Goldman Sachs Will Reject Your IPO if Your Board is All Straight White Men

Goldman Sachs hardly needs an introduction – it is one of the largest, most prominent, and most prestigious investment banks and underwriters of initial public offerings (or IPOs) and an economic titan.

This January, Goldman made some waves in the world of corporate boards.

David Solomon, Goldman’s CEO, issued a bold statement from the World Economic Forum in Davos, Switzerland calling for increased diversity on companies’ boards of directors. More specifically, Solomon stated “We’re not going to take a company public unless there’s at least one diverse board candidate, with a focus on women.” The rule will come into force on July 1, and for the time being will focus on US and European companies (Asia is not yet included in the firm’s rule).

Solomon’s announcement comes on the heels of similar initiatives by investment managers BlackRock and  (they have announced will vote against board slates without female directors) and the State of California (in September 2018, California passed a law that would fine any public companies with all-male boards $100,000).

So, what does this all mean?

As an initial matter, one might anticipate some legal challenges going forward. So, stay tuned as to whether any of these initiatives ends up being challenged in court. One might also wonder about whether Goldman’s rival investment banks will follow suit, and whether other states may follow California’s lead. Another open question is how rigorously this rule will actually be enforced (will Goldman really stick to its guns and sit out the IPO of the Next Big Thing? We have no reason to doubt Solomon’s seriousness or candor, but… money talks).

There is some good news – if you’re a private company and not planning to go public any time soon, don’t panic. None of these initiatives (yet) are targeting private companies.

Solomon stated that “the performance of IPOs where there’s been a woman on the board in the US is significantly better than the performance of IPOs where there hasn’t been a woman on the board”. On the other hand, the Harvard Business Review concluded the evidence was unclear, performance-wise. “Evidence that board diversity benefits firms, however, has been mixed. A 2015 meta-analysis of 140 research studies of the relationship between female board representation and performance found a positive relationship with accounting returns, but no significant relationship with market performance. Other research has found no relationship to performance at all.”

Regardless of what direction this trend takes in the future, it seems fairly clear that there will be future developments of one sort or another. While the current initiatives are more or less exclusively focused on public companies, it is certainly possible that such diversity initiatives could expand into other arenas that would affect private companies (especially companies in highly regulated industries, such as banking, insurance, finance, telecommunications, healthcare, oil & gas, and others). The lesson for startups and entrepreneurs is clear(ish) – you would do well to keep an eye on how these board diversity initiatives develop.

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