U.S. Stock Exchange Sets Diversity Rules

SEC Diversity Requirements

For the past several years, increasing board diversity has been a pressing item for public companies—and not without good reason.

In 2018, a Boston Consulting Group study found that companies, with diverse leadership, had higher revenues from new products and services (an indicator of successful innovation) as well as higher EBIT margins. That same year, McKinsey & Co. found that “diverse companies are 33% more likely to have greater financial returns than their less-diverse industry peers.”

Logically, one would expect a homogenous entity composed of individuals, with almost indistinguishable backgrounds, to be less than perfect at governance, a role which benefits from wider perspectives and the occasional respectful disagreement. In addition, public opinion favors boards that better reflect the American public.

Despite these actualities, progress has been slow. The New York Times finds that the share of board seats, filled with directors who were Hispanic, Black, Asian-American, Pacific Islander or Native American, only increased by 2.5% in the last five years. The ending percentage, 12.5% in 2020, heavily under-represents the 40% of the U.S. population who are a part of those minorities. Similarly, women make up only 21% of board directors.

Certain institutional investors have decided to take the diversity matter into their own hands, reports Kellogg Insight. Goldman Sachs, for example, announced in 2020 that they would refuse to take a company public if their board did not contain at least one diverse board member. The following year, Goldman Sachs increased that figure to two.

States have also acted. In 2018, California passed a bill requiring at least one female director on the board of every publicly traded company, whose chief executive resided in the state. Prior to this mandate, only 293 of 625 applicable companies fulfilled the requirement.

A week ago, the SEC approved the Nasdaq proposal for board diversity requirements. The rule stipulates that boards must have one person who identifies as female and another who is a member of an underrepresented minority group or is LGBTQ+, reports BBC News. The rule isn’t binding companies who don’t meet the objective can explain why they were not able to do so, says Forbes. Despite this leniency, the proposal was a big step. Even if companies decide not to meet diversity quotas, there will still be increased transparency into the board selection process and the company’s rationale behind the lack of diversity in their boardroom. This is especially important because the board positions in question are highly influential due to the size and finances of public companies.

In a survey, Nasdaq found that 75% of its over 3,000 listed companies would not meet the objectives. They decided to pass the diversity regulations anyway. With an average board size of nine members, requiring two diversity members means that upwards of 4,500 board seats will need to be filled with diverse members within the next year.

What does this mean for women and members of underrepresented minorities? It means that now, more than ever, is the best time to search for board positions.

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