As I noted a prior post, on August 6, 2021, the SEC, in a split vote along party lines, approved Nasdaq’s proposed listing guidelines requiring companies listed on the exchange to comply with board diversity requirements or explain their failure to do so. On August 9, 2021 a nonprofit directors’ organization called the Alliance for Fair Board Recruitment filed a petition with the Fifth Circuit Court of Appeals seeking to have the appellate court review the SEC’s order. The organization explained its move in an August 18, 2021 press release, stating that it sought to challenge the order because it “will compel many of our nation’s largest publicly traded corporations to illegally discriminate on the basis of gender, race, and sexual orientation” in selecting directors. The appellate petition can be found here. The August 18 press release can be found here.


In its press release, the states that the directors’ group is a nonprofit membership organization incorporated in Texas. The group has previously filed legal challenges to other efforts to require companies to diversify their boards. In July, the group filed a suit seeking to challenge California laws that require public companies with their headquarters in California to diversify their boards.


The petition the group filed with the Fifth Circuit is very cursory and presents no legal arguments. However, in its August 18 press release, the directors’ group presents its contention that the Nasdaq “discriminate-or-explain” rule “exceeds [the SEC’s] role and the authority granted by federal securities law and also violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable.”


The group also challenges the Nasdaq rule’s practical justification that companies with diverse boards produce better results; the press release quotes Harvard law professor Jesse Fried as saying that “numerous studies” have shown “that stock returns suffer when firms are pressured to hire new directors for diversity reasons.”


Finally, the group also states in the press release the Nasdaq’s “virtue signaling rule” will harm the organization’s members, “who, because of their race, sex, and sexual orientation are force to compete on an uneven playing field because of Nasdaq’s quote requirements.”


The press release quotes a statement from the group’s president as saying that “The race, sex and sexual identity board quotas required by Nasdaq are unfair and illegal. This rule violates our nation’s civil rights laws and Constitution and should be struck down by the courts without delay.”



The group’s petition has only just been filed and it remains to be seen how it will fare. The arguments that are likely to be advanced can be previewed in the dissenting statements of the two Republican SEC commissioners who voted against the approval of the proposed Nasdaq guidelines. Commissioner Hester Pierce’s statement, it which she contends that the SEC’s approval of the guidelines is “outside the scope of the [Exchange] Act and contrary to fundamental Constitutional principles,” can be found here. Commissioner Elad Roisman’s partial dissent can be found here.


UCLA Law Professor Stephen Bainbridge, in an August 18, 2021 post on his blog discussing the recently filed petition, notes what he characterizes as “legitimate” concerns about the Nasdaq guidelines and the SEC’s approval. Among other things, he states that “asking corporate executives to take on governmental functions not only asks them to undertake tasks for which they are untrained and for which their enterprise is unsuited, it also subverts the basis of a liberal democracy. Government efforts to solve social problems are inherently limited by the checks and balances baked into the American political system.”


Bainbridge quotes one commentator’s statement about the Nasdaq guidelines as saying that the exchange’s initiative reflects the efforts of many organizations to “impose different aspects of a ‘progressive’ agenda on private companies without the bother of going through the usual democratic mechanisms.”


Bainbridge also quotes remarks that the economist Milton Friedman made back in the 70’s; Friedman said that liberals of that era argued that society was plagued by hot of ills that “too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.”


Bainbridge’s comments reflect something of a theoretical opposition to the Nasdaq guidelines, premised on an argument that the imposition of the rules by a regulatory body is “undemocratic.” Regardless of what anyone may think about Bainbridge’s comments, this objection presumably would not apply to the California laws, which were in fact enacted by a democratically elected legislative body.


One thing that is missing from much of the discussion of these issues is a consideration of whether or not companies having more diverse boards is or is not a good thing. To be sure, Commissioner Roisman, in his dissent the SEC’s approval of the guidelines, makes a point of emphasizing his support of the goal of public companies having more diverse boards.


Along those lines, I feel compelled here to state my support for the proposition that companies should have more diverse boards. I have served on the boards of several organizations and have seen first-hand the value for both the boards and the organizations they represent of having a variety of experiences and backgrounds in the board room. However, though I think board diversity is a worthy goal, I am not a fan of mandates.


Here’s my concern. Over the years, I have participated in innumerable conferences, sessions, seminars and so on where corporate governance topics are discussed. An all-too-familiar theme at many of these conferences is that board composition should be altered to address this or that policy objective. I have heard it said that boards should be required to include directors that have climate change expertise. I have heard it said that boards should be required to include directors that have cybersecurity expertise. Others have said that boards should include individuals who have corporate governance expertise. Many other similar views have been raised.


What gets lost in this discussion of mandates is the fundamental need for an organization’s board to consider, discuss and address the organization’s goals and objectives. What an organization needs is a board composed of persons who understand the organization’s industry and who can help the company adopt strategies that will aid the company to achieve its objectives. This imperative is not in any way incompatible with the goals of board diversity. My concern is that mandates are a blunt weapon; today, Nasdaq says that boards must include diverse members, tomorrow some other group may say that boards must include other kinds of representatives, as suits their priorities and agendas. I just don’t think that is road that we should be going down.


Board diversity is a worthy goal, a view that I know many share. In fact, institutional investors have been very prominent in trying to promote diverse boards. That kind of investor action seems to me the right way for board diversity to be advanced. I am not a fan of mandates.