In an effort to “enhance investor confidence,” Nasdaq submitted a proposal to the Securities and Exchange Commission (SEC) to require companies to meet a diversity quota within 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 listed on the Nasdaq exchange do not comply, they must publicly file why they did not meet the new regulations or be delisted from the exchange. There are currently over 3,000 companies listed on Nasdaq’s exchange and only 25% meet the diversity standards within their boards as they stand.
A board of directors’ main responsibility is to represent shareholder interests, and having diversity among directors ensures that shareholders and investors of all kinds are represented. However, the diversities that provide true benefit are those based on merit, experience and viewpoint. Diversities based on gender, sexual identity and skin color alone do not guarantee sufficient representation for shareholders. The diversity within a board that companies should aspire to maintain, creates a stronger business that operates primarily to exceed the needs of their customers and continually increase shareholder value.
On the heels of 2020, companies across the U.S. have taken some devastating blows. From a shareholder perspective, seeking diversity among a board of directors based on outward appearance, gender and sexual orientation does not guarantee that your voice will be represented and your shareholder value will increase. Candidates should be selected based on talent, experience and how they can drive the company to yield the greatest return on investment for their shareholders.
If this proposal is passed by the SEC, companies will spend a large amount of time, possibly four to five years, and millions of dollars attempting to elect directors who, in some cases, might not be the best fit for the organization. Not only are boards responsible for the company’s executive management, setting business goals, and managing company resources, but 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, has often proven to redirect businesses away from their fiduciary responsibilities and decrease 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 the shareholders by providing the highest return on investments.