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Tuesday, October 3, 2023

Do Diverse Corporate Boards Lead to a Fairer Workplace?

Since 2015, Silicon Valley diversity reports have become a ritual. Each year, companies including Facebook and Google update elaborate splash pages with missives on inclusion, sharp visuals featuring smiling and assured women and non-white employees, and promises of a more diverse future. They haven’t delivered yet.

Soon, Silicon Valley may be forced to take a different tack: diversify its boardrooms or face public criticism, compounding fines, and, the latest threat, delisting from the Nasdaq stock exchange. Earlier this week, Nasdaq proposed requiring each of its 3,300 listed companies to have at least one director who is a woman and another who is either an "underrepresented" minority (defined as Black, Latinx, or indigenous) or a member of the LGBTQ+ community.

The proposal needs approval from the US Securities and Exchange Commission, most likely led by an appointee of president-elect Joe Biden, after public comments.

Under Nasdaq’s plan, listed companies would have one year after SEC approval to disclose the diversity of their board. Within two years, companies would need to have at least one “diverse” director. Larger companies would have four years to have at least two diverse directors; smaller and non-US companies will have five years.

Companies that don’t meet the requirements would have to offer public explanations for why they haven’t. Otherwise, they’ll face delisting.

Nasdaq says an internal review found that roughly 80 percent of its companies have at least one woman on their board, but only about a fourth of companies have a second board member who would qualify as an underrepresented minority or LGBT.

The experience of some high-profile tech companies calls into question whether a diverse board leads to a more diverse workforce. Straight white men are a minority on the boards at Apple, Microsoft, Facebook, and Google parent Alphabet. None of the four would have to make changes to comply with Nasdaq’s rule. But none has shown big progress in diversifying its workforce. White and Asian employees make up 76 percent of Apple’s workforce, for example. Facebook’s employees are 82 percent white or Asian.

California already has two laws that require diversity on the boards of publicly listed companies headquartered in the state. AB979, passed earlier this year, will require companies to have one or more people of color on their board, depending on size. A 2018 law required at least one woman on most boards. The latter’s been remarkably effective—the number of all-male boards has declined to 17, from 93, in under two years.

Pressure is coming from elsewhere, too. Goldman Sachs recently said it would require companies to have at least one diverse board member before it will help take them public. To Goldman, “diverse” means women or people of color.

“Quota” style diversity initiatives are becoming more popular but generally focus on gender.

Advisory firm Institutional Shareholder Services found that, in 2019, 27 percent of directors at S&P 500 companies were women, up from 16 percent in 2008. Boards are adding women about three times as fast as they add people of color, according to ISS.

Making representation of women and of people of color different goals create complexities. AB979’s definition of “minority” is self-reported, based on how members identify themselves, and includes East Asians, who are often well represented at tech companies as rank-and-file employees but less well-so in management. Many companies could “increase diversity” without ever recruiting underrepresented minorities.

Nasdaq’s rule is both a play on the role of public perception for any company that would flout its requirements and an investment in a trickle-down effect for diversity. It might help in the short term, but in five years time could look paltry.

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