For tech companies, Nasdaq listings are a financial status symbol. Now, getting a coveted spot on the list will require that every large tech company have at least one female board member and another who identifies as a historically underrepresented minority — and while the Nasdaq did not provide data on how many companies have that status, the majority of them failed an earlier, slightly stricter version of the requirement.
Companies don't have to comply with the "diversity" rule (which goes into effect August 2022, or by the annual 2022 shareholder meeting), but those that don't have to provide a public explanation to Nasdaq as to why they are unable to meet the requirement, or why they have taken a different approach to ensuring their boards respect a range of perspectives and personal backgrounds. Companies with five or fewer board members get an exemption from the second diverse member requirement.
The trend toward requiring board diversity isn't a new one — California enacted a similar rule in Sept. 2020 for all companies headquartered there, and another rule focused just on gender diversity in 2018 — but the Nasdaq is the first stock exchange to formalize it. While the definition of "diversity" ranges depending on the organization, investment firms like BlackRock and Goldman Sachs require a wide representation of various ethnic and racial backgrounds, sexual orientation, genders, age and business perspectives on the boards of their portfolio companies. Research from these financial institutions, as well as the country's top business schools, indicates that "diverse" boards perform better financially.
Board membership turnover is so slow on average that general trends in employment and company leadership demographics can take decades to appear on boards. "You'd see boards that were together for 15 years and one member is falling asleep at the board table because they are in their late 80s, and they are all white men and the average age is 62," Coco Brown, the founder and CEO of the Athena Alliance, said. "People are saying this is ridiculous, how can you be on the cutting edge, and the world is changing so much. Your boardroom has to be different than it was in the past." The Athena Alliance — alongside Equilar and theBoardlist — has partnered with Nasdaq to provide free tools for companies seeking to recruit new board members to meet the rule. All three of these organizations, though they vary in their mission and other services, collect information from thousands of qualified board candidates, often endorsed by current serving board officers, and help companies connect to and recruit them.
Existing company boards also have few natural market incentives to change their makeup. Changing the board makeup usually means that someone has to volunteer to leave a coveted job, one that comes with only a few required meetings a year, a high salary and other luxury benefits. Board jobs are also among the few that allow someone to work a full-time job elsewhere, or hold multiple board seats with multiple attractive compensation packages.
"Everyone is like, 'Yeah, when we have an opening we're going to look for diversity.' But if you don't have term limits and everyone keeps voting for the same people, then the board never changes," Brown said. "Who wants to leave that? No one is going to voluntarily leave that. Because you're this small collective of people who have been together for a long time, you're a self-protecting system. 'I don't want to leave the board, so I'm not going to boot anyone.'"
Prominent Republican lawmakers, led by Pennsylvania Sen. Pat Toomey, opposed the new rule because they believe it defines diversity too narrowly, limiting the range of experiences that could qualify. "By defining diversity by race, gender, and sexual orientation, NASDAQ's mandate will inevitably pressure companies to subordinate crucial factors such as knowledge, experience, and expertise when selecting board members. These prescriptive requirements may ultimately harm economic growth," he said in a statement after the SEC approved the rule on Aug. 6.
While Equilar defines diversity beyond the three demographic characteristics in the Nasdaq rule, the idea that it's not possible to find equally or more qualified people who meet the Nasdaq requirements offends Belen Gomez, the vice president of strategic initiatives and communications at Equilar, one of the companies helping Nasdaq-listed boards get in compliance with the rule. "I think blanket statements like that just don't really belong in the discourse or this discussion," she said. "The talent issue is not on the table. I personally think that it takes away from the amazing accomplishments of plenty of highly accomplished board members, serving on nonprofits that are private. They have so much to offer."
"I personally have experienced the backlash of, 'No one is going to tell me how to put my board together, and I just want the best person for the role.' This is not about loving women. It's just good business sense," Brown added.
For private tech companies and early-stage startups, the new rule is also a signal that if they aspire to a Nasdaq listing, they have to carefully consider the makeup of their boards. "After the California legislation, which only impacted public companies based in the state of California, we were getting calls from private companies in the state of California, and public and private outside the state. Elevating the issue in the way the Nasdaq has brings a level of awareness and aspirational behavior that brings a much broader level of progress," Shannon Gordon, theBoardlist's CEO, told Protocol.
Because tech companies emphasize newness and innovation in their products and marketing, Gordon finds it especially ironic that some might not yet meet the new Nasdaq standards. "Some of the same brains and faces are working on the problem and bringing the innovation to the table over and over again," she said. "It's quite shortsighted and kind of a backwater in this very forward-thinking Silicon Valley ethos."