Corporate boardrooms are gradually becoming more diverse, but Nasdaq wants to accelerate that process by wielding a big stick.
Under a recently proposed rule, each Nasdaq-listed company would have to elect at least two diverse directors, including one woman and one person who was a member of an underrepresented minority group or identified as LGBTQ+.
Companies that don’t comply would face delisting. There is an out for companies that publicly explain why they can’t find diverse directors, but that would be an embarrassing admission to make.
The era of the boardroom as a white male bastion is already ending, although not fast enough for some people. In the St. Louis area, I could find only one Nasdaq-listed company with an all-male board and that company, Reliv International, has decided to go private.
Nationally, all of the S&P 500 and 90% of all public companies have at least one female director.
Other dimensions of diversity are harder to measure, because companies often don’t disclose whether directors identify as, say, Black or Hispanic or gay. Institutional Shareholder Services estimated in September that 16.8% of large companies’ directors were racially or ethnically diverse, up from 13.6% in 2015.
Nasdaq would be following California and several nations, including France and Norway, in imposing a quota for women directors. California also passed a law last year requiring boards to include underrepresented minorities.
Such quotas work, to a degree, but they may not be the best way to vault women and minorities into positions of real power.
Todd Gormley, associate professor of finance at Washington University’s Olin Business School, recently studied the role three big investors — BlackRock, State Street and Vanguard — have played in pushing for gender diversity.
The three firms, which own shares in virtually every U.S. company of consequence, began campaigning for boardroom diversity in 2017, including a threat to vote against directors on all-male boards.
Gormley, along with four co-authors, finds in a new study that the pressure caused companies to add 2.5 times as many women directors in 2019 as they did three years earlier.
Women directors also were more likely to assume key roles, such as chairing the audit committee. That didn’t happen when boards added women mainly to comply with a legal requirement, as in California.
“With the California mandate, evidence suggests that firms complied, but the women who were added to boards were not given any real influence,” Gormley said. “It was tokenism.”
That shouldn’t be surprising, he adds: “If you’re being told that you need to do this, by Nasdaq or by the government, you may not think it’s in your shareholders’ best interest, and you will do the bare minimum.”
Charles Elson, who heads the University of Delaware’s Weinberg Center for Corporate Governance, argues that a mandate is the wrong way to advance boardroom diversity.
“As a listing standard, I think it’s an unwise idea,” Elson said. “You have to trust the voters, the shareholders, to pick diverse people.”
Perhaps surprisingly, though, the corporate establishment isn’t lining up to oppose the Nasdaq rule. The U.S. Chamber of Commerce issued a statement calling it “a positive and balanced way to get to the end result of allowing boards to be more representative.”