Economy and Society: SEC approves Nasdaq board-diversity proposal

ESG Developments This Week

In Washington, D.C.

The SEC and diversity

On Friday, August 6, the Securities and Exchange Commission approved a plan set forth by the Nasdaq stock exchange to promote diversity among the companies it lists. Late last year, Nasdaq suggested that all listed companies would either have to have underrepresented minority groups on their boards of directorsor would have to explain why they are unable, at this time, to have such minority representationor they would be delisted. The Wall Street Journal explained the decision and its impact as follows:

“In an order released Friday afternoon, the Securities and Exchange Commission agreed to Nasdaq’s proposed rule changes. But in a sign of the political divisions over the proposal, the SEC’s two Republican commissioners registered their opposition, with one voting against the decision and the other giving only partial support.

Under the proposal, Nasdaq-listed companies would need to meet certain minimum targets for the gender and ethnic diversity of their boards or explain in writing why they aren’t doing so.

For most U.S. companies, the target would be to have at least one woman director, as well as a director who self-identifies as a racial minority or as lesbian, gay, bisexual, transgender or queer. Companies would also be required to disclose diversity statistics about their boards. Nasdaq found in a review conducted before submitting its plan late last year that more than three-quarters of its listed companies wouldn’t have met its proposed requirements.

“These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders,” SEC Chairman Gary Gensler said in a statement….

Critics of Nasdaq’s plan have warned that it could be challenged in court. Some conservative groups have argued that the exchange’s diversity rule, if implemented, would violate the U.S. Constitution and civil-rights laws.

“The proposed rule is racist and sexist in that it mandates that firms establish quotas and discriminate based on sex, skin color, ethnicity or sexual orientation,” David Burton, a senior fellow at the Heritage Foundation, told the SEC in a January letter….

Nasdaq argued that its proposed rule change would benefit investors. The exchange operator cited studies that found companies with more diverse boards tended to have stronger corporate governance and financial performance.”

Skeptics of ESG have argued that the movement’s interpretation of diversity is superficial and potentially violates the law as well as, in their view, best business practices. Proposals like Nasdaq’s, in their opinion, are damaging to business and capital markets over the long-term. For example, in his book The Dictatorship of Woke Capital, market commentator Stephen Soukup wrote the following:

“Many companies lack diversity in various aspects of their operating structure, from employees to man­agers to executives to directors. And many of these companies could benefit from a more diverse workforce or board. There is no question that employing people from diverse backgrounds, diverse experiences, diverse educational environments, etc. can be beneficial to a company. Varying histories and personal narratives contribute to varying thought patterns and problem-solving strategies. That much is largely inargu­able. Nevertheless, one of the most important aspects of such beneficial diversity is viewpoint diversity, which is to say diversity in approaches to life, to government, to politics, to business, and so on. Diversity in itself is a noble social goal, but diversity without viewpoint diversity tends to take many of the strictly business-related benefits of the diversity strategy off the table.”

Soukup continues, arguing that, in his view, superficial diversity programs imposed from the top-down as quasi-regulatory measures are, technically, in contravention of the law:

“The law in question—the Securities Exchange Act of 1934, as amended in 2009—requires listed companies to disclose and describe their diversity policies for the nomination of direc­tors in their annual proxy statements. In its final rule on the implementa­tion of the diversity question, the SEC specifically and intentionally did not define what diversity should mean, believing that such decisions were best left up to the listed companies. The SEC wrote that it had voted to:

require disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director. . . .We recognize that companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experi­ence, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin. We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate.”

Additionally, Soukup notes that up until just a few months ago, viewpoint diversity and the rejection of superficial diversity measures were considered standard good business practices by many in the capital markets:

“[Superficial diversity programs] are also contradicted by the recommendations for “Common Sense Governance Principles” that were authored and supported by some of the biggest names in American business in 2016. Among the “authors” of these principles were some of the biggest and most powerful players in the capital markets, including four who have already been mentioned in this book: Jamie Dimon of JP MorganChase, Larry Fink of BlackRock, Bill McNabb of Vanguard, and Ronald O’Hanley of State Street.60 Toss in the Oracle of Omaha himself, Warren Buffett, and the list of the authors of these common-sense principles reads like a Who’s Who of finance. And they defined “diversity” as follows: “Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions, including diversity of thought, is critical to a high-functioning board. Director candidates should be drawn from a rigorously diverse pool. . . .While no one size fits all—boards need to be large enough to allow for a variety of perspectives.””

