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Rethinking Corporate Diversity

Nasdaq will require the over 3000 companies on its exchange to meet new diversity requirements (NY Times). The new listing rules, if approved by the SEC following a public comment period, will require Nasdaq-listed companies to have, or explain why they do not have, at least one director who self-identifies as a female, and at least one director who self-identifies as an underrepresented minority or LGBTQ+. Nasdaq’s move follows California’s requirement, adopted in September, 2020, that publicly held companies headquartered in the state include board members from underrepresented communities.

A Board's commitment to equity and inclusion drives change throughout a company, and results in firms that better reflect the societies in which they operate. As part of its rationale for the new requirements, Nasdaq presented an analysis of over two dozen studies that found an association between diverse boards and better financial performance and corporate governance. Research shows that diversity leads to better decision making and allows companies to attract and retain talent (Forbes).

Honeytree has used a definition of diversity beyond gender including racially diverse individuals, LGBTQ+ individuals and people with disabilities as core to our research since we founded the firm. These recent initiatives validate Honeytree’s investment selection process and our belief that the industry at large, focused mainly on gender diversity, was missing a large part of the data. We set a minimum requirement of 30% combined board diversity for a company to make our consideration set. As companies continue to improve in this area, as well as continue to advance their reporting, we expect to increase the minimum board diversity requirement to 40%, 50%, and beyond. Our deep dive analysis drills down to look at improvements year-over-year in gender and racial diversity at all levels in a company, and these insights help drive our security selection. Companies that are able to improve their diversity at all levels year-over-year demonstrate agility, innovation and good governance.

It is only a matter of time before other exchanges and regulators institute similar diversity requirements that go beyond the traditional gender requirement. It is interesting to note that this is one area where the EU lags – even though they are front runners on board gender disclosure and minimum requirements, racial diversity is rarely reported or discussed. Canadian boards lag on both gender and racial diversity relative to the US and EU, despite initiatives aiming to ensure gender representation on boards by institutional investors.

Finally, we expect ESG research and data providers will be expanding their datasets in accordance with growing availability of diversity data beyond gender to explicitly include racial and eventually LGBTQ+ and disability diversity. Until then we will continue to build our proprietary data sets based on the reporting of companies in our consideration set – who thankfully are leaders in disclosing this type of workforce data. We’re proud to be part of an industry moving in this direction - it's a lovely way to close off 2020.

[Colourful pastels lie in a row on an artist's table]


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