America’s second biggest stock exchange, Nasdaq, has been blocked from imposing diversity targets, that many interpret as quotas, on the boards of its 3000 listed companies, in another blow to the push for corporate diversity, equity and inclusion (DEI) policies.
A US Court of Appeals ruled in a narrow 9-8 decision that the Securities and Exchange Commission (SEC) erred in its 2021 approval of Nasdaq’s diversity rule that required listed entities to disclose board diversity statistics and meet minimum diversity benchmarks, or explain their non-compliance.
Two conservative groups challenged the SEC’s approval, arguing that these requirements effectively set quotas, which they claimed were illegal.
Specifically, Nasdaq-listed companies were required to have, or explain why they do not have, two diverse directors, including one who “identifies” as female, and one who “identifies” as either an “under-represented minority” or “LGBTQ+.”
The conservative majority of the judges’ panel criticised the SEC’s overreach into areas beyond its usual regulatory scope, saying it could lead to discrimination.
“The Board Diversity Proposal is far removed from these ordinary applications of the concept of just and equitable principles of trade,” their opinion read.
“It is obviously unethical to violate the law or to disregard a contractual promise.”
“It is not unethical for a company to decline to disclose information about the racial, gender, and LGTBQ+ characteristics of its directors.”
“We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer.”
“If there is such a custom, SEC did not cite it in its approval order.”
“It said only that the Board Diversity Proposal would satisfy some apparently important investors who demand diversity information.”
Nasdaq said it would respect the court’s decision and would not “seek further review.”
The SEC is still considering its next steps, which could include a potential appeal to the US Supreme Court.
Sheng Li, litigation counsel for the New Civil Liberties Alliance which represented the National Center for Public Policy Research said: “The court correctly recognised that neither SEC nor Nasdaq has any business regulating the composition of corporate boards along these controversial demographic dimensions.”
“The diversity rules would strip people of their individuality and force companies to classify them based on gender, race, ethnicity, and sexuality,” he added.
The Christian Post reports the decision comes amid a concerted pushback against what conservatives have called “woke” policies across various sectors, impacting affirmative action and environmental, social and governance investing strategies.
Republican attorneys general from two dozen states backed the lawsuit, arguing that the diversity mandates were unconstitutional.
A coalition of Nasdaq-listed companies such as Airbnb, Microsoft and Starbucks supported the diversity rules.
In recent years, some major US companies have rolled back DEI initiatives following a 2023 US Supreme Court ruling striking down the University of North Carolina’s and Harvard University’s admissions policies, which used race as a factor in student acceptance.
Last month, retail giant Walmart which has 1.6 million employees said it would scale back its DEI policies following similar moves by another big retailer Tractor Supply Co. as well as Ford, Harley-Davidson, John Deere, Lowes and Molson Coors.
