By Thomas Kostigen
Nasdaq recently issued a proposal to the Security and Exchange Commission that would require the more than 3,000 companies that list on the stock exchange to disclose the race, gender and sexual orientations of their boards of directors. It is a requirement that should present opportunities for investors to better vet their holdings.
First, companies with a more diverse board are likely to envelop more inclusive policies and procedures into their operations and management. This translates into a more diverse workforce and also presents the possibility for broader market reach. The broader the demographic reach, the broader the potential for revenue.
The Associated Press writes that “Nasdaq’s plan ups the stakes in what was already a widening push by shareholders and governments around the world for more diversity on corporate boards, which often are composed of mostly white men. It’s not just a sense of fairness. Proponents say greater board diversity can improve financial performance for companies — and ultimately their stock prices — by bringing in varying opinions and voices and fostering a better understanding of employee and customer bases.”
Second, companies that run afoul of diversity mandates might present more risk to investors. Governance is a broad category of issues that relates to fair wages, working conditions, as well as anti-discrimination policies. Without a properly diverse board and labor force, a company might open itself up to lawsuits, or be subject to punitive actions by government authorities that require diversity. California now requires publicly held companies with headquarters in the state to include board members from underrepresented communities. Also, companies must have at least one woman on their boards of directors.
Risks of noncompliance can affect stock prices and jeopardize corporate profitability—something investors should know.
To be sure, it may take a professional financial advisor to conduct the type of deep dive due diligence that would reveal such governance risks. BlackRock and Vanguard, two of the biggest money managers in the world, were recently called to task for not living up to their own calls for action on climate change, for example. According to Bloomberg News, BlackRock and Vanguard gave their support to less than a sixth of shareholder climate and social resolutions, despite commitments to do more to combat the effects of climate change.
So, while the Nasdaq call for diversity is something that investors can look to for buying and selling possibilities, it should be only the first step into a comprehensive corporate review for diversity and whether companies are doing as they say, not merely talking the talk.
The Carlyle Group, an investment company, found in an analysis that companies it has invested in and which have least two diverse board members experience higher earnings growth (12 percent more) per year on average than companies that lack diversity.
Often, companies that are screened for environmental. social, and governance (ESG) factors are subject to more scrutiny about their environmental track record. But as the Nasdaq proposal proves, there is more to ESG than meets the “e.”
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.
