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New board diversity rules are a positive for companies

The Securities and Exchange Commission recently approved new Nasdaq rules requiring companies that list shares on its exchange to meet certain race and gender standards.

Nasdaq-listed companies now must have at least one woman and either one person who self-identifies as an underrepresented minority or as LGBTQ+ on their board of directors. Companies will also be required to publicly disclose this information and, if they do not meet this new diversity requirement, they must submit an explanation as to why.

The order was years in the making as Nasdaq CEO Adena Friedman has noted. Friedman has previously noted that the Nasdaq owns and operates several of the markets in Nordic countries in Europe, where governments have taken the lead in establishing standards around gender diversity and have been successful at improving the diversity of their corporate boards.

The order also comes after a strong push for boards to more accurately reflect the diversity of the U.S. population and benefit from a wider variety opinions and perspectives.

A Nasdaq study found that 75 percent of listed companies do not currently meet this new standard. To reduce that percentage, the Nasdaq Exchange has proposed providing companies not meeting that requirement with one year of complimentary access to board recruiting services.

The world continues to experience profound economic and social change. In the last decade, social diversity and economic inequalities have come to the forefront as social and political flashpoints in advanced economies and beyond.

Focusing on inclusion and diversity will be important for both businesses and investors as we continue to move forward. And businesses that prioritize diversity can benefit from a potential boost to innovation and company performance. That’s why this ruling is a positive one for business owners.

Clear benefits

The overall benefits of business owners focusing on diversity and inclusion can be broken into three major categories: labor markets, innovation, and market access.

Labor markets are continuing to evolve as new and differing technologies replace jobs and create new opportunities in the workplace. In a world where technology and humans are increasingly working together, implementing strategies to attract diverse workers to fill talent gaps is extremely important.

In fact, there is already evidence that inclusive working conditions may result in better outcomes. A 2020 McKinsey report found companies with management teams with first-quartile gender and ethnic diversity had a 55 percent and a 59 percent chance of delivering above-median earnings before interest and taxes (EBIT) margins.

Diversity and inclusion may also lead to additional innovation, which is a key ingredient to success within a shifting market and a continued change in how customer-business relationships are built. An increasing body of evidence points to the benefits of crafting teams of differently abled thinkers which then leads to innovation.

Diversity in management can also yield similar results, as shown by a 2018 study from Boston Consulting Group, which found that companies with above-average diversity delivered 45 percent of total revenues from innovation, compared with 26 percent for firms with less diverse leadership teams.

Changing consumer preferences creates market access opportunities for companies that are more diverse and inclusive. Younger generations are more diverse due to shifting demographic trends and also increasingly more prepared to pay for goods and services that reflect their values.

Kyle Harris is a financial adviser at UBS Wealth Management USA. He can be reached at [email protected]