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A US appeals court has thrown out rules requiring Nasdaq-listed companies to have board members meeting certain racial or gender diversity criteria or explain why they did not.
The 9-8 decision from the Fifth Circuit Court of Appeals on Tuesday deals another blow to the diversity, equity and inclusion movement in corporate America. The appeals court’s majority found that Nasdaq’s diversity rules, which were approved by the Securities and Exchange Commission, could not be squared with the legal framework under which the securities regulator operates.
The case stemmed from comply-or-explain rules proposed by Nasdaq in 2020. The biggest companies listed on the world’s second-largest stock exchange were told they should have two diverse directors: one who self-identifies as female and one who identifies as an under-represented racial or ethnic minority, sexual orientation or gender identity. If they did not have enough diverse board members, companies would have to explain why.
The standards were devised shortly after George Floyd’s murder by a police officer in Minneapolis sparked a racial reckoning in corporate America and were positioned as a step towards improving inclusivity in top boardrooms. Nasdaq’s proposal was supported by asset managers and some companies as well.
The SEC approved the rules in 2021 in a 3-2 decision. Regulated exchanges operate under the oversight of the SEC, which must sign off on any rule changes.
A group of conservative organisations challenged the rules in court. The Fifth Circuit sided with the challengers, writing in its decision that nothing in the Securities Exchange Acts of 1934 and 1975 — which establish the SEC and its legal framework — appeared to authorise such a disclosure.
“There may be other purposes buried in the exchange act’s voluminous text, but our review of the act’s history makes clear that disclosure of any and all information about listed companies is not among them,” US circuit judge Andrew Oldham wrote for the majority.
Dissenting justices said that the SEC’s role in approving or disapproving rules for a private exchange was more limited than the majority assumed.
“Congress created a unique, limited role for the SEC that didn’t permit it to reach a different conclusion here, regardless of whatever good faith disagreement might exist in policy debates about disclosure of corporate board leadership composition,” US circuit judge Stephen Higginson wrote for the dissenters.
The case comes amid a rapid reversal on diversity, equity and inclusion initiatives by corporate America this year ahead of Donald Trump’s return to the White House. Big companies including Ford, Boeing and Walmart have rolled back some of their commitments to racial and gender equity this year.
Some companies have deprioritised diversity on their corporate boards. The number of new directors classified as people of colour who were appointed to S&P 500 boards dropped to 24 per cent in 2024, down from 34 per cent in 2022, according to a December 5 report from headhunters Egon Zehnder.
The decision will also be closely watched by Nasdaq’s rival bourses. Plans for a new Texas-based exchange, launched earlier this year, emphasised “predictability” — seen as a riposte to the furore caused by Nasdaq’s diversity rules.
Neither Nasdaq nor the SEC immediately responded to a request for comment.
