Point at Issue: Is the Nasdaq's New Proposal Enough to Fix Corporate Diversity?
Bloomberg
By enforcing diversity, can we fix the inequalities that may exist within companies across the United States? December 1, Nasdaq made a strong statement on its position to the 3,000 plus companies listed on its exchange. By prioritizing diversity, the boards of the listed firms must include at least two diverse directors. One member who self-identifies as female and another that self-identifies as either an underrepresented people of color or LGBTQ+ are required. Upon approval, new issues can infiltrate corporate America's boardrooms and upend this proposal's original intentions.
As the world evolves, companies must keep with the times. Nasdaq's proposal offers a solution to solving social injustice at the board level. Theoretically, diversity in c-level positions may help resolve certain issues thanks to the varying backgrounds of those tackling them"When we embrace diversity, we are better equipped to serve our clients, employees, partners, communities, and shareholders," explained Charlene Begley, Director, Nasdaq, in a recent press release.
However, diversity on the board also can create a counterproductive environment. A diversity of backgrounds means a diversity of opinion which can be counterproductive to agreeing on a single resolution. Decisions are difficult to make, and it can ultimately stall, if not stop progress. Some organizations find themselves been deadlocked in decisions because they cannot disseminate or make sense of all the information presented.
"Heterogeneous director biases do not cancel out," according to Deadlock on the Board, a new study from professors at Washington University in St. Louis, Boston College University, and Columbia University. It is detrimental to a company when the board cannot make a decision. "But the idea that a diverse board can exacerbate deadlock is not something many directors may think about," cited the study. This risk is not a deterrent as companies understand the benefits of having a variety of board members.
An array of representation on a board speaks to the shareholders and employees as it mimics what exists in the real world. They see themselves within the members and ultimately have more faith and respect in the decisions made. The net result is an increase in profits. According to a 2020 study from McKinsey & Company, "The most diverse companies are now more likely than ever to outperform less diverse peers on profitability."
The first step to diversification on the board is to add new members as per the proposal. Vacancies on the board should be filled by HR with qualified applicants. While the goal is to diversify, the result can create an environment that overlooks or ignores the most qualified applicants. Lost profits and animosity amongst the team are a few of the harmful consequences of a wrong hire.
Another added perception is that choosing a person based on race is biased. So now, instead of removing bias, you have just shifted it. If companies overlook workers who are not minorities or women, an added level of frustration will ensue.
Questions on the validity of a new hiring process make their way to the HR department. Minorities will wonder if the spot was awarded based on experience or because of their diversity. Candidates not hired feel slighted and deflated because they cannot fairly compete. This type of perceived bias can lower the morale of employees. Non-minority workers will eventually wonder if working to their potential is worth it if there is no opportunity to advance.
"By pushing its listed companies to address racial and gender equity in corporate boards, Nasdaq is heeding the call of the moment," said Anthony Romero, executive director of the American Civil Liberties Union. By increasing the representation of women, LGBTQ, and people of color, underrepresented groups can use their skills and voice to influence corporations. "Incremental change and window-dressing isn't going to cut it anymore as consumers, stakeholders, and the government increasingly hold corporate America's feet to the fire."
A diverse culture is vital to employees and extends outward to build a more significant reputation. Solid reputations enable a company to attract a wider variety of applicants from different talent pools. Fairness also equates to customers being loyal to that brand in purchasing from who they believe in.
Right now, more than 75% of the roughly 3,200 Nasdaq-listed companies do not meet the proposed diversity criteria, according to The New York Times. However, Apple, Facebook, Microsoft, and Google's owner, Alphabet, adhere to diversity at the top. Chinese internet companies Baidu Inc. and JD.com do not have women on their boards, and modifications may occur in the upcoming year.
Companies must act quickly to meet the minimum board allotment. All of the Nasdaq-listed companies are required to publicly disclose their board-level diversity numbers through Nasdaq's proposed disclosure framework within one year of the US Securities and Exchange Commission's (SEC) approval of the listing's rule.
For the companies listed on the Nasdaq Global Select Market and Nasdaq Global Market, the two diverse directors need to be in place within four years of the SEC's approval of the listing rule. Companies listed on the Nasdaq Capital Market must have two diverse directors within five years of the SEC's approval.
Suppose the company cannot meet the "board composition objectives" within the timeframes given. In that case, they need to provide a public explanation on why they cannot comply and will not be subject to delisting.
The question of the legality of what Nasdaq wants to do is a significant issue. The US Equal Employment Opportunity Commission (EEOC) spells out the prohibited employment policies that have the potential to hurt applicants or employees of a certain race, religion, color, sex, national origin, and those with disabilities.
On its site, EEOC explains how it is not legal for a company to publish a job advertisement that shows a preference or even discourages a person not to apply. "For example, a help-wanted ad that seeks "females" or "recent college graduates" may discourage men and people over 40 from applying and may violate the law."
To be successful, companies must make inclusion a business objective that extends from the top down. Goals setting for the year needs to include diversity as part of their overall business plans and objectives. The institution of a zero-tolerance policy in the workplace is indicative that your organization does not tolerate bias in any shape or form. There are many ways to include diversity as part of an overall plan.
Companies will improve themselves after internal looks at their diversity practices. Including diversity and inclusion workshops for your company is a necessary step in analyzing your current status and determining what changes are required. Some companies may already be doing this, but for those who are not, the timing may not be right to create an atmosphere that is welcoming and reflective of our society.
"Nasdaq's purpose is to champion inclusive growth and prosperity to power stronger economies," said Adena Friedman, President, and CEO, Nasdaq. "Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America."
The financial fallouts from Covid-19 have decimated the economy and left companies in the red. The development of the right board is not a priority for corporations looking to recoup profits. Conducting multiple job searches to revamp their boards for the sake of inclusion does not solve the immediacy of their financial needs.
Companies need to decide if they want to be inclusive and reflect on the changing times. Compliance comes with obstacles and necessary analysis of the risks. Some already have, with Goldman Sachs committing to change for an inclusive work environment. By 2025, the company is aiming to have "representation in our vice president population of 40 percent women globally; 7 percent Black professionals in the Americas and the UK; and 9 percent Hispanic/Latinx professionals in the Americas," wrote David Solomon, Chairman, and CEO of Goldman Sachs to his employees. The company is looking to implement new policies and improve existing ones to meet this goal.
Cultural change needs to be more than additions to your company board. Organizations need to foster an inclusive workplace that shows their actions are more than Nasdaq-mandated, but a real path to awareness. With good intentions, the Nasdaq proposes change; however, if required, the issue has many layers and will likely have to be revisited.