By August next year, companies that list on the Nasdaq stock exchange will have to disclose the composition and diversity of their boards through a standardized template. By the same time in 2023, companies will have to list either one diverse director on their board or explain to Nasdaq why they haven't met that goal. Even further down the line, Nasdaq will ask companies to list at least two diverse directors, or explain why they can't.
It's a diversity disclosure rule that was approved by the SEC in August this year with the aim of providing "a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders," Adena Friedman, president and CEO of Nasdaq, said at the time.
Nasdaq's new rule doesn't require companies to meet the diversity goals it outlines, just to explain why they haven't. There aren't serious repercussions if a company doesn't meet the diversity guidelines. As Nelson Griggs, president of Nasdaq Stock Exchange, put it: It gives businesses the "opportunity" to make progress on their diversity goals.
It's a type of rule that's aimed at using shame to encourage businesses to diversify their boards, according to Subha Barry, president of Seramount, similar to a policy the Australian Securities Exchange implemented in 2010 to push companies to improve diversity. Some countries in the European Union have gone so far as to enforce quotas on the number of women on boards, but nationwide laws enforcing quotas haven't found their way to the U.S.
"It was interesting to see how, when mandated by the government, companies figured out how to be able to find the people," Barry said of the impact of quotas on diversity. The approach of Australia, and now the U.S., is more about, "if we can shame and embarrass them into revealing how miserable their numbers are, maybe that shame and embarrassment will drive them to want to do better."
It's a first step in pushing for more diverse boards, but Barry believes retailers may have to contend with even stronger mandates in the years ahead, as some in the U.S. are putting more "teeth" into their board diversity efforts.
Take California for example: The state in 2018 signed a bill into law mandating a certain number of women on boards for publicly traded companies that have their principal executive offices in the state. In 2020, the state signed another one into law mandating a certain number of people of color or a person who identifies as gay, lesbian, bisexual, or transgender. If a business doesn't meet the requirements, the government would fine it $100,000 for the first violation and $300,000 for subsequent violations.
According to a report the state filed in March this year regarding its women on boards mandate, only 318 businesses filed a disclosure statement last year, out of 647 corporations that are required to abide by it. Out of the 318 that filed, 311 were compliant with the law. That leaves upwards of 300 businesses unaccounted for, which if non-compliant, could be fined $100,000 each for their 2020 board diversity makeup alone.
While certainly more forceful than Nasdaq's disclosure ruling, the California Secretary of State's Office told Retail Dive it has not "announced or imposed fines for failure to comply" yet. According to CDF Labor Law's Los Angles Office Managing Partner, Dan Forman, that's likely because the state needs to create and publish regulations around the enforcement process before implementing the fines. Both laws are also under attack in the court system, which could invalidate them and therefore negate the need for enforcement, Forman said via email.
Whether or not the laws stand, they represent an interest in more serious board diversity scrutiny in the U.S., and other states have launched similar efforts to advance board diversity, experts told Retail Dive. Even Fortune announced last year its Fortune 500 list would include self-reported diversity statistics from companies.
Board diversity has reached a "tipping point" thanks to last year's widespread social justice protests, Meesha Rosa, vice president of corporate board services for Catalyst, said. Retailers are now living in a world where investors are increasingly honing in on board diversity, and from state mandates to stock exchange rules, retailers may have more interested parties to answer to if they don't show progress going forward.
"There's a lot of stakeholders and demands for gender, racial and ethnic diversity in the boardroom," Rosa said.
So where do retail boards stand now and what impact are regulations like the above having?
A 'renewed focus' on board diversity
California's laws may carry a heavier weight since they come with financial repercussions, but even disclosure rules like Nasdaq's could impact the amount of energy retailers put into building out a more diverse board.
"Even if there's no penalty, there is at least an effort to push or nudge companies to move in the direction to diversify the composition of the board," Rosa said, adding that such laws can help "ensure that companies are making the right decisions."
The necessity of having a diverse board of directors is not necessarily anything new. In fact, surveys have shown there are financial benefits to having diverse leadership, which has helped make the case for more action in the past. But in order for retailers to gain the benefits of a diverse board, there needs to be a "critical mass" of diverse board members, according to Barry, which requires more effort than just adding one woman or person of color to a board.
