Diversity on boards has been a major topic of discussion over the past number of years, but why is it so important? Studies have shown that companies with greater diversity at the board level tend to perform better than those without. Recent events and regulatory changes have brought this issue to the forefront of corporate governance discussions.
In late 2020, Nasdaq proposed a new rule requiring companies listed on its exchange to have at least one woman and one person from an underrepresented minority group on their board of directors. The rule was approved by the SEC in August 2021 and requires most Nasdaq-listed companies to have at least one diverse director by December 31, 2023 and two diverse directors by December 31, 2025.
The move by Nasdaq is part of a broader trend towards greater board diversity. In recent years, there have been numerous regulatory changes around the world aimed at promoting diversity on boards. In Europe, for example, some countries have introduced quotas requiring a certain percentage of board seats to be held by women.
Research has shown that greater diversity on boards leads to better business performance.
Lodestone Global's 2023 Private Company Board Compensation Survey found that 98% of boards with at least one diverse director reported an increase of 65% on average since the respondent joined the board.
In 2022, London Business School Review's "Board Gender Diversity and Firm Performance: New Evidence from Cultural Diversity in the Boardroom" article found that having a more gender-diverse board was positively associated with firm performance, and that this relationship was strengthened when the board also had greater cultural diversity. Specifically, the study found that when the board had a higher proportion of women and members from different cultural backgrounds, the firm was more likely to experience better financial performance, operational performance, and market performance.
In 2020, McKinsey & Company's "Diversity Wins" report found that companies in the top quartile for ethnic and cultural diversity on executive teams were 36% more likely to have above-average profitability than companies in the bottom quartile. Similarly, companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the bottom quartile.
In 2019, Credit Suisse's "CS Gender 3000: The Reward for Change" report found that companies with at least one woman on their board outperformed all-male boards in terms of share price performance and return on equity. Additionally, companies with more than 30% female board representation had higher return on equity, lower leverage, and higher valuations than companies with less than 10% female board representation.
Also in 2019, Harvard Business Review's "The Other Diversity Dividend" article found that diverse boards were better able to generate innovative ideas and were more effective at implementing them. Additionally, diverse boards were better equipped to identify and mitigate risks associated with new business ventures.
These studies, among others, highlight the importance of board diversity in driving business success. By promoting diversity and inclusion in leadership positions, companies can tap into a broader range of perspectives, experiences, and insights, which can lead to better decision-making, innovation, and risk management.
Despite the evidence supporting greater board diversity, progress has been slow. According to a 2020 report by the 30% Club, women held just 29.2% of board seats in the FTSE 100, the UK’s leading stock index. In the US, women held just 24% of board seats at S&P 500 companies in 2020, up from 16% in 2010.
The private space is a little further ahead with women representing just below 40% of board seats according to Lodestone Global's 2023 Private Company Board Compensation Survey.
The move by Nasdaq is therefore a welcome step towards greater diversity on boards. By requiring companies to have at least one woman and one person from an underrepresented minority group on their board, Nasdaq is sending a strong message that board diversity is important for business success.
But more needs to be done. Companies must take responsibility for promoting diversity on their boards, and governments and regulators should continue to push for greater diversity. The evidence is clear: greater diversity on boards leads to better business performance. It’s time for companies to take notice and take action.