A Wall Street gatekeeper is challenging corporate America to diversify its boardrooms in a proposal that could have profound implications for leadership at thousands of U.S. companies.

In the wake of a racial reckoning in the U.S. sparked by the death of George Floyd, Nasdaq Inc. is wading into the yearslong conversation about diversity in corporate America and the benefits of increasing gender and racial diversity in boardrooms and C-suites.

The stock exchange giant has introduced what could prove to be the strongest measure yet from a financial heavyweight to promote board diversity in the U.S.: a new rule proposal that will force most of its more than 2,500 listed companies to have at least one director in the coming years who identifies as a woman and another who is Black, Hispanic, Native American, LGBTQ+ or part of another underrepresented community. Companies that do not meet the requirements will have to explain why, according to the exchange's proposal, which the U.S. Securities and Exchange Commission needs to approve before it can go into effect.

"You need diverse perspectives in boardrooms," said Ariel Investments LLC Chairman and co-CEO John Rogers Jr., who is a director at McDonald's Corp., Nike Inc. and New York Times Co., in an interview. "I always tell people, I used to play basketball in college. If my basketball team could only be people who grew up with in Hyde Park here in Chicago, we could only be so good. If you start to recruit from the whole city of Chicago, the team's going to be better. You search everywhere for talent, you're going to have a stronger team."

For decades, a small but growing movement has been pushing companies across the country to remedy the imbalances in the makeup of their boards, an effort that has gained momentum with mounting evidence that diverse leadership can lead to better corporate governance practices and often higher financial performance. Companies with the most gender diversity on their boards are 28% more likely than their peers to outperform financially, according to a May report from consultancy McKinsey & Co. Portfolio companies of private equity titan Carlyle Group Inc. that had at least two diverse board members posted average earnings growth that was nearly 12% higher annually than the average of companies that lack diversity on their boards, the firm said in its 2020 Impact Review. When adjusting for industry, fund and other factors, companies with diverse boards still generated earnings growth five times faster on average, Carlyle said.

Nasdaq is not the first Wall Street heavyweight to advocate that companies diversify their top ranks. Chicago-based Ariel, which has $13.3 billion in assets under management, has convinced 45 companies to take on their first diverse board member, Rogers said. Some of the world's biggest investors, such as BlackRock Inc., Vanguard Group Inc. and State Street Global Advisors Inc., have threatened to pull their money out of companies that do not show progress on certain environmental, social and governance issues, such as board diversity. And Goldman Sachs Group Inc. has stopped underwriting IPOs for companies in the U.S. and Europe that did not have at least one diverse director.

The push for corporate diversity is gaining some traction in government as well, as lawmakers in California and Illinois enacted laws to make publicly traded companies embrace racial diversity on their boards.

But Nasdaq's role as a Wall Street gatekeeper makes its proposal unique. It is one of just a few stock exchanges that offer a listing home in the U.S. public markets for companies looking to raise capital or access liquidity, giving it a level of control over other private companies only rivaled by other bourses and regulatory bodies such as the SEC. The Intercontinental Exchange Inc.-owned New York Stock Exchange is its main competitor in the corporate listings business.

"This is a very important moment in driving board diversity," said Rusty O'Kelley III, co-leader of board and CEO advisory partners at leadership search company Russell Reynolds Associates, in an interview. "It will force boards to have conversations and to publicly disclose why they have not met these diversity requirements. When you combine that with the emphasis on gender and ethnic diversity by Vanguard, BlackRock and State Street, it is going to be hard for any significant public company with large investors not to comply and increase board diversity."

Under the rule's current structure, companies listed on Nasdaq's exchange would need to publicly detail within one year of the SEC's blessing of the proposal how much of their boards are made up by members who identify as women, part of the LGBTQ+ community or as an underrepresented minority as defined by the U.S. Equal Employment Opportunity Commission. The SEC's review of the proposal is expected to last well into 2021.

Most of the companies will then need to have at least one diverse director on their boards or explain why they do not within two years of the approval. In total, companies will have between four and five years after the approval date to have two diverse directors. Foreign and smaller companies listed at Nasdaq have more flexibility in those rules.

Data on the race and sexual orientation of board members is scarce, making it difficult to determine how many Nasdaq-listed companies currently comply with the diversity proposal. Gender is easier to measure, and an S&P Global Market Intelligence analysis of public disclosures found that about 18% of the 2,707 companies listed at Nasdaq do not have a female director; 22 companies were excluded from the analysis due to an absence of director-level data. Nasdaq-listed companies in the energy and utilities sector had the lowest percentage of female directors on their boards, the analysis found, while consumer companies listed on the exchange had the highest percentage of female board members.

While there have been signs of progress in diversifying boards in the U.S., there are still very few Black board members in corporate America, noted Roy Swan, director of mission investments at the nonprofit Ford Foundation.

"[It's] sort of like that 'Where's Waldo?' game," said Swan, who is the former co-head of global sustainable finance at Morgan Stanley, in an interview. "You have to look really hard to find any Black people on corporate boards."

Swan called the Nasdaq proposal a "nudge to help people do what's good for them."

Nasdaq hopes that its proposal will help pave the way for a "national framework" around diversity disclosures on corporate boards, according to Jeff Thomas, the exchange's senior vice president and head of Western U.S. listings and capital markets.

"When you look at the issues around social justice and the need to create more inclusive and diverse capital markets, we felt this was really the year to take a step forward and put this out there," Thomas said in an interview. "It wasn't so long ago when Nasdaq rolled out a requirement to have a majority of board members be independent. At the time, that was fairly controversial, and now, it's accepted as commonplace. We see this proposal as the next step in terms of governance disclosures."