The Nasdaq mandate will expand diversity in business — and that’s good for business

The stock exchange’s new rule takes on crony capitalism, which for far too long has allowed powerful people to make decisions in the interests of their own restricted group and reserve the spoils of business performance for their own use.

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As The Boston Club’s corporate census has identified, Massachusetts is moving the needle on the advancement of women and people of color in the business community. In our work, we measure this data year after year, and we are seeing incremental progress, but it is crucial to implement mandates and practice intentionality to continue leading the way.

The recently implemented Nasdaq Board Diversity Rule, approved by the Securities and Exchange Commission in April, is one step along the way toward achieving equity in the business community. The mandate requires companies to publicly disclose the gender and racial makeup of their boards and should be followed by similar requirements around executive leadership, particularly the for C-suite. Policies like this, when done right, have the power to continue to drive change and create equity in the boardroom and beyond.

The Nasdaq requirement takes on crony capitalism, which for far too long has allowed powerful people to make decisions in the interests of their own restricted group and reserve the spoils of business performance for their own use. Homogenous board compositions built from existing networks, and from playing the game of “who knows who” is an unacceptable way to fill board seats, even if discrimination and preservation of power are unintentional. The new Nasdaq rule forces nominating committees to find the “hidden figures” with enormous talent, albeit different networks and backgrounds.

Women have been getting the majority of all bachelor’s and master’s degrees for decades yet hold only 8.1 percent of the CEO positions among the Fortune 500. Our research at the Women’s Power Gap Initiative on leadership in the higher education industry found that while women of color were earning 16 percent of all PhDs, they made up only 2 percent of the top-earning employees at elite universities.

Anecdotal evidence also shows that measures such as the Nasdaq requirement are about more than increasing value to other stakeholders. When employees from underrepresented groups see their identity groups reflected on boards, it inspires higher aspirations, lower turnover, and better job performance by their employee counterparts. Moreover, these requirements grant individuals their own opportunity to serve on boards and gain valuable experience and connections, increasing their value to their current employer and the likelihood of landing a top position. Even legendary investor Warren Buffet called for more women on boards in his 2020 shareholder letter, offering women as an answer to crony capitalism.

The Nasdaq requirement is an important step toward ensuring good governance to benefit shareholders. This is done by widening perspectives on decisions and avoiding hasty and risky actions before weighing them from multiple angles.

For customers and communities, broader perspectives included in board decisions can increase the value of products and services. It seems odd, for example, that Kimberly-Clark Corp., an American multinational personal care corporation selling popular paper-based consumer products such as Kleenex and Huggies, took years to have any women in top management, and it’s hard to imagine that focus groups alone could be a substitute for any personal experience with the company’s products. As we saw with women then, and with racial tensions at a high in America now, board members who can credibly speak to ameliorating actions ensure more effective, authentic responses.

At the Eos Foundation, our evaluation of Massachusetts’ Top 25 Companies found that some employers do better than others. That is, they can “find” the women and people of color to place in top positions. When we publish rankings that show how individual companies are doing with their power and pay gaps as compared with one another, it creates a race to the top. Definitive requirements like Nasdaq’s apply pressure on companies straggling to broaden searches and combat selection bias for top positions. Mandates enforce intentionality, and intentionality works, as we’ve seen in the rise of the percentage of women board members from 12 percent to 31 percent from 2000 to 2019.

The United States must step up and realize the success requirements like these have had in European, particularly Scandinavian, countries that have been leading the way. Our voluntary measures have failed, and we cannot afford to wait any longer to achieve full inclusion in leadership for the majority of our population.

The Nasdaq mandate on its own won’t ensure better governance or better performance without cultural changes. We cannot assume that the mere presence of diverse people creates true inclusivity, and we also can’t expect that the responsibility lies within them to make the structural changes needed to create true parity in corporate America. We must avoid stereotypes — that any woman speaks for all women, that any member of a particular ethnicity or person of color has the same experiences as another. We must also avoid placing one or two individuals on a board for show rather than substance. But still, in today’s world, every step toward breaking up cronyism and fostering inclusion brings us closer to the goal of better business.

Rosabeth Moss Kanter is professor of business administration at Harvard Business School. Andrea Silbert is president of the Eos Foundation.