Nasdaq’s Diversity Proposal: A Bet That Transparency Is Good For Business

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With the approval of this new rule, Nasdaq immediately sets itself apart from other stock exchanges.
Nasdaq President & CEO Adena Friedman

Nasdaq’s board diversity proposal, recently approved by the SEC, is as much a smart business decision for the stock exchange and its listed companies as it is a move to encourage companies to practice good governance. The transparency called for in the proposal is good for business and good governance. Corporate boards should consider the value created by the proposal’s requirements as they sort out how they will comply with the new rule.

All companies listed on Nasdaq’s U.S. exchange will have until August 8, 2022 or the date the company files its proxy or information statement for its annual shareholder’s meeting in 2022 to disclose board-level diversity data. This annual disclosure must show that the company has at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+, or provide an explanation why the company does not meet that standard.

Responding to critics who claim the proposal is a mandate or quota, Nasdaq says:

“This rule is not a mandate and does not set a hard target that companies must adhere to regardless of their circumstances. If a company chooses to explain why it does not meet the diversity objectives, it would provide its explanation in its proxy statement, information statement for its annual shareholder meeting, or on the company’s website. Nasdaq will verify that the company has provided an explanation, but will not assess the merits of the explanation.”

While Nasdaq won’t assess the merits of those explanations, shareholders will. In a statement announcing the SEC’s approval of Nasdaq’s proposal, SEC Chairman Gary Gensler said there had been “calls for greater transparency about the people who lead public companies,” many of which came from shareholders. “These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have flexibility to make decisions that best serve their shareholders.”

Beyond encouraging board diversity, what the Nasdaq rules really strive for is transparency. For sure, there are times when you can make a case that being transparent can hurt a company’s bottom line, but disclosing the makeup of the board doesn’t seem to fit in that category. It appears that Nasdaq has made a bet that transparency is good for business, and here are the benefits:

Nasdaq, and Nasdaq-listed companies, gain financially.

With the approval of this new rule, Nasdaq immediately sets itself apart from other stock exchanges as the exchange that stands for transparency and diversity in corporate boardrooms. That’s a positive reputation that should enhance Nadasq’s ability to attract new companies to list on the U.S. exchange, which would benefit its bottom-line.

Such a reputation may also spur more investors to consider investing in Nasdaq-listed companies that offer more transparency and a greater commitment to board diversity. If transparency becomes a differentiation point for Nasdaq firms, they may benefit from greater investment and a reputation for better governance.

Better relationships with SEC, ISS, Glass Lewis.

It is also possible that while working on the approval of this proposal, Nasdaq has fostered a better working relationship with the SEC. The two entities coming together on this aspect of governance may make sorting out future issues of governance easier and less confrontational. Since the SEC, ISS and Glass Lewis have all indicated support for diversity in boardrooms, Nasdaq-listed companies should meet their standards immediately, leaving a more positive impression about the company’s overall governance.

Better relationships with shareholders.

Since shareholders have been asking for this greater transparency about diversity in boardrooms, Nasdaq and its listed companies are delivering on a shareholder request that could encourage greater investment in the future.

Also, by complying with the Nasdaq rules, Nasdaq-listed companies can avoid negative publicity from shareholder proposals asking for greater transparency about board composition or shareholder groups banding together to vote against board members who do not support diversifying boards. Shareholder lawsuits over companies alleged false claims of commitment to diversity may also be avoided by complying with the new rules.

Better relationships with employees/customers.

For Nasdaq-listed companies greater transparency is generally good for customer and employee relations. Customers and employees generally favor companies that support diversity, so it can be argued that there are multiple benefits that spring from transparency that proves a company’s commitment to diversity.

When customers believe a company is committed to diversity it can improve customer loyalty. When employees believe a company is committed to diversity it can improve morale because everyone feels they have an opportunity to advance to leadership roles.

The approval of Nasdaq’s board diversity proposal simply requires companies to state where they are on this governance issue. It appears that Nasdaq believes transparency here, like most governance issues, is good for businesses—and business.

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