The Nasdaq stock exchange this week sent the strongest message yet that listed companies need to take diversity seriously.

In a filing with the US Securities and Exchange Commission (SEC) the proposal will require most Nasdaq-listed companies to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Companies that are not able to meet these requirements must be able to publicly explain why.

All companies will be expected to have one diverse director, or a credible explanation, within two years of the SEC’s approval of the new rule, or potentially face delisting.

The move sends a strong message on the importance of diversity to the US market’s agenda. Nasdaq cited over two dozen studies that found an association between diverse boards and better financial performance and corporate governance.

“We believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America,” said Nasdaq Chief Executive Officer Adena Friedman. “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders.”

According to a review carried out over the past six months, Nasdaq said that at present more than three-quarters of its listed companies would fall short of the proposed requirements. Around 80% to 90% of companies had at least one female director, but only about a quarter had a second one who would meet the diversity requirements.

Normalizing Speak Up culture

Nasdaq highlighted a difficulty that has come up time and time again; inconsistencies in the way companies report such data, which makes it very hard to measure. There’s still a lot of stigma to overcome too, which adds to the challenge.

We’re barely comfortable with having a conversation about gender parity and ethnic diversity, so topics such as transgenderism, queerness, disability, or neurodiversity still require a lot of work. That said, 2020 has seen the world make great leaps in normalizing discussion around these important topics and the US has been something of a trailblazer here.

In a highly polarized political environment, what’s interesting is that public sentiment is changing quickly in favor of more support for inclusivity. For example, when the Supreme Court extended protections to LGBT employees in June, a poll conducted by the Kaiser Family Foundation found that 90% of American adults agreed with the motion.

US President-Elect Joe Biden’s victory has also ushered in a number of firsts. Kamala Harris of course made history as the first female, Black, South Asian American VP-elect, and at least five, and counting, transgender candidates have already made political history, including Sarah McBride, a Democratic LGBTQ activist, who won the Delaware State Senate race to become the first openly transgender state senator and the country’s highest-ranking transgender official.

Europe is also making headway. In October, Petra De Sutter, an openly transgender woman was sworn in as deputy prime minister in Belgium’s new government, becoming the most senior transgender politician in Europe.

So it will be interesting to see what these and other bold moves, like that of Nasdaq, do in terms of normalizing the conversation and removing the stigma around diversity topics.

Social and governance risks are financial risks

There’s clearly a commercial driver. According to research analyst Gartner, workplace culture is now the most discussed talent issue on earnings calls, with the number of mentions having grown 7% annually since 2010.

It’s also on shareholder agendas. Just this week, shareholders in Pinterest filed a lawsuit against the company’s top executives, including CEO Ben Silbermann, for allegedly enabling a culture of discrimination. The complaint alleges that a toxic work environment has hurt the company’s reputation, leading to a user boycott and financial damage, making specific reference to a “white, male leadership clique.”

Previously, Pinterest’s former COO Françoise Brougher had sued separately for discrimination and retaliation.

But Pinterest isn’t the first to feel shareholder wrath this year. In September, Google’s parent company Alphabet faced a series of shareholder lawsuits over a toxic work environment rife with allegations of sexual harassment linked to former executive Andy Rubin, who received an exit payout of $90 million after he was investigated for misconduct. McDonald’s is also trying to claw back a multi-million dollar package given to ousted CEO Steve Easterbrook amid allegations that improper relationships with junior employees were greater than first understood.

With such strong signals forcing savvy companies to get their house in order, attention will, quite rightly, turn to the mechanisms through which a positive workplace culture can be enabled.

The risk spectrum is expanding and with it the remit of the Ethics & Compliance function as well as the requirement for greater collaboration between E&C and HR as the key guardians of culture.

This is something we go into in greater detail in a webinar with the London Stock Exchange and compliance expert Tom Fox. You can get access to that webinar here.