Advocates of diversity, equity and inclusion policies suffered another setback this month as the 5th U.S. Circuit Court of Appeals blocked the Nasdaq stock exchange from requiring its nearly 3,000 listed companies to have at least one women, one minority and one LGBTQ director on their boards or explain why they do not. The Nasdaq rules, which were approved by the SEC, also required companies to annually disclose how board members identify in those categories. Corporate board members of Nasdaq-listed companies are now free to decide whether to continue to abide by the Nasdaq diversity rules or not.
According to a news report from the Associated Press, the court ruled to end Nasdaq’s diversity rule, stating, “It is not unethical for a company to decline to disclose information about the racial, gender and LGTBQ+ characteristics of its directors. We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender or sexual orientation diversity as Nasdaq would prefer.”
The Nasdaq has decided to respect the courts’ ruling and said it would not seek further review.
Now, corporate board members have another opportunity to decide where they and their company stand on diversity, equity and inclusion.
For those companies that have already complied with the Nasdaq diversity rules, continuing that practice is not illegal. They can continue selecting diverse members to join their board. They can also continue disclosing information about their choices if they believe that is the right thing to do. However, company leadership and the board will need to decide to announce whether or not they are abandoning the Nasdaq diversity rules and why. At the very least they will have to make that announcement internally. The board should openly discuss the pros and cons of that decision and come to the best decision for their organization.
For those companies that never complied with the Nasdaq diversity policy, they can continue operating as usual. However, the ruling does provide corporate boards another opportunity to assess their current policies regarding adding board members. Companies might also want to ask their shareholders if having a diverse board is important to them and address the situation as they see appropriate.
Lastly, for those companies that are still on the fence regarding having a diverse board of directors, this ruling gives them another opportunity to pick a side. Boards can decide to adopt the Nasdaq rules, agree on their own policy regarding selecting diverse members to serve on their board, or determine that board diversity does not really matter.
Whichever situation your board is in, make no mistake, shareholders and corporate observers will be taking notice, so boards should prepare themselves to deal with the ramifications of their decision on this matter.
