Boards Are Adding More Women and Minorities Ahead of Nasdaq Rule

The pressure is on for boards to diversify, and it’s working.

Source: Bloomberg | Published on May 14, 2021

Shot of diverse business people brainstorming in conference room

Since last June, 145 S&P 500 companies have added at least one Black director, a “brisk” pace compared to past years, according to recruiter Russell Reynolds Associates. Latino board appointments at public companies quadrupled from a year ago, and women, for the first time, hold almost a third of all seats on the S&P 500. Only one major U.S. initial public offering debuted with an all-male board last year.

“Ninety plus percent of every board search that we’ve been asked to execute in the last nine months has had a strong focus on diversity, especially ethnic diversity,” said Keith Meyer, the co-head of board and chief executive recruiting at Allegis Partners. A year ago, only around half of his clients asked about finding women and minority candidates, estimated Meyer, who is also the co-founder of the Directors Academy, an organization that trains diverse candidates for future board roles. About 50 of the graduates of the program are now directors, double the number before the pandemic, he said.

The momentum has been driven largely by controversial quotas, similar to the rule proposed by Nasdaq Inc. Late last year, the stock exchange announced a plan to require listed companies to have at least one female and one underrepresented director. Companies without such directors can stay on the exchange if they explain their lack of diversity.

The U.S. Securities and Exchange Commission will decide by August whether to approve Nasdaq’s proposal. Meanwhile, all companies based in the state of California will have to meet the same requirements starting at the end of this year. In addition, since July 1, Goldman Sachs Group Inc. has refused to underwrite companies that don't have a certain level of board diversity.

These constraints were front of mind for Carl Hull, chief executive of Maravai LifeSciences Holdings Inc. as the company prepared to go public last Summer. The four-member, all-male board had no choice but to diversify; the company is headquartered in San Diego, California and had chosen Goldman Sachs to underwrite its IPO. It was also seeking a listing on the Nasdaq exchange.

Critics of quotas say they lower standards and give unfair advantages to people based on their race, ethnicity or gender. Working with Goldman and executive recruiter Heidrick & Struggles, in about three months Maravai found three qualified women to add to its roster: Anat Ashkenazi, chief financial officer at Eli Lilly & Co., Jessica Hopfield, a scientist and pharmaceutical industry advisor, and Susannah Gray, former CFO of Royalty Pharma. Maravai develops drugs and health therapies, including some technologies used in Covid vaccines, and all of these women had decades of experience in the medical sciences industry.

Gray, who had never sat on a board before last year, now sits on four. “You get into that loop where if you haven’t been on a board you can’t get on a board,” she said. “Goldman broadened the aperture.”

Traditionally, boards have been stacked with friends and family of founders, executives, and other directors. That pattern has kept them largely White and male, and needs to change if companies want to meet new mandates, said Ilana Wolfe, head of corporate board engagement at Goldman Sachs. “There’s real value in selecting someone you know and trust,” she said. “But when the only pool candidates you know and trust all look the same and likely have shared experiences and backgrounds, that’s not efficient for optimizing talent.” In the past year, Goldman has helped find 23 diverse directors for 21 companies, the bank said.

Among those companies was Root Inc., a car insurance company. CEO Alex Timm had been trying and failing for more than a year to find diverse directors. The company is based in Ohio, which has no board quotas, but wanted Goldman Sachs underwrite its IPO last fall. The bank helped him find Jerri DeVard, former chief marketing officer at Office Depot who was already on the Under Armour Inc. board.

This year DeVard also helped found the Black Executive CMO Alliance, a group of c-suite executives from companies such as Amazon and Netflix pushing for more Black executives in marketing roles. Often, boards look for certain credentials, like c-suite experience, in potential directors. Women and minorities are notoriously underrepresented in those roles, leading to their underrepresentation on boards.

“The system was designed for majorities to succeed and not minorities,” said DeVard. “We’re not playing on a level playing field.”

Both the MeToo movement and Black Lives Matter protests brought greater awareness to the discrimination women and minorities face that has kept them out of positions of power. But the push for board diversity is as much about improving governance by adding different kinds of thinkers to to the table. Hull said the new directors at Maravai LifeSciences have changed the dynamic and brought fresh new perspectives. In their second meeting early this year, the three women had different ideas about communication strategies than the veterans, Hull said.

“All of us speak up,” Gray, one of the new directors, said. “There’s no sense that any of us were put on the board because conveniently we happen to have the right gender.”

The fate of the Nasdaq rule remains unclear. The exchange said it got almost 85% support for the plan among the more than 200 comments submitted during the SEC’s comments period this winter. That included notes of approval from Facebook Inc. chief operating officer Sheryl Sandberg and U.S. Senators Catherine Cortez Masto and Kirsten Gillibrand. Newly confirmed SEC Chair Gary Gensler is exploring recommendations for company disclosures of board-diversity data. In addition, Congress is considering a law that would require companies to include board diversity in regulatory filings.

Republicans on the Senate Banking Committee urged the SEC to reject the rule, arguing it’s not Nasdaq’s role to “act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets.”

When the proposal was announced in December, only about a quarter of Nasdaq-listed companies met the proposed standard. Even if the rule isn't approved, the face of corporate boards will continue to change.