News Item
Forbes featured Darren Rosenblum's latest column: "Carrots And Sticks: Why Nasdaq Adopted Its Radical Board Diversity Quota"
Nasdaq announced that they have submitted a proposal to the Securities and Exchange Commission (SEC) to require listed companies have one woman board member and one other board member from an underrepresented group. Firms that fail to comply with this requirement must justify their failure or risk delisting from the exchange. This comply-or-explain rule is radical for a securities exchange. While it deserves praise for innovation, what happens next will be fascinating to watch. Will the SEC approve the Nasdaq initiative? If so, how will Nasdaq’s new rule affect companies? Will it improve equality and inclusion at the upper levels of the corporate sector? To answer these questions, we have to first understand the proposal and why it was adopted.
Though it may seem like a minor imposition, it is both novel and will affect firm governance in important ways. First, Nasdaq would be the first of the very top exchanges to adopt a board representation diversity requirement. What Nasdaq also adds here however is the inclusion of a person from an underrepresented group. Its proposal combines California’s largely sucessful 2018 quota for women and its recent quota for underrepresented groups, by which they meant certain racial and ethnic groups and LGBT people.
Nasdaq’s effort to encourage diversity deserves our recognition. Diversity, as many recognize, not only advances the firms’ interests by fostering better governance and reducing groupthink. It also serves as an investment in society overall.
Yet Nasdaq’s effort here is not just about virtue signaling. How did we get to the point where one of the world’s top exchanges, in the generally anti-quota United States context, adopted a quota? Surely Nasdaq, as the exchange that includes some of the world’s largest technology firms, would rather get ahead of this movement rather than pull up the rear. What motivated Nasdaq’s choice?
As with most choices, it probably involves a combination of carrots and sticks. For most private sector endeavors, the carrot is profits and money. This decision on Nasdaq’s part is no different. Over the past decade, key private equity investors and pension funds have initiated their own diversity efforts. Nasdaq’s decision follows their efforts, all of which reflect the market’s acceptance of quotas as a technique for realizing diversity.
