Not an ‘active mission’: Nasdaq, SEC say pushing diversity on corporate boards is what investors want

Lawyers for Nasdaq Inc. and the Securities and Exchange Commission on Monday defended the exchange’s plan to force companies to disclose the diversity of their boards, and the justices were skeptical that the court should overturn the policy.

The SEC approved the Nasdaq NDAQ last year;
A policy that requires companies to disclose the demographics of their boards and disqualifies them if they don’t meet certain diversity standards. Two conservative groups have sued that the law is discriminatory and unconstitutional, arguments similar to those that struck down California laws on the topic earlier this year, while the state is appealing it.

watch out More women than men are named to California boards in 2021

In defending the plan, Nasdaq lawyers said it was in response to investor requests for information about board diversity. The rules set a minimum target of at least two “diverse” board members: one woman, and one member of an underrepresented minority group, or someone who identifies as LGBTQ. If companies do not meet the minimum, which depends on their size, their boards must explain why.

At the hearing, SEC Assistant General Counsel Tracy Hardin presented several studies to investors in favor of the Nasdaq rule showing a link between board and company diversity and positive results.

“This is not just a voice group of investors,” she said. “We have a wide range of investors who have said that.”

A judge asked Nasdaq’s attorney directly: “So this is Nasdaq’s active mission to get minorities and gays on the board?” Or do investors demand this?

“It’s absolutely the latter,” said attorney Alison Ho, representing Nasdaq.

watch out Shareholders are pushing for more board diversity at Tesla, Google, Wells Fargo and Home Depot

A three-judge panel of the United States Court of Appeals for the Fifth Circuit in Louisiana on Monday ruled that the laws violate the First and Fifth Amendments because they compel speech and contravene equal protection, respectively.

At the hearing, Peggy Little, an attorney with the New Civil Liberties Alliance, which partners with the National Public Policy Research Institute, said, “A mandatory explanation would seriously upset the Constitution.”

“If we jump to the constitutional dispute, you will argue [Nasdaq] An exchange is a state actor,” said Judge Stephen Higginson.

The SEC and Nasdaq argue that because Nasdaq is a private entity, its activities do not involve government action and are not subject to constitutional challenges.

as well as – America’s most respected corporate boards are still predominantly filled by white men.

“Nasdaq is a private actor, not an arm of government,” said Ho, who is a partner at law firm Gibson, Dunn & Crutcher, representing Nasdaq.

Lawyers for the SEC and Nasdaq said at the hearing that courts have found that self-regulatory organizations like Nasdaq are not government actors, but another lawyer for the New Civil Liberties Alliance, Sheng Li, told MarketWatch after the hearing – governmental powers.

“Nasdaq is protected as a government actor when sued in other circumstances,” he said, adding that the judges “asked tough and fair questions of both sides.”

Aman George — senior counsel at Democratic Forward, a nonprofit organization that supports the SEC and Nasdaq and filed an amicus brief on behalf of academics and practitioners who study board diversity — said he believes the justices’ questions cast doubt on the constitutional argument..

“The timing and timing of the question seems to cast doubt on the applicants’ contention that the statute can be challenged constitutionally,” George said.

The groups that sought to appeal the SEC’s approval of the rules also argued that the exemption rules were outside the SEC’s jurisdiction. Jonathan Berry of the Fair Board Recruiting — a group led by Edward Blum known for its affirmative action political activism — told a judge who asked why the disclosures were inherently discriminatory, saying they “encourage discrimination based on race and sex.”

“Enabling investors to discriminate on the basis of race … is the most socially charged question we have in America today,” Berry said.

Little, the attorney for the other petitioner, said investors “don’t contribute their money to political decisions.”

“It looks like you’re the one who decides what the information will be,” one judge replied.

The audio of the hearing was broadcast live. Besides Higginson, the other two judges on the panel were Carl Stewart and James Dennis, and it was sometimes difficult to tell which judge was speaking.

See: S&P 500 Best-Performing Companies Had Common Board Differences During Pandemic

George, of Democracy Forward, told MarketWatch that the researchers paired this rule with empirical research to demonstrate the relationship between board diversity, corporate decision-making and positive company performance. But he said: “The reality is that the effects are very studied… The Nasdaq rule didn’t come out of nowhere, nor did the calls from investors come out of nowhere.”

An amicus brief filed by Democracy Forward cites a large body of rigorous, high-quality, peer-reviewed research that finds the relationship between the diversity of corporate boards and companies’ corporate governance, as well as risk, innovation, and protection. For investors.

“The results of this study strongly suggest that diversity can enhance corporate board decisions in ways that promote goals. [Securities] Exchange Act, by promoting transparency, protecting investors and reducing fraud,” the brief says.

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