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Monday, October 25, 2021
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Nasdaq’s diversity rule is not progressive

On Aug. 6, the Securities and Exchange Commission (SEC) approved Nasdaq’s diversity proposal which intends to increase the number of women and minorities serving on corporate boards. Improving diversity on corporate boards is a laudable goal. But Nasdaq’s proposal will merely create a veneer of diversity without reducing discriminatory hiring practices.

The new mandate requires public companies listed on Nasdaq to have at least one woman, as well as either a racial minority or someone who identifies as LGBTQ+ on their board of directors. Nasdaq companies are mandated to report and release updated board-level diversity demographics each year and provide an explanation if they fail to meet the requirements. While noncompliant companies will not be delisted, the rules increase the pressure to improve board diversity.

Because gender-diverse boards are more profitable, supporters argue that the rules will benefit shareholders. Companies with diverse boards are reportedly 43% times more likely to have above-average profits. By requiring companies to change the demographics of their board appointees, it’s possible that Nasdaq may improve the performance of companies listed on their exchange.

Supporters also argue that the disproportionately male and white boards are the outcome of discrimination. At the present, 81% of Fortune 500 directors are white, and 73.5% are male. In contrast, in America as a whole, four in ten citizens identify with a race or ethnicity other than white. 

It is deeply troubling that corporate leadership does not reflect the United States’ diversity. But Nasdaq’s policy is an inadequate fix to a complex issue. Instead of removing the discriminatory barriers keeping people from being successful, it forces an inefficient, top-down approach.

As the majority of Americans agree, gender, race, sexual orientation and religion should not dictate what a person can and cannot do. When evaluating job candidates, we should reward merit above any external characteristics. If this was done properly, corporate leadership would be naturally diverse. The point is that hiring processes need to be reformed, instead of mandating outcomes that are themselves discriminatory.

The new board diversity rule does not bring us closer to this goal. It is well documented that the board seat selection process is heavily reliant on personal connections. According to a 2017 study “Director Appointments ⁠— Is It 'Who You Know'?” over 75% of new director appointments had personal relationships with members sitting on the board. Sustained progress on board diversity necessitates the dismantling of this system. And as it stands right now, Nasdaq’s policy does nothing to change it.

The rule also does not fix any underlying issues potentially contributing to inequality seen at the top levels of American leadership. It does not fix the underinvestment in minority schools, mitigate redlining, reduce the gap in higher education between the rich and poor or curtail workplace sexual harassment.

Instead, it shifts the focus away from people’s intellectual might and professional contributions. It forces companies to evaluate a candidate by the color of their skin, by the gender they identify with and by who they are attracted to, over personal merits and capabilities.

Further, corporate diversity mandates adopted in other countries have proved ineffective. In 2018, the Securities and Exchange Board of India (SEBI) required all listed companies to have at least one woman on their board of directors. Rather than awarding qualified candidates, the majority of newly hired women were reported to be either family members of board directors or were unqualified for the job. It appears that the companies did not search for genuine female talent, and the policy decreased the effectiveness of their boards. The effects of a similar policy in the context of the United States’s culture will undoubtedly be different, but negative unintended consequences are a common result of mandates.

If Nasdaq wants to increase corporate diversity, it should continue working to remove barriers to success. New businesses can be built from the ground up with diversity enhancing processes and practices. It could expand the Nasdaq Entrepreneurial Center, an initiative that provides training and support for people starting new businesses. It could use its GoodWorks volunteering program to focus on tutoring students whose parents can’t afford private options. It could also mirror programs like YearUp and Grads of Life, objectives that provide resources to low-income individuals to help them climb the corporate ladder. These solutions are commendable because they are focused on helping individuals, not changing demographic statistics.

In changing corporate leadership directly, Nasdaq should follow a voluntary approach. Rather than pushing companies that do not meet diversity standards to restructure, Nasdaq could celebrate the accomplishments of minority professionals and recognize companies who do hold diverse boards, like Milwaukee Women Inc in Wisconsin. Or it could find highly qualified board candidates and connect them with businesses looking for corporate boards, through initiatives such as TEMPO Madison’s Project REACH. These solutions draw attention to company policies it supports instead of naming and shaming those that fail to meet the determined diversity requirements.

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In a nation proud of its principles of individual rights, human equality and freedom of opportunity, corporate boards should not be so much less diverse than the American populous. . To be consistent with our values, Americans must work together towards reducing prejudice and discrimination.

Nasdaq’s diversity proposal is not a solution. It does not move us away from a society focused on race and gender when it comes to hiring practices, it does not eliminate barriers to success and it carries potential unintended consequences. While Nasdaq’s efforts are commendable, if they want to improve diversity thresholds within their businesses’ leadership boards, Nasdaq should address the underlying problems keeping people, and great companies, from reaching their potential.

Sarah Eckhardt is a junior studying economics and data science. Do you agree that Nasdaq’s policy does not address inequality in America? Send all comments to opinion@dailycardinal.com

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