Diversity for Board of Directors
From a common sense standpoint, Boards of Directors need to be diverse to match the diversity in our country. It’s the diverse population that consumes products and services. It’s the diverse population that comprise the workforce for the manufacture, distribution and sale of products and services to the consumer. It’s the diverse population that can buy and sell stocks. These diverse investors will demand diversity. So we need to effect change, and have a diverse Board of Directors, who have their fingers on the pulse of America. As a result of Board diversity, the representative Board members will have a platform to articulate for the scores of underrepresented racial and ethnic groups for which they represent. This is the time to make progress towards the asymmetrical relationship between the underrepresented racial and ethnic groups and the present day composition of Board of Directors.
In December 2020, Nasdaq filed with the SEC, a proposal for new listing rules regarding board of director diversity and disclosure. The proposal is entitled " A proposal to advance board diversity and enhance transparency of diversity statistics through new proposed listing requirements”. I am in favor of this proposal, because simply speaking, its the right thing to do and also, in view of the recent events, the public lens, is now wider not than ever, and the public will focus more on diversity issues more closely.
The Board of Directors is the corporation’s governing body. In a nutshell, the Board of Directors is responsible to oversee the corporation’s business and affairs, holds corporate authority and power, appoints officers, and is responsible for making major business and policy decisions. The Board of Directors is the leadership of the company that steers the company. In other words, Board of Directors “rule”, and not to have equal racial and ethnic representation on the Board of Directors is a travesty of business ethics. Some studies have shown that increasing diversity improves financial performance. Financial performance is important, but in this day and age, its not the most compelling reason to justify diverse boards. Its also important to avoid quotas and tokens, but rather assign a minimum number of seats to directors from underrepresented communities that would allow their voice to be heard and acted upon in the board room.
Institutional investors have applied pressure on corporations and some investment bankers have insisted on diverse boards before they associate themselves with a public offering. The current movement towards diversity is a baby step, towards diverse Board of Director representation and seems slow. The U.S. is behind other countries that have required board diversity. The goal of bringing underrepresented racial and ethnic groups into the boardroom has been even slower. A few years ago, ”The WSJ reported that “the number of women on big-company boards in Italy, Germany and several other European nations has tripled and, in some cases, quadrupled in recent years as mandates have forced corporations to boost the share of female directors to as much as 40%”. Now fast forward to September 30, 2020, Governor Gavin Newsom signed into law a bill that requires publicly held companies headquartered in the state(California) to include board members from underrepresented communities. It should be noted that in the event, companies in California that do not comply, will be fined $100,000 for the first violation and $300,000 for each additional violation. Although to a large public company, these fines are small, they may add up to a larger number, and more importantly, corporate brand reputation is at risk.
So kudos to NASDAQ for being pro active in seeking diversity, and kudos to the State of California for passing legislation that mandates diversity, and to both for taking steps to eliminate the disproportionate number of seats on Boards of a Directors.