Dive Brief:

• The Securities and Exchange Commission endorsed a proposed rule by Nasdaq that would require its more than 2,500 listed companies to include on their boards at least one woman director and someone who is a racial minority or who self-identifies as lesbian, gay, bisexual, transgender or queer. 

• Under the Nasdaq listing standard, companies would be required to report the demographic characteristics of their boards. Those that fail to justify their non-adherence to the requirements in writing would risk de-listing.

• "These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have a flexibility to make decisions that best serve their shareholders," SEC Chair Gary Gensler said in a statement.

Dive Insight:

The SEC granted approval in the face of opposition from the 12 Republicans on the Senate Banking Committee and conservative groups. They say the Nasdaq rule narrowly defines diversity, will shrink the pool of board candidates and may inhibit economic growth by imposing costs on companies and discouraging private companies from going public.

"By defining diversity by race, gender, and sexual orientation, Nasdaq’s mandate will inevitably pressure companies to subordinate crucial factors such as knowledge, experience and expertise when selecting board members," Sen. Pat Toomey of Pennsylvania, the banking committee’s senior Republican, said in a statement. "I’m disappointed [Chair] Gensler is turning a financial regulator into a laboratory for progressive social engineering."

SEC Commissioner Hester Peirce, a Republican, dissented from the approval with several objections, including the concern that the commission overstepped its authority under the Securities Exchange Act of 1934.

"The Act nowhere delegates authority to exchanges to impose on issuers disclosure mandates or ‘objectives’ related to internal corporate affairs, much less those related to important societal problems, simply because current investor or ‘stakeholder’ sentiment is said to favor such requirements," she said.

Nasdaq’s rule is ethically as well as legally flawed, according to David Burton, a senior fellow at the Heritage Foundation. "The proposed rule is a major step backward morally and is inconsistent with the equal protection principles of the Constitution and the Civil Rights Act of 1964," he said in a paper. "Nasdaq’s embrace of the ‘social justice movement’ and stakeholder capitalism, if widely adopted, would have adverse effects on Americans by reducing wages, incomes and employment."

Nasdaq said otherwise, asserting that the new rules would boost economic growth. "Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies," CEO Adena Friedman said when announcing the proposed rule in December. "Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders."

Women and minorities last year held 38.3% of board seats at Fortune 500 companies, an increase from 25.5% in 2010, according to a study by Deloitte and the Alliance for Board Diversity.

During the same period, the share of board seats filled by women rose from 15.7% to 26.5%, according to the study. Yet a large majority of those women were white. The portion of board seats held by minority women increased less than 3 percentage points, from 2.9% to 5.7%.

"While there have been a few gains in board representation for some demographic groups, advancement is still very incremental, with goals of achieving proportional representation to the presence of women and minorities in the U.S. population sometimes multiple decades away at current rates of change," according to the study.

The Nasdaq rule should mark just the beginning of company efforts to increase diversity, SEC Commissioners Allison Herren Lee and Caroline Crenshaw said in support of the proposal. "Because enhanced diversity is critically important for investors, the markets and our economy, we hope this is a starting point for initiatives related to diversity, not the finish line," they said in a statement.

Some stakeholders said the proposal was too narrow, but the SEC said in its approval that "companies are not precluded from using a broader definition of diversity, including persons with disabilities and other categories such as veteran status or age, provided that these companies disclose this."