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Will ASX kick out companies that don’t have board diversity?

asx 200 start represented by man kicking miniature man through the air
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US stock exchange Nasdaq Inc (NASDAQ: NDAQ) this week submitted a plan to force its listed companies to have diversity on their boards.

The proposal sent to the US Securities and Exchange Commission on Wednesday Australian time would see mandatory inclusion of one female board member on each company, plus another who is in a racial minority or is an LGBTQ person.

Companies that do not meet those rules could get kicked off the NASDAQ.

NASDAQ is the second largest share market by market capitalisation in the world. 

Giants like Microsoft Corporation (NASDAQ: MSFT), Apple Inc (NASDAQ: AAPL), Amazon.com Inc (NASDAQ: AMZN) and Tesla Inc (NASDAQ: TSLA) all live there.

More than 75% of its listed companies would not meet the requirements of its new proposal, NASDAQ found.

Will the ASX also mandate diversity in Australian boardrooms?

An ASX Ltd (ASX: ASX) spokesperson told The Motley Fool the local bourse would concentrate on getting its listed companies to be transparent, rather than mandating particular values.

“ASX’s focus is on disclosure and ensuring that investors have information about the corporate governance practices of companies to make informed investment decisions.”

The ASX spokesperson said that the exchange’s Corporate Governance Council has a guideline stating all companies should “set measurable objectives for achieving gender diversity in the composition of its board, senior executives and workforce generally”.

There are no clauses relating to ethnic minorities or LGBTQ representation.

“Under Listing Rule 4.10.3, ASX listed entities are required to benchmark their corporate governance practices against the Council’s recommendations and, where they do not conform, to disclose that fact and the reasons why,” said the ASX spokesperson.

“It is for the market to pass judgment on whether it thinks the practices adopted by the company are appropriate or not.”

The Corporate Governance Council is made up of 19 business, shareholder and industry representative bodies.

Why the same people are on all the boards

Despite the ASX’s reticence, investor groups have called for greater diversity on boards. Critics have said the same people merely switch between Australian boardrooms.

“It is still social connections that drive board appointments,” former independent NRMA director Richard Talbot wrote on SMH.com.au.

“It’s a small gene pool with few outsiders. It leads to ‘group think’, under which directors become more concerned with being liked and connected. In Sydney, they cluster in the eastern suburbs. They go to the same schools, then mix with the same people in legal firms and big accounting firms.”

In October, 9 major institutional shareholders — HESTA, Aberdeen Standard Investments, BlackRock Australia, Ellerston Capital, Fidelity International, First Sentier Investors, IFM Investors, Pendal Group and WaveStone Capital — started the 40:40 Vision campaign.

The program will push for all S&P/ASX 200 Index (ASX: XJO) companies to have 40% female representation in executive roles by 2030.

HESTA chief executive Debby Blakey said at the current rate it would be 80 years before equal gender representation would be seen at the CEO level.

“We see lack of gender diversity in leadership as a financial risk,” she said.

“Companies that fail to consider 50% of the population for leadership positions risk missing out on the best people and the performance of the organisation will eventually suffer.”

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Tony Yoo owns shares of Amazon. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon, Apple, Microsoft, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Nasdaq and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon and Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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