Nasdaq's Decision: The Woke Exchange (Continued)

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Late last year, I wrote a brief piece prompted by this Wall Street Journal report on a proposal by Nasdaq:

Nasdaq Inc. is pushing to require the thousands of companies listed on its stock exchange to include women, racial minorities and LGBT individuals on their boards, in what would be one of the most forceful moves yet to bring greater diversity to U.S. corporations.

The exchange operator filed a proposal with the Securities and Exchange Commission on Tuesday that would require listed companies to have at least one woman on their boards, in addition to a director who is a racial minority or one who self-identifies as lesbian, gay, bisexual, transgender or queer. Companies that don’t meet the standard would be required to justify their decision to remain listed on Nasdaq.

Banks, asset managers and lawmakers in California have taken various steps to diversify the predominantly white and male boardrooms of American corporations. Nasdaq’s move could have greater impact because of its ability to set rules for the nearly 3,000 corporations listed on its exchange….

This did not strike me as a good idea. A company’s board is elected by the firm’s shareholders, or, to put it another way, its owners. That’s their right, and they should be left to get on with it without interference.

That Nasdaq believed that it was appropriate for it to intervene in this way is a reflection of the way that the principle of shareholder primacy is being eroded in an era in which stakeholder capitalism, an insidious and increasingly influential ideology in its own right, has become intertwined with the peculiarly aggressive variant of “socially responsible” investing (SRI) known as ESG, under which companies are benchmarked against various environmental (the ‘E’), social (‘S’) and, more reasonably, governance (‘G’) benchmarks.

That said, I observed that:

Nasdaq, a private institution, is, of course, entitled to set its own rules, just as (to quote the Journal) “banks and asset managers” are entitled to try to push their clients or portfolio companies to change their ways.


it is hard to miss the mission creep that is currently occurring across a wide range of institutions, some private, some parastatal (take a look at the effort central banks are increasingly making with regard to climate change) to impose different aspects of a “progressive” agenda on private companies without the bother of going through the usual democratic mechanisms. In effect, they are, in different ways, gnawing away at the right of shareholders to have the last word on the way that their companies are run.

Traditionally, denying that last word to shareholders has been justified on prudential grounds directly related to the core function of the body that is setting the rules — it makes clear sense, for example, for Nasdaq to insist that listed companies satisfy certain disclosure requirements. It is, however, an entirely different matter when the reason for restricting the ultimate shareholder right of decision is, one way or another, political.

If shareholders’ rights are to be eroded on political grounds, then, in a democracy, the decision to erode those rights should be taken by a democratically elected body. In a corporatist (or other even more authoritarian) regime matters would be arranged differently, but I would hope that the U.S. has not yet reached that point…

I returned to Nasdaq’s plans a month or so later in another piece, in which, perhaps unkindly, I noted that it was also turning to SRI as a source of income.

As I noted:

One entertaining feature of SRI — at least for cynics — is the rich ecosystem that it has nourished: consultants here, new funds there, and fees scattered all over the place.

Nasdaq had no intention of missing out in this bonanza. In an interview earlier this year, its CEO explained:

Our investor-relations business, for instance, is well established among corporate clients. They know they have to establish great investor-relations capabilities, and they know we have a lot of data and analytics that can help them target investors the right way. Many were less sure, however, that they would need advisory services around ESG. Still, we launched an ESG advisory practice in 2019. We took a risk in launching it ahead of the demand curve, but that business is now growing.

Fast forward to this month.

The Financial Times:

Nasdaq-listed companies will be required to have diverse boards after a divided Securities and Exchange Commission approved the US stock exchange’s unprecedented proposal.

The SEC on Friday signed off on Nasdaq’s proposed listing rules, which would require companies to disclose consistent diversity statistics for board directors and have two diverse directors — including one who identifies as female and one who identifies as an under-represented minority or lesbian, gay, bisexual, transgender or queer.

If companies do not meet that quota, they will have to explain why…

It’s a mark of the degree to which this was a political decision that the SEC’s two Republican commissioners dissented from it.


Republican senators had called on the SEC to reject Nasdaq’s proposal. “All of the risks associated with Nasdaq’s proposal could cause some private corporations to avoid going public at all,” Pat Toomey, the Republican senator from Pennsylvania, and 11 other conservatives said in a February letter to the agency. “Nasdaq appears to be motivated by an inappropriate desire to influence social policy.”

Those senators were right. It is not for Nasdaq to be pursuing a political agenda. That the SEC has signed off on this move is just another sign of how politicized — and thus degraded — the agency has already become under its new chairman, Gary Gensler.

The FT:

Nasdaq’s new rules codify what large asset managers and proxy advisers have been demanding from companies in recent years, said Betty Huber, an attorney at law firm Davis Polk & Wardwell.

Yes and no, I’d say. Some of them might indeed have been “demanding” just this, but if they had been, they weren’t demanding very hard: There has been nothing to stop shareholders voting for suitably diverse boards, and, if enough fellow shareholders felt likewise, getting their way.

Perhaps these shareholders didn’t have the votes to get their way — or perhaps they just didn’t care. Not that much.

I will note, once again perhaps unkindly, that law firms will do quite nicely out of helping their corporate clients navigate yet another set of rules.

The ecosystem is what it is.

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