Nasdaq Ruling Serves a Blow to the Diversity Movement

The push to make boards more diverse recently took a hit.

In December, the U.S. Court of Appeals for the 5th Circuit overturned Nasdaq’s board diversity requirements. The stock exchange had implemented a rule requiring Nasdaq-listed companies with more than five board members to have one female director and one director who identified as an underrepresented racial or ethnic minority or as LGBTQ. The information had to be disclosed annually using a diversity matrix. Companies that failed to meet these requirements had to explain why.

The court ruling follows a wave of pushback against broader diversity, equity and inclusion measures. Given that, there are concerns that the lack of regulatory pressure will mean some companies’ will lessen their efforts to diversify their leadership ranks.

“I do think we are seeing across the board – no pun intended – there is a general waning of interest in diversity, equity and inclusion in the business community, and this is just another piece of that,” says Cary Coglianese, director of the Penn Program on Regulation at the University of Pennsylvania Carey Law School. “Not having a rule in place is probably all the more disappointing to the movement given this waning. A regulation could have helped combat that.”

Nasdaq had issued the proposed rule in August 2020, months after George Floyd was killed by a Minneapolis police officer. The event spurred widespread protests about racial inequality in the U.S., and companies rushed to pledge billions in donations for racial justice efforts and to implement DEI policies.

The Securities and Exchange Commission, which has to approve listing requirements by Nasdaq as well as the New York Stock Exchange, approved the measure a year later. Companies were required to provide the information starting with their 2022 disclosures.

In general, the NYSE and Nasdaq tend to adopt similar rules. But in this case, the NYSE did not follow suit so the diversity rule only applied to Nasdaq-listed companies. More banks are listed on Nasdaq, though the nation’s largest banks, such as JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., are on the NYSE, says Scott Levi, a partner in the capital markets practice at the law firm White & Case.

The National Center for Public Policy Research, a conservative think tank, and the Alliance for Fair Board Recruitment, a nonprofit that promotes recruiting directors without regard for diversity characteristics, sued. The 5th circuit, which is generally viewed as skeptical of federal regulation, eventually ruled 9-8 to overturn the SEC’s determination. The court found that the SEC couldn’t approve the requirement because it exceeded the agency’s congressional authority since it didn’t relate to market manipulation, fraud or proxy voting, Levi says.

The SEC said it would review the court’s decision, while Nasdaq said it would not appeal the ruling, according to Reuters. The SEC and Nasdaq did not return a request for comment for this story.

“We take it as the rule is gone,” Levi says. “The SEC could explore asking the Supreme Court to rule on it but the Supreme Court would have to accept the case.”

“There also will be a new chair of the SEC and we don’t think there will be any interest in appealing this,” he says.

President-elect Donald Trump, who will take office on Monday, has nominated Paul Atkins, a former SEC commissioner, to the post. It’s widely expected Atkins would take a more deregulatory position.

Given that the requirements were in effect for a short period, it’s unclear how much of an impact it had on board recruitment and diversity. Anecdotally, Levi says that he found that companies that did not meet the diversity standards looked to recruit new board members. “It was a conversation we were having,” he adds. “The preference was to not say they didn’t have any diverse directors.”

Scott Yonker, a professor of finance at the Cornell SC Johnson College of Business, says that boards were already diversifying when the Nasdaq rule went into effect as companies adopted DEI policies in the wake of Floyd’s death. In 2022, women held more than 30% of board seats at Fortune 500 firms, up from 26.5% just two years earlier, according to data from the consulting firm Deloitte and the Alliance for Board Diversity, a nonprofit that supports diverse corporate boards. Underrepresented racial and ethnic minorities had 22.2% of board seats in 2022, up from 17.5% over that same period.

In June 2021, 8% of Nasdaq bank boards had no female directors, according to data from Bank on Women, a nonprofit focused on increasing the number of women on boards and in leadership roles at banks. As of December, that figure had dropped to 3% while at the same time 22% had at least four directors who are female and 32% had three female board members, according to the group.

Yonker’s research has found that shifting social norms tend to lead to more significant changes in areas such as diversity as opposed to legal or regulatory mandates.

“For example, when the Black Live Matters protests took off, you saw an increase in Black directors,” he adds. “We think of that as social pressure pushing forward change.”

And despite board diversity no longer being a listing requirement, other stakeholders could continue to push for change. For instance, institutional investors and voting advisers, such as Institutional Shareholder Services (ISS) and Glass Lewis, have their own board diversity policies. If companies fail to meet these guidelines then they could risk shareholders voting against certain measures. And management teams may continue with inclusion efforts if this is an area their customers and employees care about.

“We always advise our companies to look at their investor base and determine what policies they are subject to for director elections,” Levi says. “What’s the holding of large institutional investors and certain retail investors? What percentage are following ISS and Glass Lewis? From that, you can determine how important it is for you to have a diverse board.”

Still, DEI had a tough year in 2024. A number of high profile companies, such as Walmart, Ford Motor Co. and Lowe’s Companies, announced plans to pull back in this area.

BlackRock changed its proxy voting guidance effective this month. The asset manager is no longer explicitly saying that boards should strive to be 30% diverse. (However, the firm also noted that the vast majority of S&P 500 companies already had “diverse representation.”) BlackRock said in its guidelines that it was “interested in a variety of experiences, perspectives, and skillsets in the boardroom” and that is a “means of promoting diversity of thought to avoid ‘group think.’”

It’s possible that other investors and stakeholders could follow BlackRock’s lead and back away from an explicit focus on characteristics, such as race and gender, in board composition and instead target more broadly diverse skills and experiences.

“[BlackRock] changed their requirements to make them broader,” says Brian Breheny, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom. “They didn’t talk about gender and race and instead couched it in how boards compare with their peers and their experience. Does the board have the experience we would expect to see? Part of that is work experience and financial abilities. And diversity would be part of it.”

Julie Young, a director at the $6 billion asset CNB Financial Corp. in Clearfield, Pennsylvania, thought mandated diversity could lead some boards to add unqualified directors. “Then you end up with a self-defeating problem, because you get a woman on a board who’s not qualified, and then everybody looks at her and says, ‘See, women shouldn’t be on boards.’”

As a result of the court ruling, Young, who is an employment attorney with JMY Law, said that businesses that weren’t truly committed to DEI may drop looking for more diverse directors. She says CNB has remained committed to diversity.

“[I] think the boards who are committed to DEI, who recognize that diversity leads to a better institution, they are going to keep doing what they are doing,” she adds. “They weren’t motivated by reporting requirements. They’re motivated by something much better, which is understanding the value of diversity [and] understanding the value of different perspectives.”