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Boards that Reflect Our Country

The Nasdaq filed a proposal with the SEC the first week in December. They would like to require the companies that list with them have Boards of Directors that have at least one woman and one underrepresented minority on their boards.

I find it a bit sad, given all the statistics that tells us a diverse board drives better business decisions, that we have had to resort to mandates, but if that’s the only way to get there, we should do it. Let’s take a look at the effectiveness of mandates of this kind. Luckily, California has led the charge and we have some interesting data as to their progress.

California History

In 2018, Governor Newsom signed the landmark State Bill (SB) 826 into law. This law had a phased in approach, requiring that companies headquartered in California (regardless of where they were incorporated) meet the following requirements:

This was the first legislation in the US that mandated the composition of company’s boards. So how has that worked thus far?

Honestly, it seems to be working. Below is the situation comparing mid-2018 to mid-2020. In two short years they have reduced the number of all male boards to less than 3% or just 15 companies.

The next big hurdle will be to meet the 2021 gender requirements.

But California did not stop there. In Sept of 2020, Governor Newsom, signed SB 979. This legislation requires that boards of publicly traded companies with headquarters in California to have at least one racially, ethnically, or otherwise diverse directors on their boards by 2021. For this bill, under-represented minorities are spelled out as: Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native Hawaiian, or Alaskan Native, or those who identify as gay, lesbian, bisexual or transgender. Again, a phased approach was adopted.

At the time the law was signed, more than 35% of California’s companies did not meet the 2021 requirement and about 85% did not meet the 2022 requirements.

These California laws impact between 500-600 companies.

Nasdaq Proposal

The Nasdaq proposal to the SEC will impact around 3000 companies and incorporates elements of the two California state bills, both gender and underrepresentation.

The proposal would require that listed companies have:

They define underrepresented minorities as individuals identifying as Black, Hispanic, Asian, Native American, or belonging to two or more races or ethnicities.

If the proposed changes are approved, companies would have a year to disclose their board diversity statistics. Then, depending on their listing tier on the exchange they would have either 4 or 5 years to comply.

Some of the larger companies on the Nasdaq already comply but many companies do not yet meet the underrepresented minority requirements. They will need to change the makeup of their board, explain why they aren’t meeting the target, or be delisted from the exchange.

Based on California’s pioneering experience, it seems that this proposal may drive the Boards of Companies to actually start reflecting the people that make up our country. When the top leadership of companies reflect our country’s diversity; then these companies can not only manage their businesses better, but can also push for needed changes in our country’s systems, processes, and policies. Study after study has shown that companies with diverse boards reap significant financial rewards. The 2019 McKinsey data show that when you compare companies in the fourth quartile for diversity on their executive teams with those in the first quartile you see:

Gender Diversity: 25% more likely to demonstrate above average profitability
Ethnic Diversity: 36% more likely to demonstrate above average profitability

McKinsey has been monitoring this data since 2014 and most companies have not made much progress on diversity over the last five years. Perhaps legislation is what we need to get diversity into our companies. I believe that once it is in place at the top, changes in the rest of the leadership will also follow suit. Of course, getting the diversity into the boards is just the first step. The second step is to have them start making the changes needed to start shifting the culture to be more inclusive, where diverse people are not just there, but also are actually heard and become valued and respected contributors. That’s where companies like mine come in, making cultures understand differences so they can become more Gender Savvy.

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