The tech-heavy Nasdaq is seeking permission from the SEC to require more than 3,000 companies on its main US stock exchange to install at least two diverse directors on their boards or face being delisted.
The proposal, announced Tuesday, has been bubbling up for years with influential investors calling for greater diversification in boardrooms, including Vanguard, State Street Advisors and BlackRock.
It also comes at a time when President-elect Biden is touting a broad array of female and minority talent in influential roles in his coming administration.
Biden recently announced former Federal Reserve Chair Janet Yellen as his Treasury nominee, which would make her the first woman to serve in the role in that department's 231-year history. Biden also nominated Neera Tanden as director of the Office of Management and Budget. If confirmed by the Senate, she would be the first woman of color to lead OMB.
The Securities and Exchange Commission is a large independent agency headed by a five-member independent commission serving staggered terms. The Treasury secretary, meanwhile, serves as chair of the President’s Working Group on Financial Markets, which also includes the chair of the SEC and others.
It is expected to take the SEC weeks to review the Nasdaq proposal, which spans across 271 pages and cites more than two dozen academic studies that discovered a relationship between diverse boards and improved financial performance and corporate governance.
In one example, Nasdaq cites the Carlyle Group finding that companies with two or more diverse directors had average earnings growth of 12% over the previous three years compared to 0.5% among companies with no diverse directors.
“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” said Nasdaq CEO Adena Friedman in a statement. “Our goal with this proposal is to provide a transparent framework for Nasdaq listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broad journey to achieve inclusive representation across corporate America.”
Within a year of the expected SEC’s approval of the Nasdaq proposal all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics. Within two years of the SEC’s action, all companies will be expected to have one diverse director and within four years two directors for companies on the Nasdaq Global Market and Global Select Market.
News reports citing unnamed sources indicated that up to 75% of the more than 3,000 affected companies have not attained the level of two diverse members, but Nasdaq would only publicly state that a “supermajority” of its listed companies have at least one diverse board member. Companies will have the ability to explain why they have not reached the diversity goals, and if they don’t explain they could face de-listing. Part of Nasdaq’s goal in making its proposal is to be able to find data on board diversity because there is no widely accepted standard for companies to report such data.
Reactions from the electronics industry
Many technology companies, including the world’s top chipmakers, trade their shares on Nasdaq. Fierce Electronics reached out to eight such companies for a reaction to the Nasdaq but got no immediate response. Linda Moore, CEO of the bipartisan network of technology CEOs known as TechNet, issued a statement in support of the Nasdaq proposal: “Successful companies must cultivate diversity to fuel innovation and thrive…The technology industry is committed to promoting inclusivity at all levels…”
SEMI Foundation, a non-profit that supports workforce development and DEI (Diversity, Equity and Inclusion) efforts in the microelectronics industry, pointed to the growing amount of research showing that companies with diverse leadership and staff are “more innovative and productive and have better retention rates,” said Shari Liss, executive director the foundation, in an email.
“The only way to change the inequality on boards is to put clear metrics on what needs to happen,” she said. “This move by Nasdaq will hopefully encourage C-suite level conversations and movement toward diversity, equity and inclusion.”
Jessica Gomez, CEO of Rogue Valley Microdevices in Medford, Oregon, noted the timing of the proposal, amid a tumultuous 2020. “Our country is moving through a period of social change and if companies intend to be competitive in the future, it is important that they embrace socially responsible practices, innovation and building a brand that connects with both shareholders and customers alike,” she said in an email. “It is difficult for me to imagine that this would be possible without a diverse board of directors.”
Worries about tokenism?
Other reactions were more circumspect and even personal, which may indicate the questions the SEC will face in coming days. Some observers are worried about the Nasdaq proposal unintentionally setting the groundwork for a form of institutional tokenism.
“Diversity is good, if done the right way and not just for sake of appearances,” said Jack Gold, an analyst at J. Gold Associates. “At the end of the day, it’s still about the quality of the board members that counts. If you can find high quality diverse members, it’s much better as it brings potentially new insights and decision making processes to the board. Too many boards are stuck in group think, but just creating a diverse board with no goal of actually making a quality improvement is not any help.”
Gold mirrored comments from Nasdaq and other groups that too many boards tend to share members from other corporate boards. “This is classic “board member for hire” mentality,” he said.
Denise Ruffner, co-founder of Women in Quantum and a business development executive for a quantum startup, said she expects the Nasdaq proposal will gain favor. “It’s a sign of the times,” she said. “There’s a lot of scrutiny on diversity. I do believe the idea will go somewhere. It’s a good question to be asking when putting together a management team: Are we representing diversity?”
Since the creation of Women in Quantum a year ago, Ruffner said she has been often been asked by many women in technology jobs asking how they can further their careers. Part of creating the organization was to create a showcase of the work of women and minorities in the field.
Even with her favorable impression of the Nasdaq proposal, Ruffner said she was initially surprised by its announcement, given her own career which she started as a biologist.
“I’ve advanced in my career based on my performance,” she said. “I’d love to see more opportunities given to women, but I feel we need to earn them as well. I’ve never liked to be the token… I also feel that the hallmark of my career is that I’ve earned where I’ve gotten."
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