U.S. Courts Uphold Nasdaq Board Diversity Rule

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If they haven’t already, companies should prepare to comply with the rule and have the appropriate disclosures ready by the end of the year.

In mid-October, the 5th U.S. Circuit Court of Appeals upheld Nasdaq’s board diversity rule which is a vote of confidence for those organizations that believe that inclusiveness is an important aspect of establishing sustainable business practices and positive corporate culture. If most companies comply, perhaps we will be able to track and determine if an entire exchange enjoyed improvements from having diverse boards.

The rule requires companies listed on the stock exchange to have one director who identifies as female, a member of an underrepresented racial or ethnic minority, or LGBTQ+ by the end of 2023 or explain why they do not. Companies may need to have two diverse directors by the end of 2026 to comply with the rule. The rule also requires annual disclosure of how board members identify themselves in designated categories, although individuals can decline to answer.

Conservative organizations National Center for Public Policy Research and the Alliance for Fair Board Recruitment, along with several Republican states attorney generals had challenged the Nasdaq rule on the grounds that it was discriminatory and restricted free speech. The court disagreed, noting that Nasdaq is a private entity and not acting on behalf of a government agency (SEC). The court also ruled that the plaintiff’s arguments against the rule did not hold up because (1) the Nasdaq is not performing a “traditional, exclusive public function”; (2) the SEC did not “compel” Nasdaq to promulgate the rule; and (3) the SEC and Nasdaq did not act jointly in a manner such that Nasdaq’s “conduct could be attributed to the government.” 

Compliance has its benefits

While this is probably not the last time the Nasdaq rule will be challenged, if they haven’t already, companies should prepare to comply with the rule and have the appropriate disclosures ready by the end of the year.  Those boards that have not found diverse board members to sit on their boards can explain that they are continuing the search or explain why they don’t need to add diverse board members. Just like any other disclosure, board diversity information will be used by shareholders to make investment decisions, which could:

• Increase investors interest in the company because it promotes itself as more progressive, inclusive and truly interested in representing all types of people who use its products and services;

• Convince investors that the company is prepared to capitalize on demographic changes in consumer markets because it has persons who represent and understand multiple communities on the board; and

• Decrease the risk of activist divestment campaigns and shareholder lawsuits from disgruntled parties.

There are studies that suggest that companies with diverse boards are generally more profitable, less corrupt, have more effective governance and better corporate culture than those that do not. Now perhaps we will find out if the performance of an entire exchange can improve with the help of diverse boards.

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