DEI | Dec 12, 2024
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A Legal Setback for Diversity as U.S. Court Ruling Invalidates Nasdaq’s Diversity Requirements for Boards
Nasdaq’s attempt to promote diversity on corporate boards just hit a major legal roadblock this week. The Fifth U.S. Circuit Court of Appeals has overturned the rule requiring companies listed on Nasdaq to include diverse directors or explain why they do not. In a close 9-8 decision, the court found that the rules were incompatible with federal securities laws and that that Securities and Exchange Commission (SEC) overstepped its authority when they approved these requirements.
See:Â How Fintechs Are Tackling Financial Inclusion in Canada
As a refresher, Nasdaq and the SEC implemented rules in effort to improve diversity on corporate boards and strengthen companies by bringing varying opinions and voices to the boardroom that would impact 3000 companies. The rules required listed companies to have at least one women and one member of an underrepresented minority or LGBTQ+ on their boards. If companies opted out, they would need to publicly disclose their reason why. In 2016, women held just 15% of board seats and that figure increased to 23.1% in recent years.
Implications
By striking down these rules, the court raises questions about the future of diversity, equity and inclusion (DEI) policies and their legal foundations in corporate governance. Nasdaq’s initiative was seen as a milestone that encouraged companies to recognize the value of different perspectives in decision making.
See:Â Conservative Backlash Leads to DEI Retreat on Wall Street
While some businesses voluntarily prioritize diversity, others might scale back such initiatives, signalling future hurdles for any regulatory attempts to add diversity to the boardroom. The ruling is part of a national debate about DEI that ranges from companies policies to college admissions.
Closing Thought
Diverse boards are often touted as having better decision making and stronger financial performance. They should reflect society’s evolving values and nurture a wider range of voices in leadership roles. How will businesses balance voluntary diversity efforts with growing legal and political challenges?
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