Nasdaq’s plan for board diversity is disapproved by Senate Republicans

“We commend individual companies for the proactive efforts they have already made in recruiting, promoting and retaining diverse talent,” wrote the senators, led by Pat Toomey in Pennsylvania. “However, it is not Nasdaq’s role … to act as a social policy arbitrator or to impose a prescriptive one-size-fits-all solution on markets and investors.”

Nasdaq’s proposal, filed with the SEC in December, requires publicly traded companies to have at least one woman on their boards, in addition to a director who is a racial minority or someone who identifies herself as a lesbian, gay, bisexual, transgender, or queer. . Non-compliant companies should justify their decision to stay on Nasdaq.

Nasdaq said in a statement Friday that its proposal is “a market-led solution that should simplify and standardize disclosure requirements to prevent the type of regulation from being beyond the critics.”

The senators wrote that board members should be elected on the basis of merit and ability to improve business performance, and that choosing them based on a “narrowly defined concept of diversity” could undermine that goal.

Some studies have shown a link between board diversity and better financial results.

“The benefits of greater diversity to stakeholders are increasingly apparent and include a wider variety of new perspectives, improved decision-making and oversight, and enhanced internal controls,” Nasdaq said in its proposal.

The SEC will decide on the proposal later this year, likely after Gary Gensler, President Biden’s choice to head the committee, is confirmed by the Senate.

At full capacity, the committee has five members, usually with the chairman and two others belonging to the same party as the US president.

The Senate Banking Commission, which oversees the SEC and will vote on Mr. Gensler’s nomination, is split equally between Democrats and Republicans. The chairman is Ohio Democrat Sherrod Brown.

A spokeswoman for Mr. Brown referred to a letter the Ohio lawmaker and 15 other Senate Democrats signed last month in which they welcomed the Nasdaq proposal. “For too long, public corporations have not done enough to ensure that the voices of women and communities of color are represented and heard in boardrooms across our country,” the Democrats wrote.

Banks, wealth managers and lawmakers in California have taken several steps to diversify the predominantly white and male boardrooms. Nasdaq’s move could have a greater impact because of its ability to set rules for nearly 3,000 companies listed on its exchange.

Companies that fail to meet the requirements can be dropped, although Nasdaq executives say this is unlikely. Companies could comply by explaining why they are not meeting Nasdaq’s diversity goal – for example, because they have a different philosophy regarding diversity. Only companies that fail to make such disclosures can be faced with a deletion procedure.

“We are going to make sure that every company has a very easy way to meet the standards,” Nasdaq Chief Executive Adena Friedman said in an interview last year.

Last year, Nasdaq found in a review that more than three-quarters of its listed companies would not have met the proposed requirements. About 80% or 90% of companies had at least one female director, but only about a quarter had a second director who would meet the diversity requirements, said one person familiar with the review, adding that it was difficult to measure due to inconsistencies in the way companies report such data.

Nasdaq’s main rival, the New York Stock Exchange, has established an advisory board to help its listed companies identify board candidates from a variety of groups. But the NYSE, owned by Intercontinental Exchange Inc.,

has not proposed a mandate.

Letters of comment submitted on the proposal show the partisan divisions on the issue, with Democrats like California Senator Dianne Feinstein backing it and conservative groups like the Heritage Foundation opposed.

Senate Republicans said Nasdaq’s alternative to meeting the quota requirement – disclosure that declares non-compliance – could still hurt businesses.

“Activist groups could use the information to set up costly print campaigns against companies with so-called non-universal boards,” said lawmakers, adding that such risks “could result in some private companies not going public at all.”

—Alexander Osipovich contributed to this article.

Write to Andrew Ackerman at [email protected]