The regulatory push for a representative board is here

What does board diversity mean?

Board diversity is a fundamental aspect of ESG, however it’s often taken a back seat given the more obvious aspects of ESG such as carbon emissions and health and safety. While diversity and inclusion is a vital element on the social side of ESG, it’s often hard to view D&I through a governance lens, leading to some companies being relatively strong on ESG, yet with a board that does not reflect the world the business operates in.

Nasdaq have recently taken the lead by requiring the 3,000 companies listed on the tech exchange to have at least one women on their board, one person from a racial minority, and one person who is LGBTQ+. The requirements also force companies to publicly disclose statistics on the demographic make of their board.

SEC chair Gary Gensler welcomed the changes, saying: “These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.”

The only exemptions from the new rules will be for Nasdaq-listed companies with five or fewer board members, who will only be required to have one member who is a woman, from a racial minority or LGBTQ+. While companies who do not comply will not dace delisting, they will be expected to publicly explain why they are not complying with the rules.

The deadlines for compliance will differ depending on how the company is listed, but all must have at least one board member who meets the requirements within a year. While Nasdaq’s efforts have sharpened the focus on board diversity, they are far from alone in doing so.

Why is board diversity important in a corporation?

The decisions that a board of directors makes for a corporation are essential for their success. A diverse board composition enables the board to adapt to the changing demands of the business environment and makes sure that it is able to fulfil its role in driving sustainable corporate performance. In addition, having a diverse board promotes innovative thinking and problem solving and improves the quality and objectivity of the decision-making process by having a variety of voices involved in the debate and decisions.

California and the EU lead the way on board regulation

California has had a law in place since 2017 requiring publicly traded companies headquartered in the state to have at least two or three female directors. This law was expanded last year to require at least one board member from an under-represented ethnic community, or an LGBTQ+ person.

The US is far from alone in the regulatory push for board diversity. Earlier this year, the EU adopted landmark quotas on women on boards. From 2026, large companies in the EU with over 250 employees will have to ensure the ‘under-represented sex’ has at least 40% of board seats. The rules also state at least 33% representation in all senior roles, including non-executive directors and C-suite leaders.

Across the EU, women hold an average of 30.6% of board seats, but the variation is staggering. Estonia has only 9% of board seats held by women, while France, which already has a 40% mandatory target, is nearing parity with 45.5% of boardroom seats held by women.

Approaches to ESG regulation have always been piecemeal. There is not yet one overarching framework or set of ESG rules. However, these individual parts of compliance make up the regulatory matrix for wider ESG requirements. They can often guide companies to what regulators are looking for. Gender pay gap reporting has been one key priority area in recent years, as is emissions data.

Now, board diversity looks set to be a key driver of regulatory attention on ESG. Board diversity is in fact a critical factor in business resilience, long-term financial performance, and risk mitigation. The push for board diversity, first from investors and now from regulators, is coming from the fact more diverse board and governance structures achieve better results, enhance risk management and drive profitability. 

How to measure board diversity in a company

When measuring board diversity, two main metrics are often used: gender and race. One should also look at additional metrics such as ethnicity and LGBTQ+ breakdown across the board, metrics which are less often reported on. 

What are the challenges in measuring the board diversity of a company?

It can be difficult to compare companies’ information as there is a lack of uniformity in how organisations report data on board diversity. Also, sometimes metrics are combined, which can increase the appearance of a diverse board, but could actually be hiding who is actually represented on their board of directors.

How to increase board diversity

Increasing the diversity of a company’s leadership takes time and effort. But it’s not only the preserve of the chairman or the nomination committee to drive diversity. Existing board members can also help by suggesting individuals and looking outside the tried and tested pools of directors.

Other options to help achieve greater diversity include offering potential candidates the opportunity to serve on sub-committees which can allow companies to get to know candidates before they are nominated to the board. Providing new board members with a mentor and sponsor on the board also improves integration of new members.

Good board candidates have experience in the industry, knowledge of governance, finance, change management and other key strategic skills. Human resources skills and technical expertise are also vital. Looking to the charity and voluntary sector can offer an untapped pool of talent. People who already serve on charity boards will have a great deal of the governance skills corporates require, and these can serve as good recruiting grounds for qualified individuals who bring a diverse perspective.

What to do now for ESG board diversity compliance 

• Understand your current gender, ethnicity and LGBTQ+ breakdown at all levels of the business.
• Flag any ‘hot spots’, teams or departments which are overwhelmingly male, of the dominant ethnicity, and straight.
• Consider internal promotion tracks and management programmes to support growth of people from under-represented backgrounds in the company.
• Set targets for the board and senior roles, with regular reviews to ensure targets are met.