Post By: Ty Francis, Chief Advisory Officer, LRN
“It all begins and ends with the board” is a familiar refrain in ethics and compliance circles, meaning as the board goes, so does the company.
There was little surprise earlier this month when Securities and Exchange Commission approved Nasdaq’s proposed listing rule on board diversity.
Back in 2015, I remember having a conversation with my former colleague Erica Salmon-Byrne, and Lopa Zielinski, a corporate governance executive for a global banking/financial institution, about how we felt that the gender diversity needle wasn’t being moved far enough.
We knew that gender diversity was emerging as a business imperative and a well-established best practice that supports the overall sustainability and governance of global companies. This wasn’t a vanity play or a ‘nice to have’; the data we were seeing was proving its economic value. Data from a survey we had commissioned suggested that more than half of the 140 respondents indicated that gender diversity was considered when selecting independent directors but, more poignantly, not prioritized on the same level as background and experience. The same notion applied to critical senior leadership roles where 53% of the survey participants revealed that education and experience were the deciding factors. It was clear that companies were not ready to keep up with the growing demand for gender parity.
An ethical approach, which places value on equity, is not just the right thing to do, it makes good business sense. Shortly after, in the February of 2017 I co-hosted an initiative at the NASDAQ MarketSite with over 75 companies to highlight thought leadership, key metrics and global trends in gender diversity and inclusion to inspire companies to expand their D&I programs. Throughout the event, key themes emerged such as retirement, recruiting and retaining diverse employees and the importance of effective and robust disclosures. It became clear that diversity was an opportunity for companies to differentiate themselves and break away from the pack and to voluntarily use the data from your company to tell a powerful story. It was clear that companies needed to keep the momentum going regardless of the political climate and new regulations.
So, fast forward to 2021, and we see the new guidance for publicly listed companies in what I hope is the latest in a line of new requirements aimed at increasing diversity of corporate boards, after intense stakeholder demands for diversity in corporate leadership to reflect the public they are intended to serve.
So what are the consequences for the ethics and compliance office.
Similarly to Japan’s new Corporate Governance Code update that includes board diversity requirements, NASDAQ will apply a “comply or explain” approach to enforcement. Organizations must include two diverse – meaning individuals who self-identify as female, underrepresented minority, or LGBTQ+ – directors or explain why they have not done so. Nasdaq reported that the new rule is not a mandate and does not set a hard target that companies must adhere to regardless of circumstances, but there are disclosure requirements and time-stamped deadlines for achieving compliance. There is risk of delisting if organizations do not comply. The initial deadline for compliance is in 2023.
Don’t get me wrong, this is extremely welcome news, but let’s not miss the forest for the trees.
New mandates for board diversity are being enacted by regulators and in markets across the globe.
In the UK, The Financial Conduct Authority (FCA) is partnering with the Prudential Regulation Authority and the Bank of England to launch a consultation into how financial services can improve diversity. ‘Diversity and inclusion in the financial sector – working together to drive change’, the joint discussion paper has highlighted various areas of concern. One suggestion is to ensure at least 40% of board directors are women, as well as having at least one woman in a senior board position. The paper also recommends at least one senior board position to be taken by someone from a non-white ethnic minority background. Boards of FTSE companies have become more diverse than ever, according to a study from the Financial Reporting Council and the London Business School. The report, entitled: ‘Board diversity and effectiveness in FTSE 350 companies’, claimed almost all had benefited from improved gender diversity in the boardroom.
The Securities and Exchange Commission (SEC) is expected to propose its own board diversity requirements, which are sure to include requirements for disclosures on progress, as with the NASDAQ’s Board Diversity Rule. In 2018, California mandated all public companies with executive offices in the state to have at least one woman on their boards by December 2019 or face steep fines. Other states are seeking to follow their lead.
This is part of a movement toward greater transparency and the introduction of various disclosure frameworks to meet investor and stakeholder demand for visible and measurable impact and more accountability in a time of environment, social and governance change.
Diversity at companies and among boards generate better decisions, particularly in crisis; higher levels of innovation, and the silver lining of greater financial returns, study after study has proven. Yet progress to adopt greater board diversity has been slow.
The new mandates appear to be working.
Today, in the US, female representation on corporate boards has reached 30 percent from nearly 10 percent a number a years ago. Yet the percentage of underrepresented minorities on boards remains at 10 percent. Another bill in California is set to require publicly owned companies based in the state to add more underrepresented groups, including Black, Latino, Asian and Native American people and members of the LGBT community, to boards.
LRN’s recent reports on the obligations of boards in the new world of work also shows how diversity of skills, perspectives, ages, and tenure can mitigate the risk of ‘groupthink’.
No matter where you look the pressure for business to meet societal demands for diversity, equity, inclusion and general good governance and ethical business practices has ratcheted up – whether from regulators, markets or stakeholders. Smart companies are actively working on spirit behind the comply side and not the letter of the explain side of these new rules. They are also realizing that it is not a matter of IF, but WHEN new requirements for greater disclosure and accountability on good governance, culture, leadership and behavior will land at their doorsteps.
About the Author: Ty Francis MBE is the Chief Advisory Officer at LRN where he leads LRN’s worldwide ethics & compliance and board advisory consulting business. He helps companies reinvent and rewrite codes of conduct, deliver policy simplification, provide strategic E&C program evaluations, and conducts ethics and culture assessments.