Latest Update October 19, 2023

Fifth Circuit Upholds SEC Rule That Promotes Corporate Board Diversity Amongst NASDAQ-listed Companies

The United States Fifth Circuit Court of Appeals rejected conservative attempts to gut the SEC rule that promotes corporate board diversity and furthers a bold, vibrant democracy in the United States.

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In December 2020, Nasdaq sought approval of a rule with the U.S. Securities and Exchange Commission (SEC) that would require the boards of Nasdaq-listed companies to have on their boards at least one self-identified female and at least one underrepresented minority or LGBTQ+ person, or explain why they don’t. Another rule from Nasdaq would require these companies to disclose board level diversity statistics. In August of 2021, the SEC approved the proposed rule changes for Nasdaq-listed companies.

Nasdaq’s rule changes are grounded in evidence & the law. They’re also important to move society forward. Indeed, as of 2020, 82.5% of directors at Fortune 500 companies are white. And only 23.5% of board seats of the top 3000 publicly traded companies are held by women.

However, Nasdaq’s rules have faced legal challenges from The Alliance for Fair Board Recruitment and The National Center for Public Policy Research. (The Alliance for Fair Board Recruitment separately sued California after it passed a board diversity requirement.)

On February 25, 2022, Democracy Forward and Lambda Legal filed a brief on behalf of academic experts in business, management, and economics in the Fifth Circuit Court of Appeals supporting Nasdaq’s diversity rule, and the SEC’s approval of the rule. 

This brief supports the SEC’s approval of Nasdaq’s proposal to require Nasdaq-listed companies to have or publicly disclose why they do not have at least two diverse board directors. The brief demonstrates for the court the strong evidence linking board diversity and corporate performance. Democracy Forward and Lambda Legal are representing experts signers in business, management, and economics, with particular expertise in studying the role of corporate board diversity in company performance.

These signers explain to the court that 1) substantial evidence supports a link between greater board diversity and positive non-financial outcomes, such as corporate governance and shareholder protection; 2) substantial evidence supports a link between greater board diversity and positive firm financial performance; 3) the Nasdaq Proposal has the added benefit of facilitating transparency and further rigorous study of board dynamics and effects; and 4) evidence continues to emerge since the Nasdaq Proposal that reinforces the positive links between board diversity and performance.

On October 19, 2023, the Fifth Circuit upheld the rule.

In a win for diversity and inclusion, the U.S. Fifth Circuit rejected extremist arguments and upheld the SEC rule.