Nasdaq’s Board-Diversity Proposal Wins SEC Approval

WSJ LogoAgency backs plan to set minimum targets for composition of listed companies’ directors

In an order released Friday afternoon, the Securities and Exchange Commission agreed to Nasdaq’s proposed rule changes. But in a sign of the political divisions over the proposal, the SEC’s two Republican commissioners registered their opposition, with one voting against the decision and the other giving only partial support.

Under the proposal, Nasdaq-listed companies would need to meet certain minimum targets for the gender and ethnic diversity of their boards or explain in writing why they aren’t doing so.

For most U.S. companies, the target would be to have at least one woman director, as well as a director who self-identifies as a racial minority or as lesbian, gay, bisexual, transgender or queer. Companies would also be required to disclose diversity statistics about their boards. Nasdaq found in a review conducted before submitting its plan late last year that more than three-quarters of its listed companies wouldn’t have met its proposed requirements.

“These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders,” SEC Chairman Gary Gensler said in a statement.

Republican Commissioner Hester Peirce voted against the proposal, while the SEC’s other Republican commissioner, Elad Roisman, offered a partial dissent. In a statement, Mr. Roisman praised the goal of greater boardroom diversity, but said the SEC’s approval order fails to make the case for why the agency should agree to the rule. He also warned that the rule could drag the SEC into thorny legal disputes over discrimination.

“A serious concern is that the SEC—without any doubt, a state actor—may need to take future action in which the agency must consider disclosure of the racial, ethnic, gender, or LGTBQ+ status of individual directors,” Mr. Roisman wrote. “After all, the Commission is the adjudicating body for exchange delisting decisions.”

Republicans on the Senate Banking Committee and some conservative groups have criticized the plan, saying Nasdaq is overreaching and pursuing a political agenda. “I’m disappointed Chairman Gensler is turning a financial regulator into a laboratory for progressive social engineering,” Sen. Pat Toomey (R., Pa.), the committee’s ranking member, said after Friday’s decision.An insightful weekly view of how diversity is changing the landscape of business with new company policies, workplace trends and redefined missions.

 Democrats on Capitol Hill and corporations such as Goldman Sachs Group Inc. and Microsoft Corp. have voiced support for the proposal.

Critics of Nasdaq’s plan have warned that it could be challenged in court. Some conservative groups have argued that the exchange’s diversity rule, if implemented, would violate the U.S. Constitution and civil-rights laws.

“The proposed rule is racist and sexist in that it mandates that firms establish quotas and discriminate based on sex, skin color, ethnicity or sexual orientation,” David Burton, a senior fellow at the Heritage Foundation, told the SEC in a January letter.

Lawyers for Nasdaq say the rule wouldn’t violate any laws. Nasdaq has rejected characterizations of its proposed rule as a mandatory quota system, since companies would have the option of filing a written explanation for why they weren’t meeting the diversity targets.

The exchange operator also amended its initial proposal to make it easier for small companies to comply. One of the changes, for instance, allows companies that have five or fewer directors to meet the targets with just one board member from a designated diverse background, rather than two.

Nasdaq argued that its proposed rule change would benefit investors. The exchange operator cited studies that found companies with more diverse boards tended to have stronger corporate governance and financial performance.

Nasdaq’s Diversity Push

“We are pleased that the SEC has approved Nasdaq’s proposal to enhance board diversity disclosures and encourage the creation of more diverse boards through a market-led solution,” Nasdaq said Friday.

A variety of Wall Street initiatives have sought to bring more diversity to U.S. corporate boards, which remain heavily white and male. Asset managers such as BlackRock Inc. and State Street Global Advisors have pushed their portfolio companies to appoint more women as directors. Last year, Goldman said it would no longer underwrite initial public offerings of companies in the U.S. and Europe unless they had at least one “diverse” board member. The bank recently raised that target to two diverse directors.

An analysis released in June found that big U.S. companies significantly boosted the share of new directors who are Black or Latino this year, and have added more women to their boards in recent years. Nearly 75% of new independent directors at companies in the S&P 500 are women or belong to a racial or ethnic minority, up from about 60% last year and 31% a decade ago, according to the analysis by board and executive recruiting firm Spencer Stuart.

Still, the shift left around 80% of board seats occupied by white directors and about 70% by men. About 11% of S&P 500 board members are Black, 4% are Latino and 6% are Asian, Spencer Stuart found.

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...we find that banks with more gender diversity on their board perform better once the composition of these boards reaches a critical level of gender diversity, corresponding to a board female share of around 13-17 percent.

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