Alongside, growing demand for greater board diversity in the corporate sector, NASDAQ proposed a rule requiring its thousands of companies to have at least two diverse directors on their boards.
In August 2021, the U.S. Securities and Exchange Commission (SEC) approved a new board diversity rule put in place by the NASDAQ exchange. This rule, requires all boards of companies in the exchange to have one director who identifies as female and one director who is a member of an underrepresented group, either as a racial or ethnic minority or as a member of the LGBTQ+, by the end of the year. If a company does not adhere to this rule, it must explain why it does not. Additionally, NASDAQ companies must now disclose their board diversity information every year. Companies that do not comply will have their shares delisted from the exchange. When this rule was originally proposed, people at NASDAQ believed that at least 85% of NASDAQ-listed companies were already in compliance.
Not long after the initial approval of NASDAQ’s rule, two groups, known as the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, sued the SEC, asking the 5th U.S. Circuit Court of Appeals to block the rule. The groups argued that the rule was in violation of the U.S. Constitution because it inhibited free speech and acted as a discriminatory law.
The attack on NASDAQ’s board diversity proposal relied on the idea that restrictions on the U.S. government are able to be applied to NASDAQ. This would mean that the SEC could penalize NASDAQ if it does not enforce the rule’s requirements. However, the SEC and NASDAQ have both stated that NASDAQ is a private entity and cannot be restricted in the same way that the government is. They also maintain that the diversity proposal is a disclosure requirement to provide information on board diversity, rather than a diversity quota for companies.
In October 2023, the U.S. appeals court upheld NASDAQ’s board diversity rule, rejecting the attempted block on the rule by the aforementioned groups. The court states that it was within the authority of the SEC to approve NASDAQ’s rule. Disclosing information about board diversity allows investors to make informed decisions and the SEC should be able to consider this.
Adena Friedman, the CEO of NASDAQ, stated that the board diversity proposal does not mean that NASDAQ seeks to create an optimal board composition, but rather that the exchange believes every board should have the minimum level of diversity that the new rule outlines.