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Feb 24, 2021

GOP senators criticize Nasdaq’s board diversity plan

Companies would be required to have – or explain why they do not have – at least two diverse directors

The Republican members of the Senate Banking Committee have urged the SEC to shut down Nasdaq’s proposal for promoting diversity on boards, amid support from both investors and corporate commenters for the initiative’s ‘comply-or-explain’ approach.

Nasdaq in December filed a proposal with the SEC to adopt new listing rules that would require companies to have – or explain why they do not have – at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an under-represented minority or LGBTQ+. Listed companies would also have to disclose consistent, transparent diversity statistics regarding their board.

Nasdaq defines an under-represented minority as a person who self-identifies in one or more of the following groups: black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or two or more races or ethnicities. This reflects the US Equal Employment Opportunity Commission’s categories.

The proposal has attracted dozens of comment letters, many offering positive feedback. But the 12 GOP senators led by ranking committee member Pat Toomey of Pennsylvania filed a letter earlier this month raising a variety of objections.

The lawmakers express support for board ‘diversity of perspectives’ and individual companies’ efforts in that regard. But they argue that ‘it is not the role of Nasdaq, as a self-regulatory organization, to act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets and investors. Nasdaq’s narrow concept of mandated diversity, one that prioritizes race, gender and sexual orientation, and pressured board diversity, misses the mark.’

The senators write that the proposal interferes with a board’s duty to govern in the best interest of the company and its shareholders by imposing the prioritization of what they say is a narrow conception of diversity over merit. They assert that the proposal is not consistent with a free market ‘because its arbitrary diversity requirement does not demonstrably improve corporate performance and could sometimes harm it.’ 

The senators’ concerns about the framing of diversity in the proposal also include their assertion that it would limit companies’ flexibility in recruiting directors ‘as they see most appropriate’ and could discourage the recruitment of board members with certain expertise or experience.

Another argument presented by the Republicans is that the proposal violates the concept of materiality as used in federal securities law governing disclosures, because the disclosures Nasdaq seeks ‘would not help a reasonable investor evaluate a company’s performance.’

The GOP lawmakers also criticize self-identification for board diversity disclosures, arguing that this would create ‘unique liability concerns under the anti-fraud and reporting provisions of the federal securities laws’. They argue that companies could be held liable for reporting directors’ diversity information if their ethnic or gender identity is misrepresented.

Among other things, the senators argue that the proposal ‘would harm economic growth by introducing unnecessary regulatory costs, decreasing the attractiveness of US capital markets and presenting an additional concern for corporations deciding to go and stay public.’

A Nasdaq spokesperson says in a statement: 'Our proposal is a market-led solution that should simplify and standardize disclosure requirements to avoid the type of regulatory overreach the critics fear.'

Meanwhile, support for the proposal has come from organizations such as the Council of Institutional Investors, with general counsel Jeffrey Mahoney writing that the group believes corporate governance best practices include the expectation that boards will reflect the diversity of their communities, customers and employees, and that diverse boards can boost financial performance.

‘We support the proposal’s comply-or-explain model that provides a transparent framework for listed companies to present their board composition, with the flexibility to explain why the Nasdaq proposed standards cannot be met,’ Mahoney writes. He adds that any burden for companies to comply with the planned requirement for disclosing board-level diversity statistics would be outweighed by the benefits of the information to investors.

New York City comptroller Scott Stringer writes that the proposed rules would ‘provide investors with vital information to inform investment and proxy voting decisions, as well as improve shareowner value by fostering increased board racial and gender diversity without imposing mandates or quotas.’

Microsoft and Facebook are among the corporate supporters of the proposal.

Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, in another letter writes that the group ‘commends Nasdaq for promoting a private sector-based solution to foster greater diversity among boards of directors. The proposal encourages companies to think critically about how to incorporate diversity into their corporate leadership, which is a goal the chamber shares.’

Gary LaBranche, president and CEO of the National Investor Relations Institute (NIRI), writes in the group’s letter that it traditionally has been wary of disclosure mandates or ‘overly prescriptive SEC rules that try to address societal problems.’ Rather, LaBranche says, NIRI generally favors principles-based disclosure rules that offer compliance flexibility and welcomes Nasdaq’s approach along those lines.

‘While some companies may question the feasibility of meeting Nasdaq’s diversity goals (or explaining their board selection policies) or believe diversity should not be part of an exchange listing standard, we believe the potential benefits from Nasdaq’s proposal would outweigh these concerns,’ he writes.

Editor's note: This article has been updated to include a comment from Nasdaq.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...