Four years later, a federal appeals court has struck down an attempt by Nasdaq’s US exchange – home of Apple Inc, Nvidia Corp, Microsoft Corp and Tesla Inc, among others – to compel companies to include more women, people of color and LGBTQ+ directors on their boards.
The ruling this week only confirms what many executives have quietly come to accept: the diversity efforts they adopted and celebrated aren’t simply under attack – they’re getting rolled back. The new Donald Trump administration is bound to dial up the pressure.
Nasdaq Inc, responding to the decision in the conservative Fifth Circuit, conceded the loss and said it was moving on.
“We respect the Court’s decision and do not intend to seek further review,” a spokeswoman said in a statement.
DEI Battle
The ruling from the conservative Fifth Circuit in New Orleans represents the latest salvo in a war between right-wing activists and corporate America. Cast as a discrimination suit, like many similar culture-war suits, it was fought over something else: the power of the Securities and Exchange Commission. But after myriad legal challenges to internship programs, startup grants and even ATM fee waivers, many of even the most committed companies have begun to bend — at least, in public.
And this ruling has triggered concerns that other SEC disclosure rules, around climate-related risks and greenhouse gas emissions, could also be relaxed, leaving investors in the dark about important information. Even disclosure around diversity is likely to become inconsistent from company to company, creating a headache for shareholders trying to compare businesses.
The decision leaves Goldman Sachs Group Inc. with one of the more prominent diversity requirements for public company listings. The bank said in 2020 that it would no longer underwrite initial public offerings of companies in the US or Europe without at least one diverse member on their boards — either women, people of color or people who identified as LGBTQ — and required two diverse members starting in 2021. That policy remains in place, the firm confirmed Thursday.
Even in the climate it was proposed four years ago, Nasdaq’s rule was always controversial. It said companies must have a woman, “underrepresented minority” or LGBTQ+ board member — or report in their proxy statements or on their websites why they weren’t able to comply — by December 31 of last year. Nasdaq had planned to ramp up the requirement to a minimum of two diverse directors at the end of next year, one of which must be female.
“The theory was that while the rule may not push leading companies to do better, it would force laggards — companies with zero or one woman — to do better,” said Rob Du Boff, a senior ESG analyst for Bloomberg Intelligence. With an estimated 25% of board seats in the Nasdaq already held by women, its bar was very low, he added.
Challenged
From the beginning, critics attacked Nasdaq’s rule as a quota system. Even though director appointments aren’t subject to traditional employment laws on anti-discrimination, quotas remain legally dubious. The Alliance for Fair Board Recruitment, an organization led by Edward Blum, the activist who succeeded in fighting affirmative action in college admissions, quickly challenged the SEC’s approval of the rule, which it claimed enabled “invidious discrimination.” State attorneys general joined in with a similar message.
The court’s decision side-stepped discrimination entirely, saying only that a rule about diversity isn’t within the SEC’s regulatory purview.
“The Fifth Circuit, especially taken as a whole, is intent on striking down agency rules, no matter how important to investors, markets, and the public interest,” said Stephen Hall, legal director at financial markets-focused nonprofit Better Markets. He added said that he believes it’s interpretation of the law is wrong. “This decision represents a terrible setback for transparency, which is the lifeblood of our securities markets.”
Lawyers don’t expect the SEC, the main party to the suit, to challenge the result, especially since the agency will soon be run by a Trump appointee.
Prominent companies had been on Nasdaq’s side: Airbnb Inc, Microsoft and Micron Technology Inc, all listed on the exchange, joined in a legal brief describing the rule as “a commonsense measure.” Investment giants like Lord Abbett & Co. and Northern Trust Investments Inc were too. Reliable information on board diversity, they complained, “is difficult to obtain, sometimes inaccurate” and often inconsistent.
Investor Demands
Former activist investor and Syracuse University adjunct professor Jared Landaw said smart companies send a signal when they release information about board diversity. In more than 16 years at Barington Capital Group, including as chief operating officer, he found “many under-performing companies tend to have some form of homogeneousness in the board room that’s either contributed to the problem or prevents the board from self-correcting.” Bringing in directors of different demographic and life backgrounds helped address the problem.
“A majority of S&P 500 companies disclose their diversity statistics, regardless of whether they are traded on Nasdaq,” Landaw said. “I think that’s a reflection of what investors want and have come to expect.”
Heather Spilsbury, who leads board diversity advocacy organization 50/50 Women on Boards, points to her experience in California, which instituted a law requiring most public companies in the state to have at least three women directors by 2021. Begun in 2019, it was struck down in 2022. But while it was in place, the percentage of women on boards grew to 34.2% from 20.6% in California-based companies; it’s remained at about 34% since.
“We saw the ripple effect” of its impact even beyond California, she added.
Others aren’t so sure. Without the rule, companies will “enjoy more flexibility about the nature and extent of board diversity information to include in its SEC filings, on its website or in other public disclosures,” Davis Polk lawyers wrote in a client update on Thursday.
The Davis Polk lawyers say that the court is likely to apply similar reasoning to the SEC’s disclosure rules around climate-related risks and greenhouse gas emissions, and could affect corporate governance rules adopted by the Federal Deposit Insurance Corporation.
And it’s a playbook that may be used again and again — regardless of what investors want.
--With assistance from Andrew Ramonas and Sridhar Natarajan.
