Nasdaq’s board diversity rule pits corporate elites against the Constitution
Too often, elite clubs have led to racial and religious discrimination in America. Think racially exclusive neighborhoods and country clubs, elementary schools that didn’t allow Catholics or Jews, and Ivy League colleges that once capped Jewish admissions and now do the same for Asian Americans. .
Why have these elite venues engaged in discrimination, in some cases long after it was banned? It wasn’t just prejudice. For these clubs, discrimination served to distinguish the elite from the rest of society.
Fortunately, the US Constitution and our civil rights laws prohibit this type of discrimination. But the lesson remains: it is usually the elite that feels powerful enough to abandon the American principle of equality.
Now a new elite club that wants to stand out from the rest of America: progressive activists and their corporate friends. They are highly motivated, ideologically and financially, to channel the immense wealth of corporate America towards their goals. And they decided that dictating the identity – racial, gender and otherwise – of corporate executives is a key means to that end.
Enter the new Nasdaq Stock Exchange Board Diversity Quota. Nasdaq rule requires its listed companies to have a certain number of racial or sexual minorities and women on their boards or publicly ‘explain’ in writing why they haven’t done so, raising a hand in contempt progressive. If a company fails to comply, the Nasdaq kicks it off.
Worse, the feds gave this regime its explicit blessing: the Securities and Exchange Commission approved the rule (and also rewrote its legal rationale). And with that blessing comes a curse: the Nasdaq is now legally obligatory to enforce its quota rule on companies, which the SEC must scrutinize.
This Nasdaq and government entanglement to impose a discriminatory rule violates the Constitution, including our guarantee of equal treatment under the law.
Many companies will feel the unconstitutional bite of the rule: When it proposed the rule, Nasdaq estimated that more than 75% of its listed companies failed to meet these arbitrary quotas.
It’s not just the big Fortune 500 companies that are listed on the Nasdaq. The exchange includes more than 3,000 companies of all shapes and sizes, from regional industrial and construction companies to the world’s largest conglomerates.
“Diversity” in a small-cap construction company should mean something different than in a global giant. But not according to the Nasdaq.
In other words, unless you are a foreign company. The Nasdaq gives them special treatment. Rather than meet the rule’s quota with racial or ethnic minorities, for example, foreign companies could add another woman to their board. So a Chinese company could install the wife of a Communist Party insider in place of, say, one of the Uyghurs held in labor camps.
Why impose this arbitrary, standardized requirement on a diverse group of American (but only American) companies? Because the Nasdaq has, in its own words, joined the “social justice movement.” He became dissatisfied with the “pace of progress” and decided to adopt a “regulatory approach” to constrain American companies.
Overall, the largest Nasdaq-listed companies support this requirement. Some have already embraced the “social justice movement”. But for many others, the rule brings overwhelming pressure to discriminate in pursuit of an awakened agenda. And that’s the point.
Being removed from a major scholarship is no small penalty. Write-off was once reserved for the worst cases of fraud, misrepresentation and insolvency. It now hangs over the head of every director or executive of an American business who holds the old-fashioned belief that Americans should be judged by their merit, not their race, gender, or sexual identity.
The executive order is an unequivocal message from the ruling ideological and financial elite to the rest of corporate America: play by the new rules of identity politics or get out.
The Nasdaq rule is another example of an elite club overstepping the law to impose its preferences on society through discrimination. Let’s hope the courts enforce the Constitution’s promise of equal treatment (as the Alliance for Fair Board Recruitment demanded in arguments I recently presented to the United States Court of Appeals for the fifth circuit). As usual, the best check on the abuse of power by elites is the law put in place by We the People.
Jonathan Berry is a partner at Boyden Gray & Associates, a law and strategy boutique in Washington, DC. He was chief of policy at the US Department of Labor and law clerk to Judge Samuel Alito.