A Texas nonprofit wants a federal court to reverse a rule approved by the Securities and Exchange Commission that requires more than 3,000 companies on Nasdaq’s U.S. stock exchange list to meet board diversity quotas.
The Alliance for Fair Board Recruitment (AFFBR) filed a petition for review in the 5th U.S. Circuit Court of Appeals that argues the rule is discriminatory and the SEC‘s approval violates constitutional equal protection rights.
The rule requires the companies to meet race, gender and sexual orientation quotas within their boardrooms or publicly explain why they don’t. Those that do not comply risk being booted from the exchange list.
The appellate court’s decision could impact companies’ ability to tout leadership diversity and the trend of investors who want to consider such factors on top of quarterly earnings.
Conservative legal activist Edward Blum created AFFBR in 2018 and he says the diversity rule is “unfair and illegal.”
“We have dozens of members, some of whom have served on corporate boards and recognize that the chances of them continuing to serve on boards because they are white and male have been greatly diminished by this new quota rule,” Mr. Blum told Roll Call.
The AFFBR website states that its members’ identities are confidential and that it is dedicated to promoting the “recruitment of corporate board members without regard to race, ethnicity, sex and sexual identity.”
The rule at issue was approved last month and it specifically requires the companies to hire at least one board director who is female and at least one director who is an underrepresented minority or LGBTQ.
Nasdaq says the rule will “enhance board diversity disclosures and encourage the creation of more diverse boards through a market-led solution.”
Mr. Blum, however, said in a press release that the rule will not fulfill its promised benefits.
He cited a paper published in April by Harvard Law professor Jesse M. Fried, who said studies show “stock returns suffer when firms are pressured to hire new directors for diversity reasons.”
AFFBR is represented by attorneys from Boyden Gray and Associates, a law firm based in the District of Columbia.
The Washington Times on Thursday sent requests for comment to the SEC and Nasdaq.