Toward Equity: Nasdaq Adopts Board Diversity Guidelines

27 Sep, 2021


Toward Equity

September 2021

Nasdaq Adopts Board Diversity Guidelines

The Securities and Exchange Commission has approved Nasdaq’s proposal requiring companies listed on the exchange to meet targets for gender and racial diversity on their boards — or explain why they have not done so.

The new rules “will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity,” says Gary Gensler, the SEC chair. But it will also give them “the flexibility to make decisions that best serve their shareholders.”

The decision, announced in early August, is the result of a debate within the SEC about the policy change. Nasdaq has set a goal for companies to have at least one woman director as well as at least one other board member who identities as a member of a racial minority or as LGBTQ. A Nasdaq study in 2020 found that more than 75% of companies would not have met these goals.

The changes come after calls from investors “for greater transparency about the people who lead public companies, and a broader cross-section of commenters supported the proposed board diversity disclosure rule,” according to Gensler.

Critics in Congress

When the proposal was unveiled in December, some Republicans in Congress, especially on the Senate Banking Committee, said it would pressure companies to put political stands above strategic business interests. “Corporate boardrooms, like all organizations, can benefit from a diversity of perspectives, but Nasdaq’s one-size-fits-all quota misses the mark,” said Pat Toomey of Pennsylvania, ranking Republican on the committee.

“By defining diversity by race, gender, and sexual orientation, Nasdaq’s mandate will inevitably pressure companies to subordinate crucial factors such as knowledge, experience, and expertise when selecting board members,” Toomey said, accusing Gensler of “turning a financial regulator into a laboratory for progressive social engineering.”

That’s not the case, Bonnie Hagemann, a Republican and a co-founder of WomenExecs on Boards, told MarketWatch. The policy “forces us to find someone who fits both the criteria and who fits diversity,” an effort that is long overdue. Progress toward boardroom diversity, she said, has been “extremely slow.”

What About the Disabled?

But criticism of the policy has also come from advocates for people with disabilities. Their push to include disability in the goals was “rebuffed,” according to Ted Kennedy Jr., chairman of the American Association of People with Disabilities (AAPD), quoted by Reuters.

“Overall, Nasdaq’s proposal makes a valiant effort to increase the disclosure of board diversity. But leaving people with disabilities out renders the rule unnecessarily under-inclusive — and perhaps reveals unintentional bias,” Kennedy, who lost a leg to bone cancer at age 12, wrote in Fortune in June. When the new rules came out, he noted, “Millions of people with disabilities were disheartened to learn they were not counted among the ‘diverse.’”

‘Widespread Push’

MarketWatch characterizes the new requirement as “the latest effort in a widespread but controversial push for board diversity that has included legislation in California, which was the first state to mandate diversity on boards of publicly held companies but is facing legal challenges to the law.

“Other influential voices in the push include Goldman Sachs Group Inc., which last year said that in 2021 it would only underwrite IPOs of private companies that have at least two ‘diverse’ board members,” MarketWatch reports.

Companies are not required to meet the diversity goals, Adena Friedman, Nasdaq’s CEO, points out. Any company that doesn’t want to comply or explain its reasoning “may transfer its listing to a competing listing exchange.”

Also, the proposal allows time for companies to explain their thinking. That’s to be expected, considering how long advocates of diversity have waited for this change.

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