Nasdaq to Corporate America: Make your boards more diverse or get out

Nasdaq is proposing a rule that would require at least some measure of diversity on the boards of directors of companies listed on the exchange.

The rule, which needs the approval of the Securities and Exchange Commission to take effect, would require companies to have at least two diverse directors, including one woman and one member of an “underrepresented” minority group, including Black people, Latinos or members of the LGBTQ+ community. Smaller companies and foreign companies on the exchange could comply with two woman directors.

Companies also would be required to disclose “consistent, transparent diversity statistics” about their boards. Assuming they are approved, the rules would require at least one diverse director within two years and two within four to five years, depending on the size of the company. A company could have its shares delisted from the exchange if it does not comply.

“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” said Nasdaq CEO Adena Friedman. Nasdaq’s proposal presents an analysis of over two dozen studies that found an association between diverse boards and better financial performance and corporate governance.

The exchange joins a growing group of voices pushing for greater diversity in boardrooms. In September, California Governor Gavin Newsom signed a law that would require at least one minority member on the boards of all publicly traded companies based in California. And in January, Goldman Sachs announced it would not take a company public unless it has at least one diverse board member.

Many large public companies already comply with the minimal requirements of the Nasdaq rule. In fact, four of the five largest companies on the exchange in terms of market value – Apple, Microsoft, Google owner Alphabet and Facebook – have boards on which straight White men are in the minority.

Two more companies in the top ten – Comcast and Adobe – have women or minorities making up half their boards. And the third largest firm, Amazon, has five women, two of whom are from a minority group, on its 11-member board.

A spokesman for Nasdaq said it believes that at least 85% of its 3,249 listed companies already meet the first criteria of the rule, having either one woman or one underrepresented minority on their boards.

But boards are still a bastion of White male power in corporate America. A study in September by ISS ESG, the responsible investment arm of Institutional Shareholder Services, found that only 16.8% of 33,000 directors at large cap companies belong to a minority group, and only 27.4% of directors are women. And 55 of the 496 large cap companies measured by ISS ESG, or 11%, had no diverse directors.

But there are critics of the push to require even minimal diversity on boards. The conservative group Judicial Watch filed a lawsuit in September seeking to block the California law requiring at least one minority director on publicly-traded companies based there.

The group said it opposes Nasdaq’s proposed rule as well.

“It is disturbing and may violate the law for Nasdaq to seemingly require a discriminatory quota system for race and gender,” said Judicial Watch President Tom Fitton.

But the US Chamber of Commerce issued a statement praising Nasdaq’s proposal.

“We appreciate the leadership of Nasdaq in developing a business led solution to resolving diversity issues on corporate boards,” said the statement from Tom Quaadman, executive vice president of the Center for Capital Markets Competitiveness, which is part of the Chamber. “This proposal will help accelerate the developments that are already underway and is a positive and balanced way to get to the end result of allowing boards to be more representative of a business’s consumer and employee base.”

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