Corporate America has long been criticized for its lack of gender and racial diversity, with underrepresented racial groups making up just 12.5% of board seats at the 3,000 largest publicly traded companies, and women making up just 21%.
To fix this issue, several companies, and even a few states, have implemented diversity mandates. Earlier this year, Goldman Sachs said it would not take a company public unless it had at least one diverse board candidate, with CEO David Solomon saying they will place a special "focus on women." In 2018, California became the first U.S. state to mandate that all public companies within the state have at least one woman on their board by December 2019, resulting in 68 new women being added to company boards following the announcement. This fall, the state implemented a similar law as it relates to racial diversity.
Now, Nasdaq is stepping up to the plate with its own diversity mandate that will require listed companies to have at least two diverse board members, including one person who self-identifies as female and one person who self-identifies as an underrepresented minority or LGBTQ+. An underrepresented minority, Nasdaq clarifies, is anyone who self-identifies as Black or African American; Hispanic or Latinx; Native American or Alaska Native; Native Hawaiian or Pacific Islander; or Asian.
In its proposal for the mandate, which was filed with the U.S. Securities and Exchange Commission (SEC) on Tuesday, Nasdaq said that all companies will be required to publicly disclose board-level diversity numbers within one year of the policy being approved and they will be required to have at least one diverse director within two years of the policy's approval. The timeframe for companies to have at least two diverse board members will vary from four years to five years depending on a company's tier in the Nasdaq stock market, with foreign companies and smaller reporting companies having more flexibility to satisfy these requirements with two female directors. If a company fails to meet these goals without a public explanation for why, then it can risk being removed from Nasdaq's list.
"We are taking the leadership here because there has been so little action on this front and we do think it's an important thing for us to do," Nasdaq president and CEO Adena Friedman told CNBC's "Squawk Box." Right now, more than 75% of the roughly 3,200 Nasdaq-listed companies do not meet the proposed diversity criteria, according to The New York Times.
Nasdaq's announcement has been met with a lot of praise as well as concerns from business leaders who are disappointed that companies have to be forced to prioritize diversity.
"I have two public companies, I have BGC Partners and Newmark, and both of those companies have women and minorities on the board," Howard Lutnick, who also serves as CEO of financial services firm Cantor Fitzgerald, told CNBC's "Squawk Box." Lutnick adds that while Nasdaq's push is "a reasonable thing to do," he believes that "companies should really be doing this on their own." Right now, BGC Partners and Newmark each have five board members, that both include a woman and a Black director.
"No one needed to tell me that this was the law, I mean give me a break," he adds. "Women are half the people on the earth. How do you not have women on your board?"
Crystal Ashby, who serves as interim president and CEO of the Executive Leadership Council (ELC), the preeminent organization for Black CEOs, board directors and executives, says that while it's reasonable to question why these mandates are necessary to begin with, it's important to understand that sometimes change needs to be required in order for it to actually happen.
"If you're not going to organically create change, and I mean we're talking however many years in which change still hasn't happened, then you actually have to go in and create the change that you need," she tells CNBC Make It. "And, that's what these mandates are doing."
Right now, Black directors make up 4% of board-level seats at the 3,000 largest publicly traded companies and Black women make up 1.5%. "Companies have had more than ample opportunities to diversify their boards," Ashby says. "So, I sit here and look at my membership and my organization at ELC and I think of the number of Blacks who are more than qualified to be sitting on corporate boards. And so, I would say based on what I've witnessed in terms of the fact that it is a needle that has been very slow to move, NASDAQ's mandate may be an effective solution to increasing the numbers."
Carolyn Childers, co-founder and CEO of Chief, a private network for C-suite women, agrees that diversity mandates are often key in helping to bring about real change. However, she says company boards and leaders must understand that meeting a diversity criteria does nothing if you don't have an inclusive workplace culture to match.
To achieve this culture of inclusivity, Childers encourages companies to go beyond any mandate that requires them to add just one or two diverse hires to their board or leadership team in order to avoid having that person feel like an "only" in the room. Roughly 40% of senior-level women or women in technical roles say they are the "only" at work, according to Lean In data. Of those who are an "only," 80% say they've been on the receiving end of microaggressions at work, leading to these women being 1.5x more likely to leave their jobs.
"My only concern with a mandate would be that it can create a less inclusive feeling internally versus when you organically get there," says Childers, while explaining that this can easily happen if a company hits a one- or two-person diversity mandate and think they're done with diversity hiring. But, she says she believes that the pros of diversity mandates far outweigh the cons and she hopes that Nasdaq's push will be the change that's needed for more diverse qualified candidates to join boards.
Already, several studies have pointed to the benefits of having diverse firms, including a 2020 McKinsey report finding that companies with executive teams in the top quartile of gender diversity are 25% more likely to have above-average profitability than companies in the bottom quartile of gender diversity. Additionally, a study released by Boston Consulting Group in 2018 found that companies with more diversity at the management level generate 19% higher innovation revenues than companies with less diversity.
Ashby, who is the first woman president and CEO of the ELC, says that Nasdaq's announcement comes at a time where it is critical for us to implement real change when it comes to diversity, equity and inclusion.
"This is one of those, in my opinion, true moments in time where we have an opportunity and we have to get it right," she says. "Nobody should go back to where we were before Covid-19 impacted Black and Brown communities worse than it impacted anybody else. No one should go back to where we were when the number of Black men and Black women who were murdered before George Floyd was murdered were a one-day news story. We all watched a man beg to breathe and if that compelling moment in our history does not change the paradigm then we have done ourselves a huge disservice."