Delisted For Diversity

Should publicly-traded companies on NASDAQ have a diverse board of directors? Sure. Why not? If they want to, and they should, but is that any of NASDAQ’s business? In what the Wall Street Journal calls a “publicity stunt,” NASDAQ has asked the SEC to approve it’s new diversity mandate.

If approved by the SEC, the new listing rules would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority1 or LGBTQ+. Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors.

The issue is not whether listed companies have underrepresented minorities, whether by race, gender or sexual orientation, on their board, but that they must either report it publicly or “explain” why. What such an explanation might look like is unknown, since the obvious explanation is that the board is comprised of the individuals whom the company believes best serve it’s shareholders’ interests, and nobody on the board gives a damn whether the best directors are black, white or green, or with whom they snuggle on a cold evening.

NASDAQ, however, believes it has a right to require “transparency.”

Our duty is, as your editorial says, and our proposal to the SEC outlines, to provide “transparency for shareholders.”

Our proposal preserves each company’s decision-making authority over its board while advancing an important dialogue among its shareholders.

Most shareholder dialogue has to do with share price and product sales. If shareholders want a more diverse board, which is entirely fine, they can run people for director to fill whatever needs they believe need filling.

But “transparency”? First, it’s a sham. If the question was transparency, NASDAQ would simply require board members to be identified by race, gender, whatever, without the additional factors of requiring specific identities to be represented or their absence “explained.” If having a woman of color matters to you as a shareholder, rather than, say, a 356% return on investment, there is nothing to stop you from using your 100 shares to compel it or, if that doesn’t work, divesting from this company that lacks the right color board.

Investors increasingly care about diversity and governance, as evidenced by the surge in net asset flows into ESG-focused strategies from $4 billion in 2016 to $40 billion in 2020. Our disclosure-based proposal provides investors with greater transparency about board composition. This only serves to enhance investor confidence in the director selection process.

Rarely has an attempt to manufacture a justification so blatantly failed. “ESG” refers to “environmental, social and governance,” a strategy that seeks companies who seek to serve positive social goals. And that’s great, if that’s your investing criteria. But $40 billion is a drop in the bucket, Zuckerberg’s pocket change, and the existence of ESG funds evidences that the opportunity exists, for anyone who seeks it, to put their money where their social justice is. Don’t like Evil Corp.? There are “ESG-focused strategies” available for you. Problem solved.

Second, NASDAQ denies that it’s trying to manufacture a corporate quota system or mandate, even as it blatantly does exactly that.

Nasdaq claims, including in a letter to these pages Wednesday, that it is only aiming for “transparency.” But the names of board members already must be disclosed. Nasdaq wants companies to list how many board members fit in each category. If companies don’t meet Nasdaq’s quota, then they must “explain why they do not” in filings or on their website—or face delisting. That’s intended as a public-relations sanction even if Nasdaq pretends it isn’t.

If transparency was the goal, then it’s fulfilled by disclosure of board members. But it’s not, which is why NASDAQ requires a specific number upon pain of being delisted from the market. The “explain why” safety valve is childish, as if there’s some response that’s acceptable. “Because we can’t find anyone”? Try harder. “Because we want the best qualified”? Whoa, racist, sexist plus. What explanation could possibly suffice?

That there is a problem to be address in the makeup of publicly-traded company’s boards of directors isn’t a secret. Between directors coming out of the old boy’s network and the inability of women, black and openly-gay people to break into the upper echelon of corporate management as a product of historic discrimination, boardrooms lack the breadth of vision and fail to take advantage of the full universe of brilliant business minds.

Boardrooms are white, male and straight because that’s who directors know, hang around with and raised through the pipeline. They are leaving an awful lot of talent on the table, and they may well fail to see opportunity that’s happening outside their line of sight. In other words, it’s not only a good thing for the sake of diversity that they bring new blood, different blood, into the boardroom, but good for the company as well.

One business justification, Nasdaq tells the SEC, is that the exchange “is concerned that boards lacking diversity can inadvertently suffer from ‘groupthink,’ which is ‘a dysfunctional mode of group decision making characterized by a reduction in independent critical thinking.’” See? Nothing to do with politics; this is about preventing bad business decisions.

That boards should be more diverse, because it’s a smart and sound business decision, however, does not mean NASDAQ should be able to ram diversity down company’s throats. And being black doesn’t do much to distinguish between being Thurgood Marshall and Clarence Thomas.

Everyone else should be more worried about “groupthink” in Nasdaq management than at companies that hire board members based on talent, experience and business judgment. This decision is a manifestation of the ideology sweeping through elite America that holds that most of what you need to know about a person you can tell by their skin color or sex.

To the simplistic kids on campus, race, gender and sexual orientation tell all you need to know. But then, they aren’t responsible for maximizing shareholder value, and it should take more than pigmentation to serve on the board of a public company. So while boards should be more diverse, maybe even have more than two marginalized identities in the room, they should be there organically. And companies should do it because it’s good business.