Mandatory Disclosure Rules: Companies Today, Foundations Tomorrow?

Recently, the Nasdaq stock exchange proposed a new rule on board diversity, a rule my firm has challenged on behalf of the Alliance for Fair Board Recruitment. Under the Nasdaq rule, approved by the Securities and Exchange Commission, companies listed on the stock exchange must have at least one female director and one minority director — and disclose it. If a company does not meet these quotas, its representatives must explain why.

If federal courts sustain this dangerous approach, we should expect it to spread beyond business and to the philanthropic sector.

As any executive knows, a company’s public statements aren’t made in a vacuum. There are significant legal risks to making detailed public statements on controversial subjects like diversity. Companies making an “explanation” of their failure to have a sufficiently diverse board will expose themselves to public harassment campaigns, negative media coverage or even lawsuits. 

What’s more, the rule requires an explanation of a company’s failure to act on a given item — a potentially limitless concept. There would be nothing to stop future rules from requiring disclosures on whatever ideological crusade happens to be fashionable. 

It’s coercion masquerading as disclosure. If the collateral penalties of non-compliance with the “soft” diversity quota are great enough, it works just as well as a direct “hard” quota. In other words, it would circumvent legal obstacles to activists’ substantive goals.

The origin story is simple. Activists want private entities to adhere to certain policy goals, such as increasing racial diversity on boards or reducing greenhouse gas emissions, but the law usually forbids them to force private actors into compliance directly. 

For example, California trial courts recently ruled the state could not mandate minimum numbers of “diverse” members of public company boards. The court said these mandatory quotas violated equal protection. 

Anticipating roadblocks to hard quotas, activists are now taking a new approach that focuses on compelled disclosure. Though superficially different, this new tack aims to achieve the same goals in substance. On this approach, private organizations would be forced to publicly announce their attainment of goals set by proponents of these rules or explain why they failed to. 

Combine this boundless potential for future rules with the costs of non-compliance and the new playbook is clear: state a policy goal and require targeted entities to “explain” why they don’t meet it. 

Today, it may be board diversity, but tomorrow it’ll be something else. And today it may be publicly traded companies, but tomorrow it’s private foundations. 

The weaponization of disclosure must be checked today, not tomorrow. And that’s one big reason the current legal challenge to Nasdaq’s rule is important. Compelled explanation is not a legitimate workaround to the law. As I argued for the Alliance for Fair Board Recruitment last week against Nasdaq and the SEC, racial quotas are unlawful, and it is unlawful to push them by the subterfuge of mandatory disclosure. 

Race and sex quotas belong in the dust bin of history. We can’t let activists dig them out, not even with the tool of disclosure.

Jonathan Berry is a partner at Boyden Gray & Associates, a law and strategy boutique in Washington, D.C. He has previously served as head of policy at the U.S. Department of Labor and as a law clerk to Justice Samuel Alito.

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