The exchange announced this morning that it had filed a proposal with the U.S. Securities and Exchange Commission that would allow it to require all businesses it lists have to have a minimum of one person who self-identifies as female and one person who self-identifies as an underrepresented minority or LGBTQ as board directors.
Companies would be required to “publicly disclose board-level diversity statistics” to prove that they’re thinking about diversity when they pick directors, Nasdaq says. And if they don’t have the two, the businesses need to explain why.
How quickly the companies would need to comply with the rule, if passed, depends on its listing tier, according to Nasdaq’s 271-page proposal. The timelines range from one to five years once the SEC approves the requirement. Those that fail to do so won’t automatically be delisted if they outline why that’s the case.
Under the proposal, foreign companies and smaller reporting companies would be allowed to have two female directors instead.
“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” Nasdaq president and CEO Adena Friedman says in a written statement. “We believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
The proposal cites studies that found diversity leads to higher and faster average earnings growth, increased return on invested capital, better average sector-adjusted return on equity, financial performance, lower stock return volatility, increased dividend payouts to shareholders, more research and development investment, and better innovation.
The SEC accepts public comments about proposed rules via email, an online form, or snail mail.
In a statement to Fast Company, SEC chairman Jay Clayton said the agency is committed to diversity and inclusion in business. “The stresses introduced by the COVID-19 pandemic again demonstrate that financial inclusion is essential to effective participation in our economy,” Clayton said. “We welcome dialogue on how to improve diversity, inclusion and opportunity in the financial services sector and our economy more broadly.”
Hillary Sale, a professor of law and management at Georgetown University, says she can’t think of any legal reason why the SEC wouldn’t approve the Nasdaq proposition, adding that the diversity initiative will spur creative friction and innovation.
“Once you make things public, it does create pressure for change, particularly in industries that are consumer-facing, where people might pay attention and not use your products,” she explains. “Higher profits, higher revenues, more clients, more customers, ROI, almost any metric—diversity improved.”
Two years ago, California became the first state in the country to mandate that all publicly held companies with principal executive offices there had to at least one woman on the board by December 31, 2019, by filling an open seat or by adding a seat to the board. In addition, depending how big the company is, it must have one or two more women directors by December 31, 2021.
The Board Challenge, launched in September, motivated close to 20 companies to agree to add at least one Black director to their corporate boards within a year. Among those who took the pledge were Zillow and Nextdoor.