The virtue-signaling fair – The Boston Globe

Nasdaq first proposed this rule in December last year, in an SEC filing which contained half a dozen references to the social justice movement or the racial justice movement. The purpose of a stock exchange is to maintain an efficient marketplace for trading securities and raising capital, but Nasdaq seemed more interested in virtue signaling and identity politics.

Diversity can of course be a great asset in the management of a company. But in contemporary progressive theology, the only diversity that makes sense is the species that can be traced back to skin color, gender, or sexual orientation. Such foolish thoughts are popular in some locations where college campuses and newsrooms come to mind, but well-run public companies cannot afford to confuse mere racial and sexual characteristics with the talents and judgment that make good administrators.

The main responsibilities of a works council are not: look like America or make ideological gestures. They are intended to improve market performance and act in the interest of shareholders. Is that achieved by the kind of skin-deep diversity now being imposed by Nasdaq? Even the SEC, in the course of its Order of 82 pages approval of the new rule, frankly admits that the evidence is inconclusive.

For example, it cites a study: published in the Journal of Financial Economics in 2009 who concluded that the average effect of gender diversity on business performance is negative and that mandating gender quotas for directors can reduce business value for well-governed companies. In another study cited by the SECResearchers examining the outcome of gender diversity mandates in Norway reported that quotas worsened corporate performance and reduced shareholder equity.

Recently written in the Harvard Business Review, scientists at the Wharton School at the University of Pennsylvania summarize what they learned from interviewing 19 directors (of both genders) from 47 corporate boards across industries: The study found that diversity does not guarantee better-performing governance and company, they concluded. Rather, it is board culture that can affect how well various boards perform their duties and oversee their businesses.

Nasdaq insists the new rule will ultimately benefit investors. But it can’t cite high-quality research showing that diversity in governance increases returns, because there doesn’t seem to be, observes Harvard law professor, Jesse Fried, who specializes in corporate law and securities regulation. In a recent working paper, Fried warned that Nasdaq’s rule poses significant risks to investors.

But suppose Fried and the other opponents are wrong. Suppose Nasdaq is right and that when corporate boards are more diverse (as measured by the new race/gender/sexuality rules), they really function better and increase shareholder value.

If that were true (or if companies believed it to be true), there would be no need to impose such a diversity mandate. In their quest for greater market share and higher stock prices, companies would already be eager for diversity. Indeed, Nasdaq told the SEC that a vast majority of its publicly traded companies had already made remarkable strides in improving gender diversity in the boardroom and. . . work diligently to add directors with other diverse traits. So what was the need for a new rule?

In any case, it is entirely possible to commit to more diversity in corporate management without accepting Nasdaq’s narrow definition. For a company looking to broaden the range of views, skills and experiences in the boardroom, diversity based on race or sexual orientation may seem significantly less relevant than other characteristics. For example: age, military education, level of education, physical disability, religious or political beliefs, experience of having lived abroad.

The new Nasdaq mandate is humiliating. It implies that the only way to add meaningful diversity to a works council is to nominate directors who are not male, non-white, or non-heterosexual. The planted axiom is that such individuals cannot reach the top of corporate governance on their own, but must be helped to the top by outside mandates.

And yet there is evidence everywhere to prove otherwise. Spencer Stuart, a global executive search and leadership consultancy that closely monitors business management trends, reported last month of the 456 new independent directors added to the boards of the top 500 U.S. companies in the past year, nearly three out of four (72 percent) came from historically underrepresented groups. Of the incoming class of directors, 47 percent were black, Asian, Hispanic, Native American or multiracial, and 43 percent were female.

Boards of directors may not change as quickly as some activists, advocates and self-anointed social justice fighters would like, but only someone blinded by ideology would deny the change that has already taken place or fail to see that women and people of all description have been higher on the corporate ladder. Over the past five years, the number of Black executives in the S&P 500 has increased by 313 percent; the number of Asian drivers, 250 percent. With its new quota, Nasdaq is demanding that companies achieve a degree of diversity that many of them have already embraced, while making short work of other types of diversity that many boards may find even more valuable. They should be free to use common sense when recruiting new leaders, without having to deal with a stock market trying to take a political pose.

Jeff Jacoby can be reached at: [email protected]. Follow him on Twitter @jeff_jacoby. To subscribe to Arguable, its weekly newsletter, go to bitly.com/Arguable.