When the SEC approved Nasdaq’s request, Republican-appointed Commissioners Hester Peirce and Elad Roisman voted against it, and Roisman specifically questioned the wisdom of involving a state actor:

“A serious concern is that the SEC—without any doubt, a state actor—may need to take future action in which the agency must consider disclosure of the racial, ethnic, gender, or LGTBQ+ status of individual directors. After all, the Commission is the adjudicating body for exchange delisting decisions. I think that the Approval Order should have included more analysis of whether the Proposal could implicate state action through the Commission’s downstream enforcement responsibilities, or why the Commission believes this is unlikely.”

On Wall Street and in the private sector

Details emerge about Buffet and BlackRock battle over ESG

Last week, CNBC disclosed the details of a battle between one of the world’s best-known investors and the world’s biggest asset management company, Warren Buffett and BlackRock, respectively. Buffett is known in the investment world for being an opponent of ESG; as a firm believer in the inviolability of shareholder rights. He is, as a result, also known as one of the few celebrated investors who stands in the way of ESG advocates. During this past shareholder meeting season, Buffet’s shareholder traditionalism brought him into direct conflict with BlackRock, among others:

“Berkshire Hathaway is one of the best-run public companies of the 20th century, with the financial performance to prove it. But as the 21st century brings a new generation of investors shifting from pure shareholder capitalism to the stakeholder capitalism aligned with environmental, social and governance mandates, is Warren Buffett’s company positioned to be an ESG leader or laggard? The answer isn’t so simple….

[B]y some operating business measures, Berkshire Hathaway — just by doing what it does — is delivering on ESG. Berkshire Hathaway Energy, its utility company, is the biggest producer of wind energy in the U.S. Buffett’s largest stock holding, Apple, is consistently ranked among the best ESG companies in the market. On diversity, Berkshire just elevated the first-ever female CEO to run a U.S. railroad company, at Burlington Northern. Its board includes a Black director (Ken Chenault), an Indian director (Ajit Jain) and four women….”


“None of the Berkshire attributes that can be judged as ESG favorable was a factor for BlackRock, the world’s largest asset manger [sic] and the biggest force in ESG investing, when it came time to vote in the just-passed proxy season. BlackRock voted against two Berkshire directors — the directors of its audit and governance committees. And it voted with shareholders on requirements that the company produce a climate report and its holding companies produce diversity reports. BlackRock singled out Berkshire Hathaway — a step it takes with only a select group of companies in its annual investment stewardship report — as a company that left it with no choice but to vote against management.

“Berkshire Hathaway has a long history of strong financial performance; however, we had concerns related to our observation that the company was not adapting to a world where sustainability considerations are becoming material to performance.”

Meanwhile, Tariq Fancy, the former head of sustainability for BlackRock continued his press tour, criticizing his former employer and arguing that the company and its CEO, Larry Fink, are engaged in what he describes as a deadly distraction:

“They misrepresent what they are doing. It is the idea that ESG factors can be included in all these processes to achieve better returns and better social outcomes at the same time. I felt that the value of ESG data for most investment processes is very limited.

It’s a potentially dangerous placebo, a lot of marketing that answers the inconvenient truth with useful fantasy. .. ..There is no proof of that [ESG investing] Beyond the burning time, I insist, I did anything.

If you believe in ESG treatises that responsible companies are better, you argue that the best we can do is not just say it and then invest money. It’s really about making sure the regulations are smarter. In particular, by punishing irresponsible behavior at a systematic level to far support ESG products….

There is no compelling reason to believe that it surpasses non-ESG strategies, so I don’t think it should be done. In addition, there is no impact on the actual environment or society….

To make matters worse, overall, you will help contribute to a huge social placebo and delay government action.”