SEC Blesses Nasdaq’s New Rules for Board Diversity

The Securities and Exchange Commission last week approved a request from the Nasdaq stock exchange to enact rules that would prod listed companies to diversify their boards of directors.

We previously told you late last year about what Nasdaq was proposing. The exchange asked the SEC for permission for two key changes. First, Nasdaq would require listed companies to disclose statistics detailing the diversity of their boards. Listed companies also would need to reach diversity targets for their boards (or explain themselves publicly). Specifically, the boards of Nasdaq-listed companies must have at least one member who self-identifies as female and at least one member who self-identifies as a racial minority or LGBTQ+. Failure to meet the conditions would risk a delisting from the exchange.

As a sign of the decision’s importance, SEC Chair Gary Gensler weighed in on the agency’s blessing of the changes. “These rules reflect calls from investors for greater transparency about the people who lead public companies, and a broad cross-section of commenters supported the proposed board diversity disclosure rule,” said the Biden administration appointee, who has expressed general support for board diversity in the past.

In a joint statement, Democratic commissioners Allison Herren Lee and Caroline Crenshaw hailed the ruling as “a step forward for investors.” Meanwhile, Republican-appointed commissioner Hester Peirce offered a lengthy rebuttal to the Commission’s decision, taking issue with what she termed the “low quality” of the studies cited by Nasdaq in arguing that companies with diverse boards of directors tend to perform better. In an eye-catching comment, Peirce added the ruling “lends a government imprimatur to the race- and sex-based board-selection objectives that are contrary to the public interest.”

Elad Roisman, the SEC’s other GOP commissioner, also came out against Nasdaq’s proposed diversity requirements, albeit without lobbing any verbal bombs at the decision. Essentially, Roisman argued that even though Nasdaq is pursuing a “noble goal,” the SEC’s analysis of the proposal was inadequate.

Nevertheless, the objections of Peirce and Roisman didn’t stop the Commission from greenlighting Nasdaq’s rule changes. It may sound hyperbolic to describe an SEC decision as momentous, but it seems appropriate in this case. Keep in mind, however, that this looks like an example of government policymaking following popular thinking, rather than leading it. The proposal came from one of the largest stock exchanges in the world. Mammoth money manager BlackRock is voting against corporate boards it deems to be lacking adequate diversity. And investment bank Goldman Sachs will only help take a company public if it has two diverse board members.

In other words, the moment feels more symbolic than substantive. But significant even so.

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