Nasdaq seeks US approval to require board diversity

John BIERS
·4-min read
The Nasdaq asked US securities regulators to approve a requirement that listed companies have at least two diverse board members

Citing sluggish progress in appointing non-white directors, the Nasdaq announced Tuesday it was seeking US regulatory approval to enact diversity requirements on listed companies.

The exchange filed a request with the Securities and Exchange Commission to require its 3,300 listed companies to have, or explain why they do not have, at least one female board member and one board member who identifies as either an under-represented minority or LGBTQ.

The move comes amid a broader US reckoning on both gender and race in the wake of the #MeToo movement and mass protests on racial justice following the police killing of George Floyd.

Like management throughout corporate America, boards of directors remain overwhelmingly white and male.

The 271-page proposal to the SEC emphasizes the need for greater transparency of board diversity, the lack of which currently makes it impossible for investors to compare companies, according to Nasdaq.

The SEC initiative notes that companies can be delisted for failure to meet disclosure requirements, although that sanction can be appealed.

Nasdaq Chief Executive Adena Friedman said she wanted to accelerate efforts on diversity in the United States, saying other countries have progressed further.

"We are taking the leadership here because there has been so little action on this front, and we do think it's an important thing for us to do, to create a more inclusive capitalist society," Friedman said in an interview on CNBC.

- NYSE next? -

Friedman told the broadcaster that she believes the "vast majority" of Nasdaq's companies already have at least one female director but that the boards are far less representative in terms of other diversity.

Friedman said she would "welcome" a decision by the rival New York Stock Exchange (NYSE) to enact equivalent requirements.

The NYSE did not comment directly on the Nasdaq proposal, but noted it had set up a council to bolster diversity. The council is comprised of 20 CEOs from large companies, such as Merck, Delta Air Lines and Johnson & Johnson.

"As a champion for board diversity, the NYSE has developed solutions alongside our listed companies to drive change in the boardroom," an exchange spokeswoman said.

The Nasdaq proposal will be open for public comment for about 21 days, a spokesman said. The soonest it could be enacted would be 45 days after it is published.

Outgoing SEC Chair Jay Clayton said the agency has an "unwavering" commitment to diversity and welcomes "dialogue on how to improve diversity, inclusion and opportunity in the financial services sector and our economy more broadly," according to an email from an agency spokeswoman.

Among those praising the initiative were investment bank Goldman Sachs and the NAACP civil rights group. Some conservative commentators on Twitter criticized the measure.

- Better performance? -

The proposal requires at least one board director who identifies as female and one or more who self-identifies as one of the following: "Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Hawaiian or Pacific Islander."

The board member could also qualify if they are "LGBTQ+," which "means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community."

Among Fortune 500 companies, only about 34 percent of board members were women or minorities, according to 2018 study by Deloitte and the Alliance for Board Diversity.

Nasdaq's filing cited a World Economic Forum study that rated the US 53rd in board gender diversity. The exchange said Nasdaq-listed companies are already subject to European Union requirements on board diversity in some countries.

The proposal also points to academic research that shows "diverse boards are positively associated with improved corporate governance and financial performance."

These include studies that show gender-diverse boards or audit committees are better about disclosing financial information and have lower likelihood of manipulated earnings or earnings fraud.

Lorraine Hariton, CEO of non-profit Catalyst, applauded the effort.

Progress "is much slower than we would like," she said, adding, "This will drive momentum."

Social scientists offered measured praise for the move.

Frank Dobbin, a sociologist at Harvard University, called the Nasdaq effort a "step in the right direction," but urged initiatives targeting management.

"Top management team diversity does have trickle-down effects, helping to diversify lower levels of management," Dobbin told AFP in an email. "That's what companies, and stock market overseers, should be striving for."

Evan Apfelbaum, a business professor at Boston University, predicted the initiative would succeed in boosting minority representation on boards, but said that is only part of what is needed to achieve cultural change.

"What we know from all social science is numbers are just a start," he said. "What you need is for people to work through differences."

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