Board Diversity Bolstered by New Nasdaq Exchange Rules

The lack of gender and racial diversity at the highest levels of corporate America has long been an issue. A recent board diversity survey of 3,000 of the largest publicly traded companies yielded disappointing findings. The survey revealed that women make up a mere 21% of corporate board seats and racial minorities only 12.5%.

Nasdaq is one of the largest stock exchanges in the U.S. It recently added a new rule that is one step forward in making corporate boards more diverse. It remains subject to approval by the U.S. Securities and Exchange Commission (SEC) before it can go into effect.

Nasdaq’s Board Diversity Proposals

If a company fails to meet Nasdaq’s criteria, it would be required to submit an explanation of why it failed on its website or in a public filing. Failure to provide an explanation could result in delisting from the Nasdaq exchange. Currently, more than 75% of the approximately 3,200 companies listed on the Nasdaq do not presently meet the criteria.

Board Diversity Nasdaq
Board Diversity Nasdaq
oard Diversity Nasdaq

Nasdaq Leading the Way

Chairman of Nasdaq Michael Splinter echoed this sentiment: “Diversity of experience, gender, race, knowledge, and perspective means that a company is more capable of seeing the full picture, assessing risk, and overcoming challenges with forward-looking, innovative solutions.”

Board Diversity Cuts Down on Groupthink

In explaining why the Nasdaq diversity plan don’t also include other categories like veteran or disability status, Nasdaq Vice President Jeff Thomas explained: “the more inclusive you try to make your diversity policies, then frankly, sometimes they don’t have the same impact.”

SEC to Review Proposals

Individual companies or firm have previously implemented diversity goals. In January 2020, Goldman Sachs announced limits on serving as an underwriter for taking a company public. The company must have at least one diverse board candidate. BlackRock, one of the world’s largest asset managers, has publicly declared that it will scrutinize the board diversity of the companies it invests in and may pull investments from companies lacking diversity.

It also follows the trend of ESG investing, or looking at a company’s environmental, social and governance factors to evaluate whether to invest in a company. Investors are increasingly focusing on the financial performance of the businesses they invest in. But they also consider whether businesses demonstrate social and environmental responsibility.

Board Diversity Linked to Stronger Business Performance

It is still to be seen how Nasdaq’s plan will play out in practice. The proposal has also generated a fair amount of criticism. Nonetheless, Nasdaq views it as an actionable step forward. The goal is to champion the inclusive growth of companies and give people from diverse backgrounds a seat at the table.

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.

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