The seeming demise of diversity regulation is only one of a series of important board composition developments of which governance and nominating committees should take note.
The Nasdaq Proposed Rules
The December 11th federal Court of Appeals decision striking down Nasdaq’s proposed governance diversity and disclosure rules is the most recent of these board composition developments. The proposed rules, introduced in 2021, would have required companies listed on Nasdaq’s U.S. exchange to: (i) publicly disclose board-level diversity statistics annually using a standardized template; and (ii) to have, or explain why they do not have, diverse directors. The proposed rules would have established a “recommended objective” to have at least two diverse directors on Nasdaq-listed company boards.
In response to criticism that the proposed rules represented a discrete form of quota, Nasdaq characterized them as more of a disclosure-based framework. However, the proposed rules were immediately met with judicial challenges, which culminated in the December 11 decision that, in sum, the SEC lacked the statutory authority to approve the proposed rules.
The Court of Appeals’ decision follows a series of other notable judicial decisions rejecting or limiting laws and regulations that would have required the composition of corporate boards to satisfy specific diversity standards. Most notable among these were challenges to California laws legislating board gender diversity and board representation of “underrepresented communities.”
These decisions – together with the diversity perspectives of the incoming federal administration – should not be perceived as dooming the cause of diversity, equity, and inclusion in boardrooms. Indeed, many valid studies continue to conclude that diverse boards make substantial contributions towards improved corporate governance and company performance.
But these judicial decisions suggest that if corporate boards are to vigorously pursue diversity across the spectrum – as most statements of governance principles recommend – they are best to rely on their own initiative to do so, rather than to rely on government to require that they do so.
The Conference Board Report
Another important development is the 2024 version of the Conference Board’s report on Board Practices and Composition. The report concludes, in sum, that “[D]espite record levels of demographic diversity in board composition, directional trends are slowing amid an increasingly complex economic and social environment.”
There are at least four important take-aways for nominating and governance committees from the Conference Board report:
First is that “corporate boards are more demographically diverse than ever”; a development reflective of “sustainable efforts to diversify boards”. A warning sign from the report, though, is that the proportion of new directors who are women or from non-white backgrounds has declined in recent years.
Second is that boardroom “diversity of thought and experience” is increasingly supported by the appointment of corporate executives with C-Suite and near C-Suite experience. In particular, an increasing number of directors possess international, human resources and cybersecurity expertise. The appointment of directors with strategic background experience also remains high.
Third is that the adoption of formal overboarding policies has significantly increased; the most common of these serving to limit directors from serving on more than three other boards. The report observes that such overboarding policies reflect a ”strong focus on maintaining direct effectiveness and accountability.”
Fourth is the evolution of board excellence practices to include more comprehensive director training and assessment practices. For example, the report suggests that “a notable minority” of organizations are outsourcing the most complex director orientation and education methods. In addition, an increasing number of companies are expanding the scope of their governance evaluation processes to include each of the full board, its committees, and individual directors-and to have these processes led by independent assessment facilitators.
General Counsel As Board Members
A third interesting board composition development is the notable increase in the appointment of new directors who are currently serving as the general counsel or chief legal officer of other corporations. The second half of 2024 has seen companies in a broad spectrum of industries tap sitting corporate legal officers to serve on their boards of directors.
Historically, corporate legal officers have not been perceived as top candidates for outside board positions, in part because of their existing job responsibilities and in part because of a sense that their service would be redundant with the company’s own general counsel and legal department. That perception has changed of late, as CEOs and board/nominating committee leaders increasingly value the unique strategic perspective and business partner experience offered by general counsel.
Conclusion
The impact of the Nasdaq decision on DEI momentum in the boardroom is significant. It should not, however, overshadow other important developments affecting board composition in companies across industry sectors. Issues of diversity, qualifications, background/experience, and refreshment are interconnected, and are best viewed collectively and not as individual silos.
These latest composition-related developments promise an active 2025 agenda for the board’s governance and nominating committee.