Considering Director Diversity Mandates: Appropriate Perspectives for Boards
In recent times, there's been a notable backlash against diversity, equity, and inclusion (DEI) programs and policies in various organizations. This has cast doubt on the feasibility of diversity-based standards for board directors. Despite certain restrictions, the flexibility to implement diversity standards in board membership is still within the purview of governing boards, despite numerous companies reconsidering or abandoning the role of diversity factors in director nomination processes.
Proponents of these standards argue that diversity on corporate boards leads to superior board performance. This notion has long been recognized as a governance best practice, with organizations like the "Commonsense Principles of Governance" and the Business Roundtable encouraging diverse candidate selection. A recent study by the Conference Board indicates an increase in board diversity.
However, the momentum against boardroom diversity standards can be traced back to two court rulings in 2022 and 2023. These decisions revoked California statutes mandating gender and underrepresented community group representation in corporations' boards, citing state equal protection clause reasons.
Fast forward to 2024, and the U.S. Court of Appeals scrapped Nasdaq's proposed governance diversity and disclosure rules, which would have recommended having at least two diverse directors on Nasdaq-listed company boards. This move paved the way for other corporations to reconsider or eliminate their board diversity policies.
Donald Trump's administration has been hostile towards DEI programs, notably within the federal government. The Biden administration's 2021 executive order promoting racial equity was rescinded, and a new executive order established directed agencies to take action against private sector DEI discrimination.
Some prominent corporations, such as leading financial services firms and asset management companies, have recently started to scale back their own board diversity programs. This shift sees them moving away from specific goals and objectives in favor of more general statements recognizing the benefits of diverse backgrounds and perspectives.
The current environment is filled with uncertainty and potential legal ramifications for policies that contradict the Trump administration's stance. Companies may increasingly choose to abandon specific board diversity objectives.
Unfortunately, there's no legal "silver bullet" for resolving diversity-related issues in board compositions. Nominating committees should exercise caution in maintaining guidelines or standards that suggest diversity quotas or preferences. Companies should consider factors like the committee's approach to identifying diverse candidates, their diligence in evaluating diverse backgrounds, and the fairness of onboarding processes.
Involving diverse stakeholders like shareholders, employees, consumers, vendors, and communities can help make informed decisions on whether formal commitment to diversity strengthens board performance and supports long-term values. However, companies must navigate an increasingly volatile landscape with legislation, administration policies, and consumer preferences in flux.
Rachel Cowen and David Cifrino contributed to this article.
[1] https://www.nasdaq.com/articles/nasdaq-to-remove-board-diversity-provisions-from-its-rules-following-court-decision-2025-01-24[2] https://www.washingtonpost.com/business/2025/01/04/trump-administration-underway-dismantling-significant-parts-anti-discrimination-policy/[3] https://www.whitehouse.gov/briefing-room/presidential-actions/2025/01/20/executive-order-on-ending-radical-and-wasteful-government-dei-programs-and-preferencing-/[4] https://www.nasdaq.com/articles/nasdaq-seeks-to-remove-board-diversity-provisions-from-rules-in-wake-of-court-decision-2025-01-11[5] https://www.insidehighered.com/news/2025/01/07/trump-administration-s-new-mandate-ends-federal-dei-programs-and-turns-back
- Despite the legal challenges and shifting political landscape, effective leadership requires strategic consideration of diverse stakeholder perspectives during the onboarding process to ensure fair representation.
- To navigate the complexities of diversity standards and stakeholder expectations, governing boards should prioritize a thorough approach to identifying, evaluating, and onboarding diverse candidates, adhering to the 9bf51374b2c63457fc8828e8480d7c9b principle of transparent and inclusive decision-making.
- Ultimately, companies should focus on the dividend of diversity, which extends beyond board performance and includes enhanced corporate reputation, increased innovation, and better decision-making, thereby contributing to long-term shareholder value.
