Why is the diversification promoted by NASDAQ important to financial advisors and investors?

The Nasdaq Exchange recently made a landmark proposal requiring companies listed on the exchange to appoint at least one woman and one LGBTQ or minority member to reflect the diversity of the board. Listed companies that fail to do this will need to explain their reasons to the exchange or face delisting. This kind of “not complying with or explaining” diversification rules is aggressive for the stock exchange. It could also have a big impact on the more than 3,000 companies that are already listed on exchanges. So what does this mean for financial advisors, investment advisors, and family offices?

There are three very important aspects to Nasdaq's diversity rules. First, it sent a message to Wall Street that the social justice movement after the murders of countless people such as George Floyd (George Floyd) and Breonna Taylor (Breonna Taylor) needed to be transformed into a viable direction based on accountability and good governance. Second, it forms a system of best practices that supports a clear direction to promote growth, that is, diversification is beneficial to enterprises. Finally, it provides a critical ecosystem for financial planners, advisors, and family offices to consciously communicate with clients and incorporate value-based components into their investment philosophy.

Let's analyze it further.

social impact

Following the “Black Lives Matter” campaign and mass protests, many believe Wall Street's reforms to invest in racial equity aren't enough. ... Therefore, the proposed rules for diversity came after many attempts to resolve this issue. In October 2020, J.P. Morgan announced that it would commit $30 billion to close the racial equity gap. In January 2020, Goldman Sachs said it would not list the company without at least one racially diverse board candidate. The Nasdaq proposal builds on California's quota for women in 2018 and recent quotas for underrepresented groups.

If a company fails to meet the requirements of the proposed rules, it will not be delisted, but the company will need to explain why it cannot meet these requirements. Failure to release board data could then result in delisting. As many have recognized, racial diversity not only promotes the interests of companies by promoting better governance, but also by reducing group thinking. Craig Broderick, who served as Goldman Sachs's chief risk officer and now serves on the boards of several entities, stated, “Making significant changes to long-established practices and models is difficult or quick, and the board composition of many companies reflects this. However, it is clear that the series of events and pressures we are facing now require organizations to quickly adjust their way of thinking. The board should actively step in rather than resist these effects.”

Norway provides an important case study on how NASDAQ rules can be adopted more widely. In 2003, Norwegian feminists were frustrated by the unequal ratio of men to women on corporate boards of directors and successfully lobbied the government to include gender quotas in legislation. When Norway adopted a corporate board quota system in 2003, many thought it was an extreme example of excessive expansion in Scandinavia. However, within 8 years, France followed suit, and other major countries adopted this provision in one form or another. As of 2020, at least 25% of the supervisory boards of the largest companies in the nine EU countries were women, and France surpassed this result, becoming the only EU country where men and women each account for at least 40% of the board of directors.

(Data on corporate board diversity over the past six years analyzed by McKinsey & Company)

Diversification is beneficial to enterprises

However, Nasdaq's efforts are more than a sign of virtue here. Numerous studies, including a Boston Consulting Group (Boston Consulting Group) report, have shown that innovation can increase revenue by 19% for companies with more diverse management teams. This finding is significant for tech companies, startups, and the NASDAQ exchange as a whole, as innovation is the foundation for growth. It shows that diversity isn't just an indicator to strive for; it's actually a critical component of a successful revenue-generating business. The US Cable News Network (CNN) reports that of the five largest NASDAQ companies by market capitalization, there are four “white heterosexual men in the minority on the board of directors.” They are Apple, Microsoft, Alphabet, and Facebook. This further reinforces the basic statement that ethnic diversity has nothing to do with optics, but is a growth engine that continues to contribute to the company's profits.

(Diversified data on boards and management of various industries of US listed companies analyzed by McKinsey & Company)

Impact on advisors

The Nasdaq Diversity Rule Proposal sends a strong message to financial planners, advisors, and family finance offices to consciously communicate with customers and incorporate value-based elements into their investment philosophy. The adage “you don't see your eyes, don't worry” is important here. The less racial diversity is promoted and discussed on Wall Street, the less financial planners, investment advisors, and family offices see the value of discussing this issue with clients. However, the more diversity is valued, discussed, and enhanced into policy discussions, the more a basic environment can be formed where investment and financial advisors and financial planners can have meaningful conversations with clients on how to include components of good governance in 401 (k) s, IRAs, 403 (b) s, etc. Leadership is important here, especially at the institutional level. President-elect Joe Biden has said he will support diversity in cabinet and personnel appointments. He will appoint the next Chairman of the US Securities and Exchange Commission. The US Securities and Exchange Commission will ultimately be responsible for approving NASDAQ's proposed rules.

The future of motorists

In the future

While we can't predict how the SEC will act, the NASDAQ diversification rules are a bold statement that shows that the US is ready to join the ranks of global corporate governance and move in a more inclusive and fair direction. The proposal sets the tone for an important shift in the country and will increase pressure on other actors, including the private and public sectors, to diversify its leadership.