Goldman Sachs Believes the Future is Female, Issuing New Mandate Regarding Board Diversity for IPOs it Underwrites

February 6, 2020

What a difference a decade makes.  Ten years ago, Goldman Sachs faced public outrage for its alleged role in misleading investors and profiting from likely-to-fail mortgage-backed securities.  Indeed, in 2010, the Securities and Exchange Commission (SEC) filed suit against the Wall Street bank claiming it committed fraud by bilking investors out of more than $1 billion by misstating and omitting key facts about a financial product tied to toxic subprime mortgages as the U.S. housing market was beginning to falter.  That same year, a class action lawsuit was filed against Goldman Sachs by three former female professional employees alleging systemic and pervasive gender discrimination, including paying women less than similarly situated men, disproportionately evaluating and promoting men over women, and fostering a “boys club” atmosphere that permitted a “culture of sexual harassment and assault” where women are either “sexualized or ignored.”  Goldman Sachs settled with the SEC for $550 million, and the gender discrimination class action is ongoing.

But it’s a new decade, and Goldman Sachs is leading by example and making headlines for entirely different reasons.  Last week, the Company announced that, starting on July 1, 2020, Goldman Sachs Group Inc. will only take a company public if it has at least one diverse board member, with a particular focus on women.  The new policy applies to Initial Public Offerings (IPOs) in the U.S. and Europe.  And starting in 2021, the bank will require companies going public to have two diverse board members.

As the top underwriter of U.S. offerings last year, this new policy reflects a refreshing shift from the IPO industry’s track record, to which Goldman contributed.  In 2019, 18 of the 59 companies Goldman Sachs helped to take public would not have met this new self-imposed diversity requirement, as those companies did not have a single female director at the time the SEC registration statement became effective.  As one of the underwriters for WeWork’s failed IPO, Goldman Sachs argued in 2019 that it would simply let investors decide if they liked a company’s board.  Speaking about the bank’s new proactive approach, Goldman Sachs’s CEO, David M. Solomon, stated that, rather than turn away companies that do not meet the new requirement, the bank could facilitate introductions to qualified board candidates.

With an eye toward long-term growth, Mr. Solomon further explained the policy: “We might miss some business, but in the long run, this I think is the best advice for companies that want to drive premium returns for their shareholders over time.”  Citing its own data, Goldman Sachs stated that companies with greater diversity performed better than those with less diverse boards.  More specifically, companies that had at least one diverse board member saw a 44% increase in their average share price within a year of going public, versus 13% at companies with no diverse board members.

Goldman Sachs has also made improving diversity a priority internally.  Four out of its 11 directors are women, and its Lead Director is a person of color.  The Company announced in March 2019 that it was setting arguably aggressive diversity goals for its staff as well.  Among the new analysts and entry-level associates it hires in the Americas, 14% would be Latino/Latina, 11% would be people of African descent, and half would be women.  For more senior positions, at least two diverse qualified candidates would be interviewed for any open role.

Increasingly, exploring ways to make the boardroom more reflective of society at large has been a focus of institutional investors, legislatures , and academics.  There is room to grow.  Women only hold 25% of board seats at S&P 500 companies.  Only 20 companies in the S&P 500 fully disclose ethnic diversity in senior management, and only 17 companies report ethnic diversity at the board level.

While significant progress still needs to be made to achieve equity, diversity, and inclusion in the boardrooms of corporate America, Goldman Sachs’s IPO policy appears to be a proactive step to open up a few seats at the table.