New Rules For Fairness

Diversity is coming to the boardroom not through government regulations but private initiative.

On December 1, Nasdaq proposed new listing rules to the US Securities and Exchange Commission which would require all companies listed on its exchange to have at least two diverse board directors: one who is a woman and one who self-identifies as either a minority or LGBTQ+. Smaller and foreign companies could satisfy this rule with two female directors. Companies that don’t comply within the time frame would have to explain why, or risk being delisted from the exchange.

“This is a real stake in the ground for transparency; what gets measured gets managed,” says Ann Cairns, executive vice chair of Mastercard and global chair of the 30% Club, a campaign pushing for more gender diversity in the C-suite. “The exchange can hold itself up as a champion for diversity and a place where companies who take gender equality seriously would want to be listed.”

Calls for diversity are also coming from the private sector and from large investors such as BlackRock, Vanguard Group and State Street Global Advisors that hold companies for the long term. Investment banks like Goldman Sachs Group, meanwhile, will only underwrite IPOs for companies with at least one diverse director. “[Investors] want to make sure companies are well-governed by their boards and create value,” says Rusty O’Kelley III, co-leader of the Board & CEO Advisory Partners group at Russell Reynolds Associates.

Despite countless studies showing that diverse businesses perform better and are more sustainable, of the over 3,000 companies listed on the Nasdaq, only about 25% would meet the proposed requirements. Most companies have at least one female director, but approximately 75% don’t have a second director who meets the diversity requirement.

The Nasdaq’s move follows in the footsteps of other stock exchanges. Since 2008, Norway has required companies have at least 40% female board representation, or risk fines or dissolution. Belgium, France and Italy have similar requirements and sanctions for noncompliance. Germany, Spain and the Netherlands have soft quotas that are nonbinding, while the UK has guidelines.

In many countries, forming a corporation falls under the purview of national governments, which can set requirements. But in the US, each of the 50 states has its own rules and regulations, says Alma Angotti, managing director at Guidehouse Consulting. “If the SEC had a requirement, you wouldn’t need the stock exchange or states to do it.”