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How Nasdaq’s New Board Diversity Requirements Will Move the Market


By Amit Batish  |  October 20, 2021

Calls from investors for more women and underrepresented minorities on boards of directors continue to grow louder, and the issue of board diversity requirements remains divided—at least politically. While mandates and quotas passed by the states of California, Washington, and others have been effective in increasing the prevalence of directors from underrepresented groups, they haven’t gone mainstream and will not likely be seen at a federal level any time soon.

Where there is resistance to board diversity mandates, it often hides behind a guise of an American capitalist ethos that opposes government intervention or forced compliance in the market in any form. The irony in this case is that the market demand for board diversity is already strong and many companies are lagging to respond.  

That’s why the new Nasdaq listing rules, approved by the Securities and Exchange Commission (SEC) on August 6, 2021, are likely to have an outsized impact on the corporate governance world in a way that previous legislative mandates have not achieved completely. The rule requires most Nasdaq-listed boards, other than exempt entities and companies with boards consisting of five or fewer members, to have at least one woman in addition to at least one member of any gender from underrepresented groups defined by race, ethnicity, or sexual orientation. In lieu of compliance, Nasdaq-listed companies can explain why they cannot or will not meet these requirements in public disclosure.

According to the SEC’s order, “the Board Diversity Proposal would establish a disclosure-based framework that would make consistent and comparable statistics widely available to investors… [which] are currently not widely available…even though the Exchange and many commenters argue that this type of information is important to investors.”

Nasdaq’s action is an indicator of continuing pressure from the market, which has become the predominant driving force behind the push for board diversity.

Solving the Pipeline Problem

The business environment is rapidly changing due to myriad factors such as technology that include a wide range of issues from cybersecurity threats to navigating social media; environmental issues including not only a company’s own contribution to climate change but also supply chain and vendor impacts; human capital management and workforce equity; and of course, diversity and inclusion initiatives at all levels of an organization, extending to customers as well.

As a result, boards must expand searches to find individuals who have experience in these areas, and the lack of a diverse board could be a red flag to investors signaling a lack of understanding on these issues.

The pool of current and former CEOs and CFOs (where board searches have traditionally started and ended) are still dominated by white men. Furthermore, many of the individuals in these roles are less experienced with the nuance of some emerging issues; therefore, boards are bound to seek out corporate executives or other outside experts that can bring deeper subject matter expertise. This has revealed a more diverse pool of potential directors, providing a strong argument for eradicating the myth that there is an inadequate pipeline of diverse board candidates.

Take, for example, the number of women in major C-suite roles. While the number of women CEOs and CFOs has increased over the past 10 years, it’s been at a much slower pace than other key roles in legal, technology, marketing, or human resources as shown in the chart below. In other words, as boards expand their searches to identify candidates with expertise in these critical areas, they are much more likely to find highly-qualified women.



As this expanding demand for diverse skill sets expands the supply of women available for board seats, the percentage of women in directorships has increased significantly and that share is gaining steam. According to the recently published Q2 Equilar Gender Diversity Index, 25.2% of board seats in the Russell 3000 now belong to women, crossing a milestone by reaching the halfway mark to gender parity on public company boards of directors.

As a general statistical rule, when big numbers get larger over a long period of time, percentage growth will start to shrink. But the last few years have displayed an unusual trend, and the percentage share of women on boards is accelerating. Over the past five years, the share of women on boards has grown at a 9.2% compound annual growth rate. Yet, from 2019 to 2020, it increased 13.4%, and then from 2020 to 2021, it increased another 10%.


Going Beyond Gender Diversity

There has been significant, unified support behind the push to get more women on boards and the numbers clearly show the success of those initiatives. The other critical piece of the Nasdaq rule is aimed at encouraging greater share of board seats belonging to underrepresented groups as defined by race, ethnicity, and sexual orientation.

Non-white individuals account for approximately 40% of the U.S. population but just 18.4% of board seats within the Russell 1000 (i.e., a subset of the largest companies within the Russell 3000 Index). Within that overall share of population, Black Americans account for about 12%, but only 8.9% of board seats, and Hispanic Americans account for over 18% of the U.S. population, but just 3.9% of directorships. Individuals of the Asian/Pacific Islander descent make up about 7% of the U.S. population, and about 5% of Russell 1000 board seats.


Board diversity statistics remain partially limited by the fact that they are subject to what companies disclose or how individuals identify themselves in their public profiles with board search organizations like Equilar that have public-facing databases. Among the Russell 3000, about half of all companies quantified the number or share of women on their boards in an annual proxy statement and just over one-third (34.5%) noted their racial or ethnic diversity mix as shown in the chart below.

It’s worth clarifying that these disclosures do not mean all these companies have women or underrepresented groups on their boards, just that they are transparent about their board composition. For example, 0.4% of Russell 3000 companies mentioned LGBTQIA+ representation among their directors, yet several example disclosures showed that column blank.



The Nasdaq requirements are likely to boost these types of disclosures and indeed, that’s part of their purpose. Nasdaq has indicated that it will not assess the merits of a company’s explanation if they do not comply, but investors and other interested parties—the intended audience for this information—will scrutinize that disclosure and hold firms accountable. If the SEC also ends up requiring board diversity disclosures from all public companies at some point, not just those listed on Nasdaq, this conversation will become an even more deeply entrenched part of corporate governance for years to come.

Ultimately, Nasdaq’s rule and the growth in board diversity in general are indicative of the importance diversity has become as a business imperative rather than a goal for its own sake. Institutional investors are concerned about the long-term viability of current corporate business models and bringing in diverse perspectives to the board will help kick-start executives with strategic visions that may have stagnated (if it isn’t broken, don’t fix it), or far worse, are stubbornly clinging to the old ways of doing business because they fear the challenges in making changes. As a result, this drive from investors to force a long-term outlook for businesses and the corporate environment is leading the charge to bring boards into the 21st century and beyond.

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This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.


Amit Batish

Director of Content and Product Marketing, Equilar

Mr. Amit Batish is the Director of Content and Product Marketing at Equilar. In this role, he is responsible for overseeing the execution of content production and strategy and leads a team that uses data to tell stories pertaining to key governance trends in the corner office and boardroom. He acts as editor-in-chief of C-Suite magazine and the Equilar blog. Mr. Batish earned an MBA from Santa Clara University and a BA in Political Science from the University of California.


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.