Two of the Most Telling Studies Cited by Nasdaq's Diversity Proposal
You can literally follow the money.
Six months ago, one of my very first essays was about diversity. In it, I discussed several points on the benefits yielded, including increased profits. Through its diversity proposal, Nasdaq saw this as a complimentary benefit among many others. Nasdaq’s proposal made waves in the news, and conversations have begun on the pros and cons of the proposed policy change.
The Proposal at a High level :
At least two diverse directors
At least one female director and at least one director who identifies as an underrepresented minority or as LGBTQ+.
If you don’t comply, publicly disclose why
Some softer requirements for international companies due to cultural differences.
Number four is an essay for another time, but the first three are pretty straight forward.
In Nasdaq CEO Adena Friedman’s 270+ page proposal, many studies were cited. Among them, I saw two that were and will likely be the largest drivers towards adopting the policies. I’ll briefly explore them below.
McKinsey & Company, Diversity wins: How inclusion matters (May 2020)
and
Moody’s Investors Service, Gender diversity is correlated with higher ratings, but mandates pose short-term risk (Sept. 11, 2019)
First, the citing of the McKinsey study. McKinsey (2020) found “a positive, statistically significant correlation between company financial outperformance and [board] diversity, on the dimensions of both gender and ethnicity,” with companies in the top quartile for board gender diversity “28 percent more likely than their peers to outperform financially,” and a statistically significant correlation between board gender diversity and outperformance on earnings before interest and taxation margin.
Next, the citing of the Moody study. Moody’s (2019) found that greater board gender diversity is associated with higher credit ratings, with women accounting for an average of 28% of board seats at Aaa-rated companies but less than 5% of board seats at Ca-rated companies.
Not everyone is a fan. Nasdaq properly cited half a dozen studies where there was minimal or no impact on earnings due to diversity on the board. Nevertheless, Friedman and her team concluded to pursue this policy anyway.
Why? To me, it was fairly obvious. In the timeline of diversity awareness, all of these studies are pretty dated, ranging between 2008 and 2014. The attitude towards diversity and inclusion has been positively trending each year since approximately 2012. See the graph below.
Therefore, Nasdaq is following a trendline, following the profits, but actually has the courage to demand its members formally adopt the changes. That in itself shows strength and leadership. Kudos to them.