The Nasdaq stock exchange is making a push for diversity in the mostly male, mostly White boardrooms of the nearly 3,300 companies it lists.
On Tuesday, Nasdaq submitted a proposal with the U.S. Securities and Exchange Commission (SEC) that would create, if approved, diversity requirements in terms of gender expression, race or sexual orientation. Boardrooms would be required to have at least one woman and at least one underrepresented minority — someone who self-identifies as Black, Latinx, Asian, Native American, Alaska Native, Pacific Islander or a combination — or someone who identifies as LGBTQ+.
If the companies can’t fulfill the requirement of two “diverse” board members, they will be expected to explain why. Foreign or smaller companies will get additional flexibility to fulfill the requirement with two female members, and all companies will also have to publish diversity statistics for their board of directors.
The proposal is the first time a major stock exchange has moved to require diversity quotas and transparent reporting on board-level demographics. The 3,249 listed companies on the U.S. Nasdaq exchange are overwhelmingly in technology — like Apple, Microsoft, Google, Facebook and Amazon — an industry that has often been criticized for its lack of inclusivity.
“We believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America,” said Adena Friedman, the president and CEO of Nasdaq, in a statement. Friedman is the first woman to lead a major U.S. stock exchange since becoming CEO of Nasdaq in 2017.
In its proposal, Nasdaq said it was hoping to enhance investor confidence that companies are considering diversity when making their board selections.
If the proposal is approved, all Nasdaq-listed companies will have to provide diversity statistics within one year of the SEC’s approval. The timeline to fulfill the full diversity requirements will depend on the company’s tier within the exchange, but all companies will have to have one “diverse” director within two years of the SEC’s approval.
Those that can’t meet the requirements in time or won’t publicly explain their justification for failing to do so will be subject to delisting.
The move is part of a shift already taking place. Last year, mutual fund manager Vanguard announced it would require companies to report the gender, age and race of their board of directors and to prioritize diversity hiring. Asset manager BlackRock said this year it would increase its Black workforce by 30 percent by 2024. And Goldman Sachs recently announced it was aiming to reach better diversity representation in its vice presidents by 2025 by ensuring 40 percent are women, 7 percent are Black and 9 percent are Latinx. Companies Goldman Sachs takes public will have to have at least one diverse board member.
As part of its proposal, Nasdaq also analyzed more than two dozen studies that found corporate diversity leads to improved financial outcomes.
“The benefits to stakeholders of increased diversity are becoming more apparent and include an increased variety of fresh perspectives, improved decision making and oversight, and strengthened internal controls,” Nasdaq wrote in its filing.
In a 2020 study, investment firm the Carlyle Group found that companies with two or more “diverse” directors in its portfolio saw earnings grow by 12.3 percent in the past three years, compared to 0.5 percent among companies that didn’t have “diverse” directors. A 2015 McKinsey study found that companies in the top quartile for gender diversity were 15 percent more likely to see financial returns above the national median. For those in the top quartile on racial and ethnic diversity, companies were 35 percent more likely to see higher returns than the national median.
But in the past few years, progress toward inclusivity has largely focused on gender. A 2020 study by management consulting firm Russell Reynolds Associates found that in the past decade, the percentage of women directors at Fortune 500 companies had grown from 16 to 23 percent. But the percentage of Black directors had remained stagnant between 7 and 9 percent.
In a recent study of its own listed companies, Nasdaq found that 75 percent didn’t meet the exchange’s proposed diversity quotas.
“It’s a statistical anomaly that boards of directors are predominantly White men. You have to work intentionally to create a structure that’s so one-sided,” said Pam Kostka, the CEO of All Raise, a nonprofit that is working to add more female venture capitalists and more female founders, particularly in the tech industry.
With its network of 20,000 people, All Raise has played a role in the increasing representation of female investors in tech from 9 percent to 13 percent in the past two years. The nonprofit recently raised $11 million of its $15 million goal.
Just as boards have stayed intentionally White and male, the Nasdaq proposal is equally intentional, Kostka said in a statement to The 19th, by “striking at the underpinnings of the status quo and structural obstacles to make long overdue changes.”
The process to approve or deny the proposal is likely to take weeks, if not months, and will include a public comment period. That means the decision will likely fall on the incoming Joe Biden administration, and whomever the president-elect appoints to chair the SEC. Biden has made diversity a priority for his administration, recently announcing a slew of top economic appointments and nominations that are dominated by women and people of color.