Diversity deficit: US stock exchange Nasdaq sets diversity rules for listed companies

September 11, 2021

3 min read

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What's going on here?

The US’ second-largest stock exchange, Nasdaq, will be strengthening its listed companies’ board diversity under a new initiative with set rules.

What does this mean?

This means that Nasdaq companies’ boards will be required to have at least one woman director, and one from an underrepresented minority group or LGBTQ+, and if they don’t meet this target they’ll be expected to explain why. Companies will also be expected to publish their diversity statistics, something which many large organisations have started doing to begin tackling the diversity problem in the corporate world, particularly in senior positions. This regime has been approved by the SEC (Securities and Exchange Commission), with Chair Gary Gensler sharing his belief that these rules will give investors a better understanding of companies’ approach to board diversity.

As well as calls from investors for greater transparency, a study in 2020 found that over ¾ of Nasdaq’s listed companies would have failed to meet these newly proposed requirements, justifying the need for such changes which ensure that there is some diversity among the companies’ most senior employees.

What's the big picture effect?

There is a clear trend within the corporate world where the higher up in seniority you go within a company, the less diversity you see. This may be explained by the fact that research has shown that women and ethnic minorities face structural challenges in getting appointed as board members. This is evident when looking at FTSE 350 companies, where just 33% of boards are made up of women, while 54% have all-male executive leadership teams. Additionally, only 3% of board members are people of colour.

However, while the new initiative has been endorsed by many, including the likes of Goldman Sachs, some Republican Senators on the banking committee are less than impressed. Some argue that the rules push a political agenda, and diminish crucial deciding factors, such as experience and expertise, in the selection of board members, forcing companies to comply with a one-size-fits all quota. However, Nasdaq maintains that this is not a case of box-ticking, but rather striving to make a positive difference. In the UK we are seeing something similar, as the FCA recently proposed a ‘comply or explain’ plan in which companies must reveal whether they have met certain diversity targets, such as boards comprising at least 40% women, and at least one non-white ethnic minority board member.

Furthermore, as one of the largest market exchange operators worldwide, comprising companies such as Apple and Tesla, these targets are likely to spread throughout the corporate world. Over the past few years, diversity has become an increasingly important priority, so the ambitious strategies and targets of one may cause others to consider their own initiatives. Additionally, this shift may also impact professional services such as the legal industry, as clients will expect their supply chains to reflect their own progress and values.

There is no denying that this is a huge step in the right direction, however tackling inequality among senior employees does not start and stop with diversity quotas, and there is still a way to go. For example, one reason for the lack of women in senior roles is that women still tend to take up the primary caregiver role, and senior positions rarely fit around the demands of family life. Therefore, initiatives which encourage more flexible and part-time working in senior positions, are also critical. Ultimately, as research has shown that gender and ethnically diverse companies tend to perform better, we hope to see others following in Nasdaq’s footsteps, and subsequently more diversity in senior roles.

Report written by Lotanna Okaro

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