diverse director, and more than one in 10 have no female directors, according to an analysis by ISS Corporate Solutions of 2,284 companies where data were available. About 8% had neither a woman nor person of color on the board, the data showed. More than 3,000 stocks trade on the exchange, according to Nasdaq.

Diversity deficit

“The data shows clear evidence that there’s a small-cap company gap when it comes to diversity on US boards,” Marija Kramer, head of ISS Corporate Solutions, said in an interview. “Listed companies, if they aren’t already, should think about how they’re going to recruit for more diverse directors.”

A Nasdaq representative declined to comment on the outside data.

Larger companies are already showing significant changes. The percentage of new Black directors on S&P 500 boards almost tripled in 2020 compared with previous years as companies responded to pressure to add diversity in the boardroom, recruiter Heidrick & Struggles found.

“I think this is another level of emphasis,” said J. Veronica Biggins, a recruiter at Diversified Search Group and a member of the Southwest Airlines Co. board. “People today are specifically saying, ‘We want to see a diverse talent pool.’”

The new Nasdaq rule, which requires companies to publicly disclose the gender and racial makeup of their boards within roughly one year after the Securities & Exchange Commission gives its endorsement, does not mandate any changes. It does require companies that don’t have women or diverse members to explain why. Most listed companies would have as many as four years to meet the standard of one woman and one person of color on the board.

Companies with fewer than six directors are only required to have one diverse member to meet the recommended diversity level. Among about 300 Nasdaq-listed companies with fewer than six board members, 64% lacked diverse directors and 44% had no female members, ISS Corporate Solutions found. Almost a third had neither a woman nor a diverse director.

California rules

Even the disclosure requirement is a significant change, since there are no federal rules forcing companies to reveal board diversity, and voluntary disclosure can vary from company to company, Kramer at ISS said. As more funds seek to invest in companies with diversity, more voluntary disclosure is likely to follow.

California will require public companies based in the state to have at least one diverse director by the end of this year or face fines. Adding to the pressure, SEC Chair Gary Gensler has said the SEC is exploring separate recommendations for company disclosures of diversity data.

It will take a combination of legal, regulatory and private efforts to get companies to fully embrace diversity, which also improves financial performance, said Meesha Rosa, vice president of corporate board services at Catalyst, which works to advance women in the boardroom. Time will tell what size role the Nasdaq rule will have, she said.

“The nudge will allow companies to proactively work toward board diversity,” Rosa said. “This sets a template for others to follow. “