The Problem with Nasdaq’s Diversity Quotas

Earlier this month, Nasdaq President and CEO Adena Friedman spearheaded an initiative to attempt to bring more diversity, equity, and inclusion to Wall Street. But she won’t be asking companies to become more diverse, according to her own shallow definition of the word: She’s demanding it.

Friedman’s proposal has been filed with the Securities and Exchange Commission, and we can only hope that the SEC will reject this attempt at bureaucratic bullying. Here’s what this would mean, in the words of Nasdaq’s statement

“If approved by the SEC, the new listing rules would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority1 or LGBTQ+. Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors.” 

Nasdaq defines an “underrepresented minority” as “an individual who self-identifies in one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or Two or More Races or Ethnicities.” 

These new listing rules are simultaneously restrictive and broad, lending themselves to various interpretations that all have one thing in common: a reductive vision of what “diversity” really means. What about intellectual diversity, diversity of background and experience, etc.? Under the new regulation, these don’t matter. 

What about companies that don’t comply? They can simply report that they chose board members they thought were most qualified for the job. That reporting still places an extra burden on them, though, and it could open those companies up to harassment and shaming from those who have accepted Friedman’s shallow definition of diversity. And there’s another problem.  

If the SEC does approve the new rule, any legal challenges from affected companies would likely have to target Nasdaq, the rule creator itself—and that case could be hard to make under existing precedent regarding affirmative action-type rules. To make things worse, it could be hard to rally support behind a legal objection when companies that don’t want to abide by the rule only need to explain their position. This make’s Nasdaq’s proposal potentially difficult to challenge, even though it still represents significant overreach. 

DEI mandates are becoming more common in both the public and private sector, and while they can be framed as initiatives “to champion inclusive growth and prosperity to power stronger economies,” as Friedman puts it, rules like Friedman’s really just saddle organizations with heavier burdens that don’t necessarily encourage the spirit of diversity. In fact, they may do the opposite.  

This type of push for phony diversity is also popular in the philanthropic sector, but there’s a better way to help those who may feel disenfranchised. There are plenty of philanthropic organizations working to increase the wellbeing of women, racial minorities, and other communities that may need unique help. As the Wall Street Journal’s Holman W. Jenkins, Jr., notes, these donors and organizations are working to empower people to make their own choices, which may include joining the board of a publicly traded company. That’s where the real change comes from—not from forcing companies to check off a few boxes.

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