The Nasdaq stock exchange is working to require more diversity in the boardrooms of companies in a proposal filed Tuesday that, if approved, would require all companies listed on the exchange to publicly disclose diversity statistics about their board of directors.
Scott Yonker, associate professor of finance at Cornell University’s SC Johnson College of Business, has researched the effects of corporate board diversity on innovation, stock price volatility and other dimensions. Yonker says Nasdaq’s diversity move will ultimately lead to firms recruiting more highly qualified diverse directors that will benefit shareholders.
“The board diversity requirement announced today by Nasdaq is not only good from a social perspective, it is also good for Nasdaq-listed firms and their shareholders.
“In a recent article, Gennaro Bernile, Vineet Bhagwat and I explore the effects of corporate board diversity. We find that board diversity is good along any dimension. More diverse boards are less likely to make erratic decisions, leading to greater stability in corporate policies and lower stock price volatility. Firms with more diverse boards are also more innovative, consistent with the notion that director diversity leads to a culture of ‘thinking outside the box.’
“Skeptics will cite academic evidence that finds ill effects from corporate board diversity quotas. One study finds that a law passed in 2003 in Norway, requiring that 40 percent of Norwegian directors be female, led firms to have younger, less experienced boards, ultimately destroying substantial firm value. The problem in Norway was that there were not enough females in executive roles to fill the new demand for directors. In economics speak, the female director labor pool was not deep enough.
“This constraint will not likely bind Nasdaq firms since there are many more ‘diverse’ individuals in corporate leadership roles in 2020 than there were in 2003, the diversity quota that Nasdaq is imposing is much lower at roughly 25 percent, and Nasdaq defines diversity more broadly, including underrepresented minorities and LGBTQ community members, along with women. Together, these facts should allow Nasdaq firms to recruit highly qualified diverse directors. Congratulations Nasdaq!”