SEC challenged in court over Nasdaq rule requiring board diversity

Dive Brief:

A group opposed to affirmative action is challenging, in court, Securities and Exchange Commission (SEC) approval of a Nasdaq rule requiring race and gender diversity on corporate boards, saying the standard would compel public companies to “illegally discriminate” when selecting directors.
The SEC on Aug. 6 backed a mandate proposed by Nasdaq that would require listed companies to include on their boards at least one woman director and someone who is a racial minority or who self-identifies as lesbian, gay, bisexual, transgender or queer. Companies would be required to regularly report on the demographics of their boards, and those that fail to justify non-adherence to the standard in writing would risk de-listing.
“The race, sex and sexual identity board quotas required by Nasdaq are unfair and illegal,” Edward Blum, president of the Alliance for Fair Board Recruitment (AFFBR), said in a statement. “This rule violates our nation’s civil rights laws and constitution and should be struck down by the courts without delay.”

Dive Insight:

SEC Chair Gary Gensler said agency support for the Nasdaq rule aligns with the preferences of investors, who are increasingly focused on environmental, social and governance (ESG) goals when committing their capital.

Investors in 2020 piled a record $51.1 billion into sustainable funds in the U.S., more than twice the previous record in 2019 and nearly one-quarter of all flows into U.S. funds during the year, according to Morningstar Inc.

The rules “reflect calls from investors for greater transparency about the people who lead public companies,” Gensler said in a statement. The standards “will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have a flexibility to make decisions that best serve their shareholders.”

The AFFBR said in its filing that "the diversity rule should be disapproved because it is contrary to law, arbitrary, and unconstitutional."

The Nasdaq’s “discriminate-or-explain command” contradicts the U.S. constitution’s prohibition against federal discrimination based on sex, race, or sexual orientation, the group said.

Also, the rule “is unlawful because it fails to advance any legitimate exchange purpose,” such as preventing fraud or protecting investors, AFFBR said, adding that Nasdaq “may not impose unnecessary burdens on competition.”

AFFBR cited a paper by Harvard Law School Professor Jesse Fried asserting that Nasdaq’s rule would not advance shareholder interests.

“While Nasdaq claims these rules will benefit investors, the empirical evidence provides little support for the claim that gender or ethnic diversity in the boardroom increases shareholder value,” Fried said. “In fact, rigorous scholarship — much of it by leading female economists — suggests that increasing board diversity can actually lead to lower share prices.

“Adoption of Nasdaq’s proposed rules would thus generate substantial risks for investors,” Fried wrote.

Moody’s Investors Service said in a report this month that the Nasdaq mandate will prove “credit positive” for the more than 3,000 companies listed on the exchange.

“The SEC’s approval of Nasdaq’s listing rules is credit positive for Nasdaq and its listed firms because the rules will improve transparency and disclosure, as well as encourage board-level diversity and inclusive representation,” according to Moody’s Investors Service.

Blum, as president of Students for Fair Admissions, has opposed other diversity initiatives, unsuccessfully challenging race-conscious admissions practices by Harvard University and the University of Texas.