Diversity is a trendier concept than ever, and corporate America is setting the course. Late last year, Nasdaq submitted a proposal to the Securities and Exchange Commission (SEC) to “enhance investor confidence.” As written, it would require companies to meet a diversity quota on their boards of directors. The proposal mandates that each company have at least two “diverse” directors: one who self-identifies as a female and one who either self-identifies as an underrepresented minority or LGBTQ+.
If companies on Nasdaq’s exchange do not comply, they must publicly explain why not, or Nasdaq will delist them. There are currently over 3,000 companies listed on Nasdaq’s exchange; only 25% meet the proposed quota.
The new quota fundamentally misunderstands the purpose of a board of directors. The board’s chief responsibility is to represent shareholder interests. Having diversity among directors ensures that shareholders of all kinds have a voice. However, much more important to analysis and decision-making is diversity based on merit, experience, and viewpoint.
Contrary to popular conception, not every woman thinks the same; not every minority has the same experiences. Far more productive is a diversity than values different experiences, viewpoints, and accomplishments. Of course, that will naturally result in diversity in gender, race, and sexuality. But to create value, such skin-deep considerations must be secondary. Viewpoint diversity creates a stronger business that exceeds customers’ demands and continually increases shareholder value.
Nasdaq: Diversity over Profitability?
On the heels of 2020, companies across the U.S. have taken some devastating blows. To avoid further loss in the wake of the pandemic, companies’ boards need to be stronger than ever. Candidates should be selected based on talent, experience, and skills: how they can drive the company to yield the greatest return on investment for their shareholders. What benefit will a company really derive if they meet a diversity quota, but all the directors have the same values and cultural worldview? Other than good PR, the company has gained nothing.
If the proposal passes, companies will pour a lot of time – four to five years – and money into it. To keep their Nasdaq listing, they may elect directors who might not be the best fit for their companies. That could be detrimental to a company. Boards are responsible for the company’s executive management, setting business goals, and managing company resources. Their decisions have a direct and substantial impact on their shareholders’ value.
This mandate will impact every American business listed on the Nasdaq exchange — and the free market as a whole. At the end of the day, this is just another arbitrary regulation that will likely not make a company more profitable. Over-intervention from outside powers, like the government or political activists, redirects businesses away from their fiduciary responsibilities and decreases profitability. Unfortunately, this mandate will likely only result in money wasted and public shaming for non-compliance.
Businesses have an obligation to select the best candidates for the boards, regardless of race, gender or sexual orientation. The right candidates will be the ones with the best experience, talents and skills needed to adequately represent shareholders. They’ll also be the ones who create the most profitability and the best products for customers.