The process of appointing powerful board directors has been put into the spotlight in recent years, as companies, courts, governments, investors and even a stock exchange weigh in. For the most part, they’re proposing and implementing changes to bring the process into the open and hold boards more accountable for who serves on them.

This period of transition may mark the beginning of a new era that’s defined by accountability and inclusivity in the highest levels of authority.

Colleen Ammerman, director of the Race, Gender and Equity Initiative at Harvard Business School, said she is seeing a “significant shift” in the appetite for change.

“There has been more of a conversation about what it means for these very powerful groups to be as homogenous as they tend to be,” Ammerman said.

A few examples of stakeholders that are pressing for change:

● Nasdaq requires companies listed on its exchange to have at least two diverse directors on the board or publicly explain why they don’t.● The European Union has moved faster than the United States in pushing companies to include women on boards and by 2026, companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors. Racial and ethnic representation, however, have not been prioritized in the continent. ● California passed laws requiring public companies based in the state to have women and minorities on their boards, but courts found the law unconstitutional in 2022. Other states also have passed laws requiring disclosure of representation on their boards.● Institutional investors and proxy advisers have wielded their power over votes to encourage diversity.

So far, one of the biggest changes that has withstood court challenges is Nasdaq’s “comply or explain” mandate for most companies listed on the U.S. exchange, which requires them to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards.(companies with five or fewer directors may satisfy the recommended target with one director from a diverse background) Companies also must annually disclose diversity statistics about the composition of their boards on measures including sexual orientation identification, gender, race, and ethnicity.

The Securities Exchange Commission (SEC) approved the proposal, but drew opposition that argued it was an abridgement of free speech. In May, the U.S. Court of Appeals for the Fifth Circuit questioned the SEC's authority to allow the 2021 Nasdaq rules under a law meant to help investors make informed decisions. According to Ammerman, while the Nasdaq rules encourage discussion, they don’t significantly impact diversity levels.

Different Approaches to Diversity Mandates

There is no national legislation requiring transparency or quotas on corporate boards in the United States, where there is little appetite for mandates.

“Americans don’t like to be told what to do, even if it's for a good cause,” said Larry Cabaldon, CEO and founder of the Boardroom Performance Group in California, which advises boards.

Mandates have yielded the fastest change in diversity on boards because they establish timelines that must be met, said Cynthia Soledad, global head of the diversity, equity and inclusion practice of Egon Zehnder, a business management consultancy. The downside: “progress stops at whatever the requirement is,” Soledad added.

Even discussion of regulation can have an impact. Soledad said U.S. businesses have responded to public debate about regulation by acting preemptively and on principle. For example, more companies now voluntarily disclose the makeup of their boards.

Unlike in the United States, European countries are opting for quotas for women on boards. In 2022, the European Parliament passed a gender balance rule with broad support requiring that by 2026, listed companies have boards where women comprise at least 33 percent of directors and 40 percent of nonexecutive directors. Some EU countries already have requirements for gender balance.

Transparency driven by new laws and rules is sparking debate and providing data about companies’ progress in Europe, according to Philine Erfurt Sandu, co-founder of Investors4Diversity, a German executive education program for women interested in board service. However, Europe lags on pushing for diversity based on race, ethnicity, and sexual orientation, she said.

Two important upsides of the mandates for female representation are its impact on diversity throughout companies and a professionalization of board searches, according to Sandu, who also teaches at the Berlin School of Economics and Law. This professionalism comes in when companies are being watched and have quotas to meet, so they look more closely at qualifications to justify choices and ensure they aren’t falling prey to unconscious bias, she said. Another consideration is sustainability of the progress.

“You can appoint one or two women quickly. The question is, can you have more women coming after them?” Sandu said. That requires building a pipeline of female leaders, she said.

Canada passed a “comply or explain” mandate related to women on corporate public boards. A study of the results showed that although large, visible firms already are making progress toward more women board members, firms outside the media spotlight were able to hide poor performance despite the disclosures, according to study author Sarah Kaplan, distinguished professor of gender in the economy at the University of Toronto.

State-Level Board Diversity Measures

California’s laws mandating that women and underrepresented minorities be included on boards for locally based public companies were groundbreaking, but fleeting. Courts ruled the state had not proved the penalties for noncompliance were warranted.

Other states have passed less far-reaching laws, many of them focused on disclosure instead of mandates and often dealing with gender representation instead of broader diversity. Washington state requires that at least 25 percent of the board members of each public company must be women, or the company must disclose its failure to achieve this diversity to shareholders. New York state requires companies to report how many women sit on their boards.

Where Do Institutional Investors Stand?

Institutional investors and proxy advisers have actively encouraged board diversity. The giant shareholders Vanguard, BlackRock, and State Street all have diversity policies that factor in representation and progress. When goals aren’t met, the investors withhold proxy votes for directors such as nominating committee members.

Similarly, proxy advisers Institutional Shareholder Services and Glass Lewis both recommend votes against nominating committee chairs when gender diversity goals aren’t met.

Companies Address Board Diversity

The public debate over diversity has the beneficial effect of shaking up the sense of complacency about the issue and forcing companies to explain how they want to approach diversity, Ammerman said.

Kaplan said, “Any company that is not moving towards better representation on their boards is going to find themselves behind the eight ball, not just in terms of pressure from stakeholders, but … [also] in terms of the products and services they offer that won’t be inclusive enough … potential investor reactions [and] performance.

“Every firm should be thinking about how they can improve the diversity of the people who are making the critical decisions.”