Earlier this month, the Securities and Exchange Commission under Chair Gary Gensler approved a controversial Nasdaq Inc. (NDAQ) proposal that seeks to shake up boardrooms and bring in a wave of women and demographically diverse directors.
Larger listed corporations, based on the Nasdaq rule, must bring on at least one director who is a woman and another who self-identifies as an “underrepresented minority or LGBTQ+” — or explain why they couldn’t find anyone that meets the requirements. Smaller reporting companies, foreign businesses and corporations with five or fewer directors will either only need to bring on one diverse director or two women, depending on whether they meet certain exemptions.
Many Nasdaq-listed companies will need to have at least one director fitting the rule by August 2023 and two by August 2025 or explain why not. Other smaller corporations will get between two and five years to comply.
Finally, all Nasdaq-listed companies need to disclose information about the demographic diversity on their board by next year, either in a proxy statement or on their website.
For now, many Nasdaq boards need work. The Deal and a sister company, relationship mapping service BoardEx, conducted a deep dive into Nasdaq corporations and found that 227 listed corporations with more than five directors have no women on their boards.
Of those, BoardEx found no women on the boards of 51 pharmaceutical and biotech companies, 17 software and computer services businesses, 17 banks, 14 healthcare companies and 32 blank-check shell companies, often referred to as special purpose acquisition companies, as well as roughly 100 others.
(SPACs are exempt for the rule until their business combination — or de-SPAC — is completed. After that they have one year to provide board diversity disclosures and two years to meet Nasdaq’s director diversity objectives.)
Patricia Rodriguez-Christian, CEO of CRC Group Inc. and a director at Actuated Medical Inc., said she wasn’t surprised that so many Nasdaq-listed corporations with large boards don’t have women directors. She argued the measure will nudge companies in the direction of diversity.
“When you recruit for board members and continue to search the way it has been done in the past, you are going to get the same result,” she said. “[The Nasdaq measure] will be a catalyst to diversify the boardroom.”
Some large-capitalization companies without women directors are U.S. based. For example, Cassava Sciences Inc. (SAVA), a biotechnology company based in Austin, Texas, has a $2.1 billion market capitalization and no women on its seven-person board. Vicor Corp. (VICR), a modular power components company based in Andover, Mass., with a $5.6 billion market capitalization, also has no women directors.
TG Therapeutics Inc. (TGTX), a New York-based cell biology and medicine company, has a $4.2 billion market capitalization and no women on its six-person board. International Bancshares Corp. (IBOC), a bank in Laredo, Texas, has no women on its board and a $2.7 billion market capitalization.
Finally, Landmark Infrastructure Partners LP (LMRK), a smaller wireless communications real estate company with a $414 million market capitalization that until recently was embroiled in a three-way bidding war, has no women directors.
Nasdaq’s requirements might send a message to activist hedge funds: Floundering corporations lacking board diversity can become good targets, especially if they don’t meet the exchange’s women and minority board objectives.
“If a company is underperforming, an activist will look for areas to drive change and create an opportunity to put a different slate of directors on,” said Brian Stafford, CEO of governance risk and compliance software provider Diligent Corp. “Corporations need to focus on absolute performance and the angles by which someone might approach you.”
Stafford added that insurgents might target corporations that opt to issue an explanation of why they were unable to install diverse directors.
“You will find activists cuing on the reasons why people said they couldn’t find diversity,” he said. “Activists will call out those specific reasons and say a well-performing organization would be able to address that and wouldn’t come up with these reasons.”
Overall, additional disclosures create opportunities for companies to educate their investor communities but also create possibilities for activists to drive change that could improve performance, he added.
Some of the largest Nasdaq corporations with no women directors are based outside the U.S. — mostly in China. According to BoardEx, eight of the 10 largest Nasdaq-listed corporations with more than five directors and no women are based in China. For example, Pinduoduo Inc. (PDD), a Shanghai-based agriculture-focused technology platform, has no women directors and a $130 billion market capitalization.
Other large foreign Nasdaq-listed companies with no women directors include Kingsoft Cloud Holdings Ltd. (KC), a cloud computing services company with a $6.7 billion market capitalization, and Akari Therapeutics plc (AKTX), an autoinflammatory treatment company based in England with a $66 billion market capitalization.
These non-U.S. businesses aren’t exempt. According to Nasdaq, foreign companies can meet the diversity objective with two female directors or one female director and one director who is an underrepresented individual, based on racial, ethnic or other categories in their country.
A number of Nasdaq-listed issuers qualify as Smaller Reporting Companies, which include businesses that have a public float of less than $250 million or meet other characteristics including annual revenue of less than $100 million. These corporations are urged to meet a diversity objective of two women or one women and one nominee advancing demographically diversity, but a new provision in the final rule allows companies with five or fewer directors to only bring on one such candidate, rather than two, or explain why they haven’t done so.
Cincinnati Bancorp Inc. (CNNB) has six directors, none of which are women, and a $43 million market capitalization. The bank appears to qualify for the smaller corporation relief provision, but because the institution has more than five directors, it will need to bring on two candidates satisfying the rule.
According to BoardEx, 127 companies with more than five directors and no women have below $250 million market capitalizations that appear to give them access to the Small Reporting Company objectives.
For now, it is unclear how much work Nasdaq-listed companies have to do when it comes to bringing in demographically diverse candidates, since corporations so far haven’t been required to disclose that information. The Nasdaq disclosure measure, which takes effect next year, should help statisticians and database operators to obtain data they need on the subject.
Rodriguez-Christian, co-president of the WomenExecs on Boards organization, noted that many director searches only seek out current or ex-CEOs, limiting the pool of potential candidates and reducing the likelihood that a woman or candidate advancing demographically diversity will emerge.
As part of the measure, Nasdaq is also providing its companies one-year complementary access to a board recruitment service or online talent marketplace — offered by Equilar Inc., Athena Alliance or TheBoardlist — that provides access to a “network of board-ready diverse candidates.”
Rodriguez-Christian argued it was a smart move for Nasdaq to provide corporations with free access to these groups to help them find diverse candidates.
“Giving free access to recruitment organizations takes advantage of the networks that have been built out over the last few years,” she said.
WomenExecs on Boards, a business association made up of current and aspiring women directors who have completed a Harvard Business School executive education program, has collaboration agreements in place with both Equilar and Athena Alliance, she noted.
Still, some Nasdaq-listed corporations will need to cast a wider net to find qualified candidates that meet the new requirements.
“[Nasdaq] understands that diversity on boards and diversity in the C-suite is about increasing shareholder value,” Rodriguez-Christian said. “The more competitive their listed companies are, the better it is for the organization.”
Finally, Rodriguez-Christian noted it made sense to give smaller corporations some additional flexibility.
“Part of it is about allocation of resources,” she said. “If an organization is smaller, they have more limited resources to find the candidates they are looking for.”
For now, many Nasdaq-listed corporations will need to start asking themselves the question — do we need more diverse directors or will we try to explain why not?