The lack of diversity among leadership in the banking industry has long been used as a rallying cry for lawmakers and consumer interest groups who say the makeup of the sector's decision makers doesn't accurately reflect the demographic the industry serves. 

But a new California law, and a recent Nasdaq proposal, could give banks a deadline to diversify their boards.

"Banks are going to need to plan ahead and start expanding their networks and looking for diverse directors now," said Vicki Westerhaus, a partner in the law firm Bryan Cave Leighton Paisner. 

Nasdaq this month asked the Securities and Exchange Commission (SEC) for permission to adopt new listing rules related to board diversity and disclosure. The proposed rules would require companies to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or lesbian, gay, bisexual or transgender. 

The Nasdaq proposal would provide each company one calendar year from the approval date to provide statistical information regarding its board-level diversity. Companies will be expected to have at least one diverse director within two years of the SEC's approval and two diverse directors within four years. Under the proposal, companies that don't meet the criteria within the designated time frames will be required to explain why.

The proposal, which first needs to be approved by the SEC, follows the passage of a California law signed by Gov. Gavin Newsom in September, requiring public corporations headquartered in the state to achieve diversity on their boards of directors by 2023.

A recent analysis by The Greenlining Institute found efforts by the state's banks to improve diversity over the years have stalled.

The nonprofit research group, which examined the racial and gender makeup of the boards of the top 15 banks in California, as measured by deposit size, found on average that 22% of board members in 2020 were people of color, a decline from 30% in 2019. 

The analysis also found only two of the 15 banks had more than one-third people of color on their boards, and on average, women comprised 29% of board members, unchanged from 2019.

"In a state that's 64% people of color, and projected to be 70% by 2040, the leadership of our most important financial institutions should reflect that diversity — and right now it doesn't," De'Zhon Grace, the report's co-author, said in a statement. "This isn't an academic question. Our recent analysis of mortgage data found Black, Latino and Native American borrowers still lagging behind. More diverse bank leadership could push these institutions to work more cooperatively with California's diverse population communities."

But the recent initiatives have been met with some pushback. 

The Wall Street Journal's editorial board accused the world's second-largest exchange of "virtue signaling." 

"Imposing its own identity politics on some 3,300 listed companies meddles in corporate management and will harm economic growth and job creation," the paper's editorial board wrote.

Conservative watchdog group Judicial Watch, which filed a lawsuit in September aimed at blocking the California law, also opposes the Nasdaq proposal.

Judicial Watch President Tom Fitton told CNN the proposal "may violate the law for Nasdaq to seemingly require a discriminatory quota system for race and gender." 

Despite the pushback, Westerhaus said there is a good chance the SEC will approve the Nasdaq's proposal for diversity requirements, and banks should start planning accordingly. 

"The proposal is, either add the directors or explain why not," Westerhaus said. "I think, ultimately, the SEC will probably agree because it's not an absolute mandate."

The New York Times, citing data from the Nasdaq, claims more than 75% of the exchange's roughly 3,200 companies do not meet the criteria.

That percentage is reflective of the roughly 300 banks that trade on the exchange, Westerhaus said.

While the majority of the Nasdaq's companies would meet one of the requirements — to have at least one woman director — it's with respect to the second requirement for an underrepresented minority where most companies are failing, Westerhaus said. 

A component of the proposal means banks will have to be prepared to ask candidates if they are willing to self-identify their diverse characteristics as part of the recruitment process. 

"A diverse director could take the position that they don't want to disclose or self-identify their diverse characteristics," Westerhaus said, in which case the Nasdaq recommends a company explain the situation but continue to search for additional diverse directors who are willing to identify.

"As they recruit, banks are going to have to ask the question in the recruiting process, 'Are you willing to self-identify so we can publicly disclose our diversity statistics as we're going to possibly be required to do?'" Westerhaus said.

The Nasdaq proposal and California legislation come as lawmakers have been pushing for more transparency from banks when it comes to sharing their diversity data.

A House Financial Services Committee report published in February suggested lawmakers pass legislation to force banks to share diversity data with their regulators and make it public. 

The report found 29% of senior- and executive-level positions at U.S. banks with more than $50 billion in assets are held by women. Racial and ethnic minorities comprise 19% of senior- and executive-level employees at those banks, the report found.

Several banks are taking progressive steps to promote diversity among their ranks. 

In response to shareholder pressure, Citi began disclosing unadjusted gender pay gap data last year, finding that the bank's female employees made 29% less on average than its men. Citi also found nonwhite employees were paid 7% less on average than its white workers. 

The bank has also pledged to improve those numbers, setting a goal to increase representation to 40% women and 8% Black at certain management positions — assistant vice president through managing director — by next year. 

In January, investment bank Goldman Sachs said it would refuse to take public any company whose board was composed of all straight, white men. 

More recently, the bank said its asset-management arm will pressure U.S. companies to appoint more women and members of underrepresented groups to their boards, Catherine Winner, Goldman's head of stewardship efforts, told Reuters on Thursday.