Evolving Board Composition in the Wake of the Nasdaq Decision

It marks a pivotal moment in the ongoing conversation around corporate board composition that the December 11th Court of Appeals decision overturned Nasdaq's proposed diversity and disclosure rules. Introduced in 2021, the rules would have required Nasdaq-listed companies to publicly disclose diversity statistics using a standardized format and either include at least two diverse directors or explain their absence. Although Nasdaq had claimed that the measure was a disclosure framework, others said it looked more like a quota system. The court ultimately determined that the SEC did not have the statutory authority to implement such measures—a severe blow to government-backed initiatives aimed at increasing diversity on corporate boards.

The ruling did not spring out of a vacuum. This development fits into a larger pattern of judicial pushback against laws that mandate board diversity, including California's efforts to legislate gender representation and the inclusion of underrepresented communities on boards. These developments might suggest a retreat from the principles of diversity, equity, and inclusion, but the broader picture is more nuanced. While government mandates face ever-escalating challenges, the intrinsic worth of board diversity—there exist a myriad of studies to establish the link between diverse boards and stronger governance and higher performance—remains unfazed. The courts, after all, may still lack effective regulatory enforcement, but the pressure is now squarely on companies themselves to take the lead towards making boardroom diversity a reality through in-house initiatives.

Another important development is emerging in this changing legal landscape through the 2024 edition of the Conference Board's report on Board Practices and Composition. The report provides valuable insights into modern boards, which are heartening in many ways and subtly warning. Encouragingly, modern boards are now more demographically diverse than ever through sustained efforts over the past decade. However, the report shows a slowdown in its progress, with fewer female and non-white directors over the past few years—a trend that raises worries about the momentum of these diversity efforts.

The report also underlines a growing sense of emphasis on the diversity of thought and experience within boards, along with a notable preference for directors who possess executive-level expertise. Companies increasingly are hiring individuals with specialized backgrounds in international operations, human resources, and cybersecurity — areas growing increasingly important in a changing economic and technological environment. Strategic experience remains in hot demand, reflecting the need for directors able to help organizations navigate challenges and drive long-term growth.

Another area of focus is overboarding policies. More companies are now limiting how many boards a director can serve on. The most common are three additional board seats, and this reflects a greater push for director effectiveness and accountability so that people have the time and attention they need to fulfill their board responsibilities. Companies are also improving board excellence practices by paying more attention to director training and performance evaluations. More organizations are outsourcing complex orientation programs for new directors and extending governance assessments to include the full board, committees, and individual directors. Frequently, independent facilitators conduct these evaluations, which suggest a desire for objective and rigorous assessments.

Outside boards of directors are increasingly filled with general counsel and chief legal officers. Traditionally, corporate legal officers were not considered for the boardroom partly because of their demanding role and partly because of perceived redundancy with a company's in-house legal function. Times have changed, however. Boards and CEOs have become aware of the value proposition general counsel bring to the table - strategic insights, risk management acumen, and the ability to serve as trusted business partners. As regulatory, legal, and governance issues grow in complexity, having general counsel on boards is an obvious response to the modern needs of corporations.

These developments point towards a much more holistic approach to board composition than the narrow demographic focus of recent years. Qualifications, experience, and board refreshment are intertwined, and these should be seen as part of a wider governance improvement strategy. Though a court ruling on Nasdaq's diversity proposal may derail one of the paths forward, it won't mean the end to progress. Companies pursue diversity, equity, and inclusion because diverse perspectives lead to better decision-making, stronger oversight, and more resilient organizations.

In this sense, boards also increasingly bear an accountability to ensure that they have acquired the appropriate skills and know-how to address emerging problems. It is through new appointments with specific experience, curbing overboarding, or through more enhanced assessment procedures that companies are perfecting ways of constructing their boards of directors. This trend presents an increasing realization that those boards that can respond to the conditions of the contemporary business environment possess both diversity of ideas and technical competence in service delivery.

These wider trends need not be obscured by the Nasdaq fallout. Even as the legal environment changes, the business imperative to create diverse, experienced, and competent boards remains the same. It will not be up to the governments to ensure the right diversity of backgrounds, experience, and expertise in the boardroom. Challenges and opportunities related to board composition will remain one of the central focuses governance and nominating committees will look ahead toward in 2025. The question is no longer if, but how companies are to be taking charge regarding the boards of tomorrow.