Should publically-traded companies prove that they have a woman, minority, or gay person on their board in order to be listed on the Nasdaq?

A federal court grappled with this question and the government’s role in greenlighting such a mandate early this week. 

Nasdaq believes that to break up the old boys club, they can make diversity quotas a condition of being listed. However, using discrimination to remedy perceived discrimination is not a good solution. Hopefully, the court will agree.

What’s happening

Yesterday, the 5th U.S. Circuit Court of Appeals heard oral arguments in a case brought by two groups, the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, challenging the Nasdaq board diversity quota rule. The rule requires companies listed on its U.S. exchange to disclose board-level diversity statistics publicly and to have or explain why they do not have at least two diverse directors. 

By “diverse” they mean one woman and one person from a racial minority or who identifies as gay, lesbian, bisexual, transgender or queer. Imagine how intrusive it is to track the sexual habits of boards of directors.

Plaintiffs contend that the Nasdaq plan violates the Constitution by promoting discrimination and that the disclosure requirements are unconstitutional compelled speech.

Margaret Little, a lawyer representing the National Center, told the court according to reporting by the Washington Times

The board diversity rules compel speech in violation of the First Amendment. It is threatening to delist people who do not speak.

In addition, the court will have to decide whether the Securities and Exchange Commission (SEC) overstepped its authority when it approved the Nasdaq board requirement last year. Not surprisingly, the government believes its hands are clean.

Tracey Hardin, who represented the SEC, insisted that the government was not discriminating and compelling speech:

Nasdaq is a private, for-profit industry. It is simply not the same as a government agency. This is a private initiative initiated by Nasdaq.

The National Center still holds the government responsible for greenlighting the Nasdaq proposal. Justin Danhof, Esq., executive vice president of the National Center, previously explained their reasoning:

In allowing Nasdaq’s board plan to go forward, the SEC is completely flouting the U.S. Constitution. The folks who run Nasdaq may have no clue what is and isn’t constitutionally permissible, but the lawyers and regulators at the SEC ought to know better. Companies should be free to appoint directors who will help their firms prosper. Mandating board appointments based on the color of candidates’ skin, their gender and their sexual partners is not only unconstitutional but also pandering, racist, sexist and just plain offensive. Let’s hope the court issues a commonsense decision overturning this radical scheme.

Battle lines have been drawn. On one side are Republican attorneys general from several states who filed a brief in support of the groups. On the other side are institutional investors and a coalition of Nasdaq-listed companies that want the rule upheld.

A word about quotas

My colleague Charlotte Whelan wrote about the SEC’s approval of the Nasdaq board requirements and opined that it’s unnecessary given that companies are already embracing more women on their boards. In addition, it can lead to tokenism and weaker boards as less qualified individuals are asked to fill quotas.

The disclosure rules serve as a tactic to shame companies into compliance with the quotas. Companies are forced to defend why they have too few women or people of color and fend off the bad PR of not appearing “diverse” enough. 

But what is the end goal of the Nasdaq’s quota? Data is inconclusive about the causal relationship between gender diversity and board performance. Many studies have found some positive and negative impacts, but nothing to establish a causal link. 

The real goal is likely to pursue gender parity as a social good. Checkboxes become virtue signaling like other types of ESG initiatives.

Increasing the number of women, racial minorities or LGBTQ directors does not equate to intellectual diversity, diversity of backgrounds, or viewpoints. Arguably, these forms of diversity can better shape the decisions of boards of directors rather than gender and race. They bring together people who view challenges from very different lived experiences. 

Racial and gender-driven diversity initiatives often tap the same women and people of color to join multiple boards of directors. And, these people often have similar pedigrees, backgrounds, and experiences as those who recruit them. That is not true diversity. 

Bottom Line

Nasdaq’s diversity quotas are on the chopping block. If they are invalidated, it will send a powerful message that discrimination should not be tolerated even if to advance social goals.