Nasdaq, SEC, diversity, monopoly
The Nasdaq asked the SEC if it was okay to make the companies listed on its exchange to be diverse. Meanwhile, their anti-competitive behavior continues apace.
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By market capitalization, the Nasdaq is the second largest stock exchange in the world. As of this writing, it has just over 3,300 companies that trade on its exchange. The top 10 companies listed on the exchange by market cap could well be defined as tech-heavy:
I don’t know the difference between ‘Alphabet Inc. Class C Capital Stock’ and ‘Alphabet Inc. Class A Common Stock’, but for the purposes of what you’re about to read, it doesn’t matter.
Besides mostly being headquartered in California (Comcast is located in Philadelphia, a place I’ve yet to visit), the companies mostly also share another characteristic—accusations of using their consolidated market power to unfairly weaken competition.
This was brought into sharp relief this week as the US government and 48 states banded together to sue Facebook, accusing it of stifling smaller competitors through abuse of its vast market power.
In early December, the Nasdaq asked the SEC (Securities and Exchange Commission) if it was legal to require all companies listed on its exchange to meet the following requirements:
Have at least two directors who meet Nasdaq’s definition of diverse (is a female, or is someone who identifies as an underrepresented minority)
To disclose publicly internal diversity statistics about their boards
If the SEC agrees, the companies have two years to fulfill the first diversity spot and then 2-3 additional to fill the second. Miss the deadline and you’re off the Nasdaq. I don’t know what the ramifications of being delisted are, but again, not relevant.
Over 75% of companies listed on the Nasdaq do not meet this requirement. Fortunately for the largest on the listing, most have headquarters in California, where it’s required by law to have at least one diverse director. Is adding a new board member difficult? Is it time consuming? What are the qualifications? Wal-Mart’s 2020 proxy statement states it’s looking for individuals with:
“...outstanding achievement in their professional careers; broad experience and wisdom; personal and professional integrity; ability to make independent, analytical inquiries; experience with and understanding of the business environment; willingness and ability to devote adequate time to Board duties."
Can you fill a board seat with a platitude?
One expands, the other, consolidates
Paradoxically, the boards of the top Nasdaq firms are in the process of diversifying while the industries they operate in are doing the opposite. Will having a diverse board solve the issue of Google signing contracts with Apple and other smartphone manufacturers to ensure its search engine is the default, conferring an unfair advantage over their smaller search rivals?
Over the last half century, executive power vis-à-vis workers at these same companies has also consolidated. Generally, boards of directors are also responsible for setting executive compensation. Using the most recent AFL-CIO paywatch info, the CEO of an S&P 500 company on average makes 264 times more than their median employee. If you’re wondering which of the above companies have worker representation on their boards, the answer is zero—it’s in the hands of boards and executives. In all 50 states, thanks to the ubiquity of at-will employment, these same executives can more or less fire someone for no reason at all. This power dynamic is effective at suppressing both dissent and collective action.
Will a room full of 12 extraordinarily wealthy and powerful people of which two are not white men chart a company towards a more equitable course?
This depends on whether you think a board member who—if they’re a board member at an S&P 500 company—earns $304,856 per year (this excludes stock grants) has the requisite power and desire to upset a system that so healthily remunerates them. I’m not a veterinarian, nor am I a CFO, but my sense is that painting a rainbow on a rabid dog doesn’t make it any less so.
What I actually know
I know that while you can’t fill a board seat with a platitude, Nasdaq is going to try. I know that despite an assortment of antitrust and anti-competitive lawsuits against most of the companies listed above, it will take time for the suits to work themselves through the courts. If successful, it will take even more time for the resulting changes to come. I also know that adding two diverse board members doesn’t guarantee corporate governance policies that encourage diversity hiring across every strata of a firm, nor does it spur greater workforce representation relative to boards and shareholders.
Man-made monsters, whether conceived by Dr. Frankenstein or Elmo, are still monsters. But like The Terminator who returned in Terminator 2 to save us from ourselves, it’s possible that with the right intervention, we can program our creations back on the right track.
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