The New Diversity in the Boardroom Requirement

Nasdaq started the month off by issuing a new, first of its kind, policy requiring most of the 3000 Nasdaq listed companies to have at least one woman on the company’s board of directors plus one additional board member who either is from a racial minority or who identifies as gay, lesbian, transgender, or bisexual. The Securities and Exchange Commission (SEC) approved the proposal.

Comply or Explain

Nasdaq companies will be required to publicly disclose information regarding their boards, or to offer a publicly disclosed explanation as to why they fail to meet this new requirement. Companies with five or fewer board members will be held accountable only for meeting the requirement of having one diverse board member.

The Diversity in the Boardroom Requirement Will Effect Change Quickly

According to the Wall Street Journal article, “Nasdaq Seeks Board-Diversity Rule That Most Listed Firms Don’t Meet,” authored by Alexander OsipovichandAkane Otani, published last December, at that time. “Nasdaq found that … around 80% or 90% of companies had at least one female director, but only about a quarter had a second one who would meet the diversity requirements…”

Members of the SEC Were Already Onboard

In remarks to the Council of Institutional Investors last September, SEC Commissioner Allison Herren Lee stated:

There is an increasing body of research showing that diversity correlates with enhanced performance. For example, one recent study on board diversity, using a definition that encompassed director age, gender, race, financial expertise, and number of directorships, had compelling findings:  board diversity corresponds to lower stock volatility due to the adoption of less risky financial policies, and firms with more diverse boards invest more in research and development and therefore are better at fostering innovation[i].

As another example, a recent study by McKinsey, which has long studied this subject, found that companies with the greatest ethnic diversity on executive teams outperformed those with the least by 36 percent in profitability[ii] . The same report found that companies with more than 30 percent women on their executive teams are significantly more likely to outperform those with fewer or no women executives.

Fortune 500 firms with the highest proportion of women on their boards outperform those with the lowest[iii]. Companies with higher than average diversity on management teams report higher revenue from new products and services[iv] . More women in senior positions is associated with higher return on assets[v]. The list of tangible performance benefits goes on. That’s why we see so many investors, asset managers, proxy advisors, and others incorporating diversity into their proxy voting decisions. I’ve even talked to analysts at quant firms who pull diversity metrics into their algorithms because they have learned that it increases alpha.

In addition, there is growing recognition that a lack of diversity represents a significant reputational risk for companies and may hamper their ability to recruit and retain top talent[vi] . Indeed research has shown that employee perceptions about their employer’s commitment to diversity strengthens their own commitment to the companies where they work. For example, a report from last year found that when employees understand that their companies are committed to gender diversity, they plan to stay with those companies longer[vii] . This is equally true for men and women.

[i] See Gennaro Bernile, Vineet Bhagwat, and Scott Yonker, “Board Diversity, Firm Risk, and Corporate Policies” (Mar. 6, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2733394.

[ii] See McKinsey & Company, Diversity Wins, How inclusion matters (May 2020), ; see also Morgan Stanley, Why It Pays to Invest in Gender Diversity (May 11, 2016), https://www.morganstanley.com/ideas/gender-diversity-investment-framework (discussing a study finding that higher gender diversity companies achieve higher returns and lower volatility than their less diverse peers).

[iii]See Catalyst, The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004–2008) (Mar. 1, 2011), https://www.catalyst.org/research/the-bottom-line-corporate-performance-and-womens-representation-on-boards-2004-2008/.

[iv] See Rocío Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, and Katie Abouzahr, Boston Consulting Group, How Diverse Leadership Teams Boost Innovation (Jan. 23, 2018), https://www.bcg.com/en-us/publications/2018/how-diverse-leadership-teams-boost-innovation.

[v] See Lone Engbo Christiansen, Huidan Lin, Joana Pereira, Petia Topalova, and Rima Turk, Gender Diversity in Senior Positions and Firm Performance: Evidence from Europe, IMF Working Papers (Mar. 7, 2016), https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Gender-Diversity-in-Senior-Positions-and-Firm-Performance-Evidence-from-Europe-43771.

[vi] See Matt Krentz, Survey: What Diversity and Inclusion Policies Do Employees Actually Want? Harvard Business Review (Feb. 5, 2019) (“In addition to being the right thing to strive for, having a diverse workforce helps companies acquire and retain the best talent, build employee engagement, increase innovation, and improve business performance.”).

[vii] See Jess Huang, Alexis Krivkovich, Irina Starikova, Lareina Yee, and Delia, McKinsey & Company, Women in the Workplace 2019 (Oct. 2019.pdf.