When stock market indexing giant NASDAQ announced plans to make the companies listed on its exchange include at least some measure of diversity on their boards last December, the reaction was loud and immediate from both sides. Right-leaning groups like The Heritage Foundation declared the move “discriminatory and immoral” and part of some outrageous “social justice” experiment while some diversity advocates said the efforts didn’t go far enough. And now, it looks like the naysayers may have won; in a letter published on Feb. 28 in The Wall Street Journal, NASDAQ President Adena T. Friedman revealed that the organization was easing back on their original requirements.
As originally submitted for approval to the U.S. Securities and Exchange Commission (SEC), NASDAQ’s original diversity requirement proposed that all boards on the exchange’s roster include “at least two board members from diverse backgrounds.” These diverse backgrounds could include either gender identity, race, ethnicity or sexual orientation, but companies didn’t need to include representation from all these groups. They just needed two individuals total on their boards that met those requirements, e.g., two women or two Latinx individuals or two Black men would be fine — no need for a fuller or more equal representation across all diverse groups.
Notably, there was no penalty for not meeting this proposed requirement. If a company couldn’t do it, they simply had to “provide an explanation to shareholders” as to why they couldn’t meet that “required” goal.
But even that much effort to promote diversity now appears to be too much for NASDAQ.
In her WSJ letter, Friedman wrote: “We have listened closely to all the feedback, and we’re making some changes to strengthen our proposal in response. For example, we heard from companies with smaller boards, as well as from several small-cap investors, that meeting the diversity objective would be more challenging for them. As a result of that feedback, we’re now proposing that companies with five or fewer directors may satisfy the recommended objective with one director from a diverse background rather than two. We’re also providing a one-year grace period in the event a vacancy on the board brings a company under the recommended diversity objective.”
The timeframe for implementation of the proposal, if approved by the SEC, remains the same according to Friedman.
“We provide a runway of two to four years to meet the objective, and we are providing free assistance to our listed companies with a suite of tools and services to help them along the way,” she wrote.
In closing her letter, Friedman wrote: “Overall, our proposal seeks to demonstrate that, with proper disclosure and clear objectives, companies and investors can create momentum toward an approach to capitalism that offers more opportunity to more people. We believe this can be accomplished through a market-driven solution — rather than government intervention.”
“We have welcomed the discussion on this proposal with the goal that a robust debate will bring us to a constructive middle ground,” she concluded. “Judging by the overwhelmingly positive response to our proposal, we think we’ve found that elusive middle: a meaningful step forward that will make a measurable difference.”
The SEC is still weighing in on the proposal and has yet to announce its decision.