Nasdaq is pushing for the more than 3,000 companies listed on its U.S. stock exchange to make their boardrooms less overwhelmingly male and white by hiring directors that better reflect the country’s diverse population.
The company filed a proposal Tuesday with the Securities and Exchange Commission that, if approved, would require all companies on the exchange to disclose the breakdowns of their boards by race, gender and sexual orientation. Companies that do not comply could be delisted, or kicked off the exchange.
The proposal would also require most Nasdaq-listed companies to have at least two diverse directors or, if they cannot meet the mandate, to explain why not. That could include one board member who is female and one who is either an underrepresented racial minority or LGBTQ. Foreign companies and smaller companies would have additional flexibility in satisfying this requirement with two female directors.
California passed a law earlier this year requiring public companies headquartered in the state to diversify their boardrooms. Those rules require more people from diverse backgrounds be added more quickly to boards than what the Nasdaq rule is proposing, according to Jeffrey Thomas, a senior vice president at Nasdaq.
Thomas said the stock exchange worked with organizations including the Silicon Valley Leadership Group, an advocacy group whose membership includes more than 360 major businesses, to craft the proposed changes.
“The California law is really saying ‘We want to see more diverse people on boards,’” Thomas said. “We want to see much more disclosures from companies of who is on their board.”
Thomas said the exchange plans to help companies that need to diversify their boards recruit executives through a Redwood City company called Equilar. The company provides a database of qualified, diverse candidates he said, adding, “We want to be part of the solution.”
Equilar has been tracking diversity on boards since 2016, according to Belinda Martinez Vega, a partner at law firm Venable.
“It takes away the excuse of we can't find people,” Vega said.
Vega said while California’s law faces legal challenges, the Nasdaq changes would have a clearer path, although they could face resistance during vetting by the SEC.
Nasdaq’s plan ups the stakes in what was already a widening push by shareholders and governments around the world for more diversity on corporate boards, which often are composed of mostly white men.
It’s not just a sense of fairness. Proponents say greater board diversity can improve financial performance for companies — and ultimately their stock prices — by bringing in varying opinions and voices and fostering a better understanding of employee and customer bases.
In its proposal, Nasdaq cited a report from the Carlyle Group investment company, which found that companies it invested in that have at least two diverse board members have nearly 12% more earnings growth per year than the average of companies that lack diversity.
Companies have heard the criticism and made some moves toward increased diversity, but progress has been slow.
Women hold just 23.1% of board seats at companies in the Russell 3000, a broad index that includes most of the U.S. stock market. That’s up from about 15% in 2016, according to executive-data firm Equilar.
Progress in improving racial diversity on boards has been slower. One difficulty is that tracking racial and ethnic diversity has been tougher than measuring gender diversity, with companies often not disclosing such data, something that Nasdaq hopes its proposal can help ameliorate.
“Corporate diversity, at all levels, opens up a clear path to innovation and growth,” Nelson Griggs, president of the Nasdaq Stock Exchange, said in a statement.
The SEC declined to comment on Nasdaq’s proposal specifically, but it has made diversity a greater emphasis and released its first diversity and inclusion strategic plan earlier this year.
“We welcome dialogue on how to improve diversity, inclusion and opportunity in the financial services sector and our economy more broadly,” SEC Chairman Jay Clayton said in a statement.
Shareholders are increasingly pushing companies to improve their board diversity, both in public and in private. Big investors are trying to cajole executives through private channels. For example, Nuveen, which invests $1.1 trillion globally, has been pushing a group of smaller and mid-sized companies without a woman on their board to add one. It’s seen more than 30% of them add a woman, as of 2019.
In public, investors are getting more chances to vote at companies’ annual meetings on shareholder resolutions seeking more disclosures on the makeup of the board.
At the U.S. Chamber of Commerce, officials were supportive of Nasdaq’s proposal on Tuesday. Tom Quaadman, executive vice president at the chamber’s center for capital markets competitiveness, called it a “business led solution to resolving diversity issues on corporate boards.“
“This proposal will help accelerate the developments that are already underway and is a positive and balanced way to get to the end result of allowing boards to be more representative of a business’s consumer and employee base,” he said in a statement.
The Nasdaq’s U.S. exchange is dominated by technology companies, but there are many financial, biotech and industrial companies as well.
San Francisco Chronicle staff writer Chase DiFeliciantonio contributed to this report.
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