On October 18, a panel of the Fifth U.S. Circuit Court of Appeals upheld a rule instituted by Nasdaq requiring open disclosures and a level of board diversity at the companies listed on the exchange. The ruling comes at a heated time for DEI efforts in the country, following on the heels of a judgment against affirmative action in higher education earlier this year. Here’s what to know about this case and what it means as part of the broader DEI landscape.
What Was the Case About?
Alliance for Fair Board Recruitment v. SEC was brought by groups led by conservative legal activist Edward Blum, whose activism was also behind the June ruling by the Supreme Court that struck down race-conscious affirmative action in college admissions. Similar and related groups have continued bringing lawsuits challenging DEI programs and rules in the business world.
The case hinged on a rule implemented by Nasdaq and approved by the Securities Exchange Commission (SEC) in 2021. It requires companies listed on the Nasdaq exchange to have at least one director who identifies as female, a member of an underrepresented racial or ethnic minority, and/or LGBTQ+ by the end of 2023 or publicly explain why they do not. By 2026, companies must have at least two such directors to satisfy the rule.
Although the groups bringing the lawsuit claimed it was unconstitutionally discriminatory and restrained free speech, the appeals court disagreed. Instead, the court ruled that the SEC had the authority to approve and enforce the rule. The SEC and Nasdaq argued that the rule is designed for transparency and disclosure over an area that could affect investor decisions. The Fifth Circuit agreed, writing that the “evidence is sufficient to support the SEC’s determination that regardless of whether investors think that board diversity is good or bad for companies, disclosure of information about board diversity would inform how investors behave in the market.”
Alliance for Fair Board Recruitment has said they will appeal the ruling.
What Does This Mean for DEI Efforts?
The ruling is a win for DEI amidst a chaotic and uncertain period following the Supreme Court’s affirmative action ruling this past summer. As we wrote at the time, one of the biggest concerns following that ruling was that similar legal cases might be on the horizon to expand challenges to DEI beyond just higher education and into the wider business world. This lawsuit indicates that those challenges are indeed coming, but also that those challenges are not guaranteed to succeed.
Board diversity remains a top priority for ongoing DEI efforts, as many initiatives in the past have – intentionally or unintentionally – focused more on entry- and mid-level roles and pipeline building rather than on leadership roles and board seats. Corporate boards remain a place where many groups are still underrepresented. Still, this ruling is an encouraging sign that information about efforts to diversify and inform will be available to investors.
At Blue Rock Search, we remain committed to identifying and placing diverse talent across various industries in leadership roles. Both anecdotal and formal research have proven, time and time again, how beneficial diversity, equity, inclusion, and belonging are for organizations.
We know the road ahead will not be smooth, and there will be challenges—legal and otherwise. Yet, the dialogues we engage in with leaders who uphold DEI principles fill us with resolute optimism, the same as this ruling supporting reasonable transparency for publicly traded companies.
By Ruben Moreno
About the Author
After a 25-year career in Corporate Human Resources and HR Executive Search, Ruben Moreno and his two partners co-founded Blue Rock Search based on a simple but ambitious vision of creating a firm that would “Change Lives and Organizations One Relationship at a Time.” Ruben leads the Blue Rock HR & Diversity Executive Search practice specializing in the identification, assessment, recruitment, and onboarding of Chief HR Officers and Chief Diversity Officers and their respective teams — inclusive of leaders in Talent Acquisition, Total Rewards, HRBP’s, Learning & OD, HR Technology, HR Operations, and HR Analytics. Ruben has helped place hundreds of HR Executives and built deep relationships within the CHRO community across multiple industry verticals. His clients consider him a trusted partner who takes the time to understand their business and add value beyond executive search.