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Diversity Data Debate at Stock Exchanges is About the Role of Finance

Bloomberg logoBloomberg 4/6/2021 Sonali Basak

(Bloomberg Markets) -- Two of the most powerful women in finance are at odds over how to use their power.

In one corner is Adena Friedman. The chief executive officer of Nasdaq Inc. oversees the Nasdaq Stock Market, which pioneered electronic trading 50 years ago and is now the primary exchange for all-powerful technology companies including Amazon, Apple, and Microsoft. Nasdaq is seeking to change its listing requirements to require companies to disclose diversity on their boards—and explain themselves if they don’t have directors who self-identify as a woman or a member of an underrepresented minority. The proposal, under review by the U.S. Securities and Exchange Commission, aims to be “one step in a broader journey to achieve inclusive representation across corporate America,” Friedman, 51, said in the company’s Dec. 1 statement.

In the other corner is Stacey Cunningham, president of NYSE Group, which oversees the New York Stock Exchange, the oldest and most famous U.S. stock market. Like Friedman, Cunningham, 46, is the first woman in her role. While she says she supports Nasdaq’s goal, she doesn’t think it’s the role of exchanges to try to change society. “The data is very, very clear that businesses perform better when there’s more diversity on their board,” Cunningham told me late last year in a Bloomberg TV interview. However, she added, “When we use exchange listing standards to require things like diversity profiles or others, we’re defining the investable universe.”

It’s an increasingly difficult question for business leaders: Whose job is it to define and encourage diversity? And even more pointedly: What is the responsibility of a powerful platform like a stock exchange? These two businesses are under pressure from activists to act as a form of social police and to produce data tracking progress on topics ranging from carbon emissions to the proliferation of automatic rifles. Some critics say Nasdaq’s proposal doesn’t go far enough—New York City’s Office of the Mayor believes it should also include disclosure of board members with disabilities.

The fundamental issue here is, where do the responsibilities of the two exchanges begin and end? This question has sharply divided politicians, investors, and corporations. Some argue that elected officials are better suited to establish policies that address diversity. Yet Nasdaq’s proposal has won support from big U.S. pension funds and companies that are seeking greater accountability and clearer data.

Nasdaq isn’t the first to wield its corporate clout in this way. Early in 2020, Goldman Sachs Group Inc., Wall Street’s biggest underwriter of initial public offerings, said it would no longer bring a company public in the U.S. and Europe if it lacks a director who is either female or from an underrepresented minority. “With power comes responsibility,” says Ilana Wolfe, the bank’s head of corporate board engagement. “If we’re taking a company public, as an adviser, we have a responsibility to make sure that they’re best set up for success.” Goldman Sachs’s fund management unit also plans to use its position as a shareholder to vote against nominating committees on any corporate board that fails to include at least one woman as a director.

What makes Nasdaq’s move different is that, as an exchange, it behaves as a quasi regulator. So its decision feels one step closer to law. Like Goldman Sachs, Nasdaq says its proposal is a matter of corporate governance and investor protection, citing research showing that board diversity leads to better corporate performance. Nasdaq isn’t mandating that companies add a woman, or a Black or Latino director (and, in truth, many of the technology and other new-economy companies who are listed on the Nasdaq have already embraced diversity on their boards). The exchange is simply requiring that companies disclose in a standardized way whether they have diverse board members to help investors make an informed choice.

That focus on transparency makes Nasdaq’s business case clearer. As a larger share of equities trading moves off exchanges into dark pools and other over-the-counter venues, Nasdaq and its rivals are turning to new ways to generate revenue, such as market data and consulting services on topics like environmental, social, and governance (ESG) issues. (Bloomberg LP, the parent company of Bloomberg News, provides ESG disclosure scores for 12,000 companies and board composition scores for 4,300 companies.)

Data on social and governance matters could be a growth area for Nasdaq, says Paul Gulberg, a senior analyst at Bloomberg Intelligence who follows the exchanges. Nasdaq has told investors that it expects its ESG data and consulting business to bring in $50 million in revenue by 2025, up from about $5 million last year. (That’s still a small percentage of the company’s $3.5 billion in total revenue in 2020.) “They can collect more data. They can potentially attract more issuers in the ESG space. There’s probably the potential for some index business,” Gulberg says. “As there’s more ESG adoption and more index build-out in that space, that can potentially open up some opportunities.”

As for the NYSE, which is a division of Intercontinental Exchange Inc., Cunningham makes an important point about imposing limitations on the “investable universe” in the U.S. The universe of private companies remains much, much bigger than the one of those listed on exchanges.

chart: In the Boardroom, Slow But Steady Change © Bloomberg In the Boardroom, Slow But Steady Change

Fewer than a third of private-sector jobs were created by publicly traded companies by the end of 2019, according to recent research by Frederik Schlingemann of the University of Pittsburgh and René Stulz of Ohio State University. Morgan Stanley’s Carla Harris has for years been on a mission to boost capital moving toward minority- and women-owned businesses. The largest private equity firms—Blackstone, Apollo, Carlyle, KKR, and TPG—have all set goals to ensure diversity at their portfolio companies. Still, in terms of most gender equity policies, the U.S. lags most countries in the European Union and is actually in the bottom quartile of all high-income Organization for Economic Cooperation and Development countries, according to a study by Bank of America Corp.’s ESG research team, led by Savita Subramanian.

Progress in the U.S. has been “glacial at best,” Subramanian says, and in many cases it’s receded, even though expanding women’s opportunities could boost the U.S. economy significantly. Separately, Citigroup Inc. researchers found that the U.S. lost $16 trillion in economic output over two decades because of the limits of opportunities for Black people.

While there are clear social and economic reasons for progress on diversity—and Wall Street is focusing more on it—the question remains: Will investors and corporate America make the changes quickly enough when left to their own devices?

Eileen Murray, a Morgan Stanley veteran and the former co-CEO of hedge fund giant Bridgewater Associates, has said she’s changed her thinking on quotas after seeing how slowly progress was made during her career. “Ten years ago and before that, I was not a big fan of any kind of quotas or government regulation in this area,” Murray, chairperson of the Financial Industry Regulatory Authority board of governors, said in a January interview on Bloomberg TV. “I’m a big fan of it now because I unfortunately think that’s the only thing that’s going to make it work.”

This is both an economic and a social problem, and isn’t that exactly the kind of thing that we elect public officials to try to fix? If government doesn’t step in with clear rules on diversity, there will always be an arbitrage. Nasdaq’s definition of diversity may fall short for people who want more change, and if companies don’t like Nasdaq’s rules, they can just move to the NYSE or an overseas exchange or not go public at all. There’s plenty of money available for private companies.

For Nasdaq, if this is the ground it wants to compete on, it should be allowed to do so. But should Adena Friedman and Stacey Cunningham be the ones tasked with defining and policing important issues like diversity? The reality is, there’s no professional training in the world that could give a Wall Street executive the tools to hold that responsibility.

Basak covers financial companies for Bloomberg News and Bloomberg Television. This column doesn’t necessarily reflect the opinion of Bloomberg LP and its owners.

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