Where do retail boards stand now? As of the beginning of this year, retail still had "work to do," as McKinsey & Company put it in a January report. In 2019, women held an average of just 26% of board seats among retail and consumer companies, while ethnically diverse board members held 16% of board seats, according to McKinsey.
However, Erin Hiatt, vice president of corporate social responsibility at the Retail Industry Leaders Association, said many retailers already adhere to some of the new requirements from the likes of Nasdaq and California or are headed in that direction. The social justice protests last summer led to a "renewed focus" on D&I efforts, Hiatt added, with more retailers engaging with RILA's D&I council and others speaking out for the first time or increasing visibility in how they are tackling diversity. The trade organization's diversity and inclusion initiative lists organization-wide participation as one of its top priorities, and board diversity falls under that pillar.
"I also think that it makes sense that a lot of these laws are really focused on directional progress," Hiatt said. "I think when there's too much emphasis on a specific metric, it can sometimes ignore the fact that meaningful change is just as much about creating the equitable and inclusive environment within an organization as it is with setting the metrics for how to measure progress."
"Unfortunately, in the U.S., we're not quota friendly, and so that is a challenge."
Meesha Rosa
Vice President of Corporate Board Services for Catalyst
Nevertheless, the metrics are low. A 2018 report by Deloitte and the Alliance for Board Diversity found that of 1,821 total board seats in the consumer space, just 23.8% were held by women. Even fewer people of color made it to the board level, with 84.5% of board seats held by White or Caucasian board members in 2018, compared to 8% held by African American or Black members, 3.5% by Asian or Pacific Islander members, 3.9% by Hispanic or Latino members and 0.2% by those that identify as "Other."
In 2018, consumer companies also had the largest percentage of companies with 0% board diversity, at 3%.
Even so, progress is being made. Deloitte's 2020 board diversity study shows that, across all industries, 200 companies have greater than 40% diversity, nearly four times the number from a decade ago. (The Fortune 500 board seats in 2020 were still 82.5% White, however, and 79.4% White on the Fortune 100).
The Russell 3000, in its Q2 report on board diversity, noted that it officially crossed the midpoint to gender parity, with 25.2% women on boards (however, only 2.9%, or 84 boards, have reached total gender parity).
The social justice protests of last year had a direct impact on pushing forward the movement on board diversity, but they also revealed additional problems with how businesses are diversifying their boards. The largest rise in new board directors in 2020 was in Black members, according to Barry, but that emphasis on adding African American and Black board members came at the expense of other underrepresented groups, which saw "little to no progress."
The share of new Black board directors grew from 10% in 2019 to 28% in 2020, Barry said, citing data from Heidrick & Struggles, with over three-quarters of those appointments coming after the murder of George Floyd. But other underrepresented groups, including Hispanic board members and women, saw their share of new board seats fall.
"The only explanation I can give is: horrific tragedy, like what happened with George Floyd, it appears that it brought out a bit of the sense of guilt about 'Oh, my God, we've done nothing for this community,'" Barry said.
It's a pitfall retailers could fall into as they try to increase their diversity in certain areas, and one companies should watch for. Diversity goals in one area should not come at the expense of another, according to Rosa.
An 'overreliance' on diverse board members
Even with a spotlight on board diversity, some underrepresented groups are gaining board seats faster than others. In Deloitte's data, which only accounts for up to June 30, 2020 (protests over the death of George Floyd started in late May), White women made the largest percentage gain in board seats on the Fortune 500, while minority men showed "no substantive increase." Six companies Deloitte tracked remained composed entirely of White men, five of which had been that way since 2016.
There has been a push recently to include more women of color on boards, Rosa said, and Catalyst's research has shown an uptick in the number of women of color that are potential board candidates, but the numbers are still "disappointingly low."
Deloitte's data also suggests companies were already relying too much on the same diverse board members to fill their seats. Nearly 36% of diverse board seats in 2020 were held by people who sit on multiple Fortune 500 boards, including more than two out of every five seats held by African American or Black board members.
