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Stock exchanges place many demands on corporate behavior. State at what share price a company can be listed. Or what events require a shareholder to vote. The composition of boards is the next area in which stock exchanges have decided that investors need to act as an advocate. But the so-called ‘positive first step’ is less radical than it sounds.
In early August, the U.S. Securities and Exchange Commission approved A Nasdaq proposal that requires its listed entities to have at least two “different” councilors. Of the two, one must be a woman and the other from a racial, ethnic or LGBT + group. Companies that do not meet the standard will have to explain why.
The change is intended to improve the amount of easily comparable diversity information available to investors. But companies are already under pressure from state governments, big investors and other corporate watchdogs to change the composition of their boards. Many are already focused on this area.
This makes Nasdaq a late mover. A study by executive search firm Spencer Stuart found this almost three-fifths of the board members added to S&P 500 businesses in 2019 and 2020 were not white men. It is important that a large proportion of the new directors were young newcomers. It denies criticism that a small pool of diverse directors is being reclaimed in several companies.
Recent changes in the composition of the board of directors mean that most Nasdaq companies are already complying with the new rules or almost complying with them, which minimizes the chance of awkward performances. The requirement is not ambitious, perhaps not surprising. Nasdaq and NYSE compete to list companies on their stock exchanges. Both disrupted Spacs and other controversial corporate structures. Both, despite investor opposition, have failed to combat two-tier equity firms. The business model of stock exchanges is based on listing of companies. This is a pot with painful corporate governance.