New IPO Standards

By on Jul 1, 2020 in News

The first day of the Goldman Sachs diversity pledge has arrived. The investment bank announced that as of July 1, 2020, it will require diversity amongst the board members of new applicants in the United States and Europe. When announced in January, the investment bank could not have foreseen how poignant the pledge would become.

All eyes on diversity

Late spring and summer brought an onslaught of social issues to the forefront of American culture. As the nation attempted to establish a new normal amidst COVID-19 precautions, essential workers kept the economy and healthcare systems afloat. During these times, 1 in 3 women were considered essential workers. Also during this time, researchers revealed that the pandemic brought worsening economic and social inequalities for women. The necessary role of women in the workforce juxtaposed the inadequate measures to help them balance the demands of work and home.

To add to the complexity, March marked the beginning of social unrest. A series of police-involved shootings sparked the first wave of protests highlighting discrimination against minorities within the justice system. The protests continued into June, joined by Pride Month events that highlight the struggles of the LGTBQ community in the workplace and healthcare system. Consumers and employees across the U.S. forced businesses and institutions to examine their inclusion practices or lack thereof.

Goldman Sachs CEO David Solomon could not have foreseen any of this back in January. He could not have known that pandemic fallout and social justice demonstrations would place the bank at the forefront of the social equity revolution on Wall Street–but timing is everything, even when it’s unplanned.

Bye bye “bro boards”

Goldman Sachs now requires all American and European IPOs to have at least one “diverse” board member. Solomon emphasized that women are the initial focus, but ultimately any non-straight white board member will suffice. In 2021, the bank will strongly encourage at least two diverse board members.

Goldman Sachs is not above its own ordinances. On its board of 11 members, four are women. There is also a black lead director. “I really value the diverse perspectives I’m getting which are helping me run the company,” Solomon said during an interview with CNBC.

While ethics is a factor—one that is being pushed by the bank considering recent events—it wasn’t the main driver behind the pledge. Solomon cites research that U.S. companies with diverse boards perform better.

“I look back at IPOs over the last four years and the performance of IPOs where there has been a woman on the board in the U.S. is significantly better than the performance of IPOs where there hasn’t been a woman on the board,” Solomon added.

Diversity as a proven asset

There is plenty of support for his statement. Companies with diverse boards rank higher on measures of sustainability like profits and performance, all of which are favorable to asset managers. MSCI, a leader in investment data and analytics, discovered that organizations with a strong female presence on their boards have higher returns on equity and more stable adherence to governance.

Additionally, when analyzing 165 equity REITs, Wells Fargo reported that companies with an elevated percentage of female board members attained higher average price, higher total returns and outperformed competitors with no female representation by 1.93 to 2.33 percentage points.

It’s not just women. Minority representation bodes well for businesses overall. The Delivering through Diversity report by McKinsey consulting firm reports that “companies in the top-quartile for ethnic/cultural diversity on their executive teams were 33% more likely to have above-average profitability.”

When does diversity transform into profits and cultural changes? The Female Quotient, an organization that advocates for gender equality, reports 30% is the magic number. “When you have a minimum of 30%, that’s when you see a transformation of culture and a true transformation of how business operates,” says CEO Shelley Zalis, CEO. The Goldman Sach’s mandate won’t bring most boards to 30%, but it’s a start.

It’s only new in the U.S.

Goldman Sach’s initiative may seem revolutionary, but it’s not. The U.S. is one of the few nations without federal mandates for corporate board diversity. Norway, Belgium, Italy, Germany and France, for example, began inclusion practices nearly 30 years ago. Each requires a board with at least 40% female representation.

Arguably, Goldman Sachs is pushing the U.S. to be more competitive in the international arena. Research confirms that diverse boards are better governed, more sustainable and more profitable. There are still some who argue that enforcing diversity measures is unnecessary and even unconstitutional.

Does the Constitution make space for diversity mandates?

The debate began in California. The Golden State was the first to pass legislation on diversity in the boardroom. The California gender diversity mandate, SB 826, requires publicly traded companies to have at least one female board director or pay a $100,000 fine. Overall compliance is favorable, with more than 282 out of 400 tracked firms in compliance to date. Massachusetts, New Jersey and Washington are crafting similar legislation, reports National Public Radio (NPR).

Ellen Kullman, one of the Goldman Sachs female board members and former CEO of DuPont, told NPR that the law “forces companies that resist change to take action. Companies have long chosen board members based on their network of friends and acquaintances.” She adds, “That’s where I think the history has led to mostly male boards. Because if it’s word of mouth and you ask the men, historically, they have given a lot of names of other men.”

There are still some who resist change. The Pacific Legal Foundation, representing OSI Systems shareholder Creighton Meland, sued the Secretary of State of California. The firm alleges that the bill is unconstitutional under the Equal Protection Clause of the Fourteenth Amendment. Additionally, it will relegate women to “quota hires” and “space fillers.”

“Europe is so far ahead of us,” said Margarethe Wiersema, a professor of management at the University of California-Irvine. “It’s like we’re in the Dark Ages on this.” Pending Meland vs. California, that could be where the U.S. stays. The research presented by Goldman Sachs, California, Massachusetts, New Jersey and Washington, however, could give pro-diversity advocates the “exceedingly persuasive justification” needed to succeed in court.

Industry disruption or a drop in the pond?

The data on board diversity is promising, and the new pledge at Goldman Sachs brings that data to the intersection of ethics, profitability and the future of publicly held businesses in America and Europe. As one of the top three IPO underwriters in recent history, the institution is a force for change.

If “bro culture” organizations do not want to play by Goldman Sachs new rules, they do have options. Competitors Morgan Stanley and JPMorgan Chase & Co. have yet to institute similar requirements.

“We might lose some business but in the long run this is the best advice for companies that want to drive premium returns for their shareholders,” Solomon said.

Except Goldman Sachs is not likely to lose much business at all. Per US and European listings recorded in the last two years, more than 90% had a board that already met diversity pledge standards. Additionally, about half of the top 10 IPOs during that time were headquartered in Asia and the Middle East. Both regions are exempt from Solomon’s pledge.

Though Goldman Sachs has little on the line, Solomon’s pledge seems daring and disruptive in a way that resonates with the public outcry for a more equitable and inclusive society. “We have the power in our business to be so damaging to culture or to really heal culture and help people understand,” tweets Goldman Sachs.