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NASDAQ Wants Greater Diversity on Company Boards

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Exchange leader Nasdaq wants greater diversity for boards across its member companies. Yesterday, the company filed a proposal asking the Security and Exchange Commission to impose new diversity requirements. In its proposal, Nasdaq will require member companies to have at least one woman and one minority on its board of directors. The minority member can either be LGBTQ or a member of an underrepresented group.

RELATED: Nasdaq’s New Rules Take Dead Aim at Chinese Companies

Diversity Statistics

Currently, 75% of Nasdaq’s 2,349 companies do not meet the proposed requirements. Under the new rule, a company that fails to meet these conditions will need to publish an explanation of why. Meanwhile, if a company fails to publish board composition data, it can face delisting. 

Once approved, all listed companies will need to share board-level diversity statistics within a year of policy adoption. Nasdaq explained that the time frame for members depends on their individual listing tier. As such, the index expects all member companies to fully comply with the directive within two years.

Benefits of Diversity

Nasdaq didn’t start the movement on boardroom diversity. But, it did ride the wave in generating awareness. After all, there are benefits in having a boardroom that is not 100% white male. In a recent McKinsey study McKinsey reported that companies that promote diversity in the boardroom are 25% more likely to experience above-average profitability. 

Nasdaq CEO Adena Friedman went one step further, suggesting that the proposal cover all companies and not just Nasdaq members. “The ideal outcome would be for the S.E.C. to take a role here,” Friedman said. “They could actually apply it to public and private companies because they oversee the private equity industry as well.”

Early Adopters

Besides, the movement already started elsewhere. Earlier this February, Goldman Sachs required companies that need their help in going public must have at least one minority board member. Goldman Sachs CEO David Solomon noted that “We might miss some business. But in the long run, this I think is the best advice for companies that want to drive premium returns for their shareholders.” Meanwhile, California Governor Gavin Newsom signed last September into law a bill enforcing more diversity. It required public companies with California headquarters to include underrepresented board members by 2021. Prior to this law, California already requires a female board member in every company. By 2021, the minimum number of female board members becomes three. 

Outside of state rules, many large companies already included females and minorities in their executive board. As a matter of fact, four of the five largest companies on the exchange in terms of market value already have diverse boards. These are the Alphabet (Google), Apple, Facebook, and Microsoft. Actually, the company’s boards have straight white men as the minority. Another two, Comcast and Adobe, are at least 50% women or minorities on the board. Meanwhile, online retail giant Amazon currently has five women on its 11-member board.

Not Everybody is on Board

It’s a start, but there is a lot of room for the movement to grow. Boardrooms remains a straight white male dominion across the United States. An ISS ESG study conducted last September reported that of the 33,0000 directors in large companies, only 16.8% belong to a minority group. In that same group, only 27.4% are women. 11% of the total of 496 companies listed do not have diversity hires. 

Not everybody is on board, though, Conservative group Judicial Watch filed a lawsuit last September asking the courts to block the California minority law. Judicial Watch also opposes the proposed rules submitted by Nasdaq. President Tom Fitton said that the rules are discriminatory. “It is disturbing and may violate the law for Nasdaq to seemingly require a discriminatory quota system for race and gender,” he said.

Going Beyond the Law

Friedman admits that their proposal is “an unusual step.” It requires companies to disclose information more than the law requires. But does it stop there? After diversity reports, will a stock exchange require their companies to respond to other issues, social or otherwise? Where does the SEC draw the line?

Watch the CNBC News video reporting on Nasdaq requesting SEC approval to require companies to diversify board:

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