NASDAQ’s Diversity Rule for Corporate Boards is Under Legal Challenge

Affirmative Action opponents don’t just target colleges when they fight against gender and racial preferences in law.

Corporations have emerged as another front in this battle. A federal appeals court heard Monday a challenge of the tech-heavy NASDAQ stock market’s requirement that the largest companies listed on its exchange must adhere to diversity standards for their boards.

The Supreme Court is getting ready to hear arguments in the fall about the impact of race on admissions decisions at Harvard and North Carolina. This case will be one of the most anticipated of the coming term.

The “Board Diversity Proposal” requires that large NASDAQ-listed companies disclose and maintain a minimum number of minorities members. Otherwise, they could be delisted. There are many corporate titans like Meta, Tesla and Apple among the listed companies on the exchange.

The rule was proposed by 2021, in February. It requires NASDAQ-traded companies, except for foreign or small firms, at least one director that identifies herself as a woman, and at most one director from a minority or part of the LGBTQ community to have, or explain why they do not have, at least one director.

The National Center for Public Policy Research is a conservative think-tank that challenged this rule. It argued it violates the Constitution as it encourages discrimination, and forces corporations to speak in violation the First Amendment. By disclosing the personal information of members of its board, it makes it easier for them to use their own details.

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” The board diversity rules forbid speech in violation the First Amendment,” Margaret Little (an attorney for the National Center for Public Policy) told the 5th U.S. Circuit Court of Appeals hearing oral arguments Monday.

“It threatens to delist people with no language skills,” she said.

The U.S. Securities and Exchange Commission approved NASDAQ’s diversity rule in August 2021, and a government lawyer told Monday’s three-judge panel that NASDAQ was a private entity and could create its own membership rules based upon investor demand.

Tracy Hardin represented the SEC and said that it was not the government acting illegally regarding race, gender, or speech.

“NASDAQ “is a private for-profit industry,” she stated. It is not as good or the same as government agencies .”


“This private initiative was initiated by NASDAQ,” she said.

But opponents to the mandates claim that NASDAQ does not have the right to impose them, and the SEC has no statutory authority or power of approval.

“It’s unconscionable that discrimination is so blatantly displayed by requiring these businesses to hire employees based only on race, sex, and sexuality,” Texas Republican Attorney general Ken Paxton stated in an amicus brief before the Fifth Circuit Court of Appeals.

A spokesperson for NASDAQ declined to comment about the suit, as it ranks second in market capitalization behind the New York Stock Exchange.

The case is National Center for Public Policy Research against the SEC and it’s currently before three judges from the 5th Circuit. All of them were appointed by Democratic presidents.

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This is not the only case involving gender and racial quotas in business this year. California courts recently ruled on two identical state laws: one relating to women representation, and the other for minority members of corporate boards.

A 2018 A state law required that every publicly-held corporation headquartered in the state, which is roughly one eighth of all U.S. companies, had at least one female director by the end 2019. The 2021, statute mandated that boards of five or more members must include at least two women and at most three women to serve as directors on boards having six or more people.

Supporters of mandates point out scholarly studies in Europe and the U.S. that show that boards that have greater diversity and racial or gender representation return higher returns to shareholders. The average share of women on boards of California companies went from 12.9% in 2016 to 23.2% in 2020 after the laws were passed.

The NASDAQ Challenge was argued two months ago, just before the Supreme Court hears arguments against affirmative-action policies at Harvard University and University of North Carolina.

Those are slated for Oct. 31, and a ruling from the high court is expected by June 2023.

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