#nasdaq

NASDAQ wants to enforce diversity on boards as a listing requirement

NASDAQ is pushing for SEC approval of a rule that would require public companies on its exchange to have at least one female director and one “diverse” director – one that self-identifies as an underrepresented minority or LGBTQ.

Companies would be required to disclose that diversity in its filings. Forgive us for being obtuse, but wouldn’t the ability to read a balance sheet or understanding corporate governance be the more relevant skillsets for shareholders? If the best candidates happen to be all women, LGBTQ or whatever other identity, wouldn’t shareholders applaud their appointment based on just being superior candidates as opposed to genitalia or who they choose to sleep with?

We’ve already seen how badly forced diversity programs have worked at companies like PG&E. Remember that the company had full data sets on the diversity of its workforce and suppliers but not the state of the infrastructure of its core business. Alas, not understanding the health of its main product led to the devastating forest fires in California last year sending the company into Chapter 11 bankruptcy.

The irony of the plan by NASDAQ is the partnership with Equilar. The picture above is the Equilar board which doesn’t seem to be playing by the very rules that NASDAQ wants to enforce on others. It reminds us of ACSI, which is a huge advocate for diversity on listed boards, but doesn’t even meet the very requirements it seeks to impose on others.

What if a prospective board member happens to be LGBT but doesn’t wish to disclose that fact as an individual member of privacy? What will happen if a company has to choose between a female, a member of the LGBT community, a person of colour or a female LGBT person of colour? Will more ticks in the identity box grant companies be seen as more advantageous in disclosure reporting even though the LGBT person is the most qualified? What will happen if prospective directors falsely claim they identify as something they are not, merely to be in the selection process? Will the companies check the validity by peering through the window of staff homes to ensure they are sleeping with the right person?

NASDAQ also wants to push the SEC to force private companies to adopt the same framework.

In a lecture we gave to a group of executive MBA students, we put up a chart where someone’s superannuation would have grown to $430,000, $180,000 and $130,000 given three different investment products over a decade. We asked for a show of hands as to which sum people wanted to retire on. Everyone wanted the $430,000. Surprise, surprise. When it was revealed that the first sum came from a direct investment in Harvey Norman, which doesn’t believe in all this woke diversity nonsense (despite having an exceptionally talented CEO who happens to be female, the group was surprised. The middle sum was the broader market index and the worst performer was the ESG fund. When asked would that change their mind, they all said no. Who knew? Being woke didn’t matter as much as being able to retire on a larger nest egg.

The students were more shocked to find out that the management fees for ‘woke’ products was higher than standard investment structures. Who knew that heavily promoting social justice would be more financially rewarding to the investment advisors pushing it? It is for the planet, diversity and their brand new speedboat you know!

When will regulators let shareholders determine who they see best fit to run the companies they choose to invest in? We have no issues seeing more diversity on boards, provided it is based on merit rather than forced quotas.

We can’t help but feel that ambitious people (of whatever incidental identity) don’t need such condescending structures. They have enough confidence in their own ability to succeed than to be patronised in a way that suggests that without intervention they can’t get ahead.

Unfortunately these programs are by their very definition are all about discrimination.

Explaining stock market volatility

They say a picture explains 1,000 points…

…the lighter side of market volatility which in reality is probably not far off the mark.

FNF Media wrote back in October 2015,

ETFs are hitting the market faster than the dim-sum trolley can circle the banquet hall. Charles Schwab, in the 12 months to July 2015, saw a 130-fold preference of ETF over mutual funds given their relative simplicity, cost and transparency….

…ETFs, despite increasing levels of sophistication, have brought about higher levels of market volatility. Studies have shown that a one standard deviation move of S&P500 ETF ownership as a percentage of total outstanding shares carries 21% excess intraday volatility. Regulators are also realising that limit up/down rules are exacerbating risk pricing and are seeking to revise as early as October 2015. In less liquid markets excess volatility has proved to be 54% higher with ETFs than the actual underlying indices. As more bearish market activity has arrived since August 2015 we investigate how ETFs may impact given a large part of recent existence has been under more favourable conditions…

CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that
leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index. As illustrated in the following chart FAS in volatile markets tends to overshoot aggressively

…The point Mr Fink is driving at is more obvious in volatile markets, the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis, the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.”

FNF Media has said for many years, where CDOs and CDSs required the intelligence of a mythical hermit atop a mountain in the Himalayas to understand the complexities, ETFs are the complete opposite. Super easy to understand which inadvertently causes complacency. Unfortunately, as much as they might try to do as written on the tin, the reality could well turn out to be the exact opposite.