"Clearly, the opportunities need to be spread more widely among eligible women and minority board candidates," Deloitte wrote. "In fact, we may be underestimating the 'overreliance' on these board members, as we are not accounting for their board seats outside the Fortune 500."
Hiatt believes that much of retail was already working on board diversity before last year, and pointed to an October report that noted retailers were "generally in-line with the governance norms of companies across the S&P 500." Increased investor interest in ESG, though, has propelled even more emphasis on boards in the retail space, Hiatt said.
"Boards are certainly so influential to long- and short-term goals and objective setting for companies, and they play a major role in defining how to measure progress against them," Hiatt said. "There's really that inherent top-down influence dynamic, so getting diverse perspectives on decision making … is a step toward greater diversity."
The challenge for retailers now becomes how to effectively diversify their boards. Board positions are often held for many years, and the movement to diversify them is further constrained by the fact that there are few recording requirements or term limits, according to Rosa. There have been efforts to get the SEC to require term limits on boards to accelerate change for underrepresented groups, but they have been unsuccessful so far.
"Unfortunately, in the U.S., we're not quota friendly, and so that is a challenge," Rosa said. "It is voluntary for boards to make this step to diversify."
How things could change
Imposing fines on companies that don't meet its board diversity standards, like California intends to, is certainly one way of accelerating diversification. But there are a whole host of other possibilities for how board diversity could be changed in the retail space in the years to come.
"Term limits, age limits: Should people time out at the age of 75?" Barry said, referring to two ways retailers can improve their board's diversity. She added that retailers can also expand the number of people on their board. Ulta, for example, had eight members on its board of directors in 2010, all men save one, and expanded that number to twelve by 2017, including six men and six women.
One challenge of improving board diversity is that CEOs are often selected for boards, and the path to the chief executive role (or any C-suite position) in retail is fraught with long-ingrained challenges and biases for women and people of color. Thus, solving the board diversity issue in some ways starts with solving the diversity issues on retailers' executive teams.
That in and of itself is a long road and a decades-long problem to address. If retailers want more diverse boards in the future, though, they need to start now by building a pipeline of diverse employees and giving them the right opportunities to grow into top execs so that, over time, they can become the next board members. Rosa flagged sponsorship or mentorship opportunities as another way companies could prioritize advancing underrepresented groups.
"How about the SEC swing into action to say, 'Hey, before you even apply, I need to know what the configuration of your board is going to look like, and unless you have X,Y,Z — don't even bother.'"
Subha Barry
President of Seramount
Retailers can also expand what type of roles they bring onto their boards, experts said. CEOs and CFOs have been traditional choices for the board, but the protests last year in part accelerated a movement to diversify what executive positions make it onto boards.
"With the leap in Black directors — there were only a limited number of CEOs and CFOs who were Black — and so they began to look at other types of roles that this Black talent had actually filled," Barry said. "And that changed the mindset of boards."
That effort has its own challenges, though. According to Rosa, some companies don't allow certain executives to serve on boards, limiting the positions to only high-level roles. She cited Salesforce as an example, where a senior vice president at the company said she was fired for taking an outside board role.
"It's a gatekeeping issue where executives are not allowed to serve on outside boards because for some reason they feel that would take that person away from their day-job operations," Rosa said.
There are still many obstacles to diversifying boards that retailers will have to tackle, but increasingly, investors are expecting retailers to tackle them. Disclosure mandates are likely only the beginning of outside pressure to do so as investors prioritize diversity.
What could come down the road is anyone's guess, but Nasdaq and California are good bellwethers for what retailers will continue to encounter, and in the future, board diversity may get a lot larger than a particular stock exchange's guidelines. Barry suggested that the SEC itself, which approved the Nasdaq's board disclosure rule, start requiring companies to disclose the diversity of both their executive teams and their board of directors.
"How about the SEC swing into action to say, 'Hey, before you even apply, I need to know what the configuration of your board is going to look like,'" Barry said, "'and unless you have X, Y, Z — don't even bother.'"
