Affirmative action opponents are not just targeting colleges in the battle against racial and gender preferences in law.
Corporations are emerging as another front in the battle as a federal appeals court Monday heard a challenge to the tech-heavy NASDAQ stock exchange’s mandate that its largest listed companies must meet diversity standards on their corporate boards.
The challenge is advancing as the Supreme Court prepares to hear arguments this fall over the role of race in admissions decisions for Harvard and the University of North Carolina, one of the most anticipated cases of the upcoming term.
The “Board Diversity Proposal” requires large NASDAQ-listed corporations to maintain and disclose a certain number of minority members — or else be delisted as a result. Among the companies listed on the exchange are such corporate giants as Apple, Meta and Tesla.
The rule, proposed in February of 2021, requires NASDAQ-traded corporations, with exceptions for small or foreign firms, to have — or explain why they don’t have — at least one director who identifies as a woman and one director of a minority race or from part of the LGBTQ community.
The National Center for Public Policy Research, a conservative think tank, challenged the rule, arguing it runs afoul of the Constitution because it promotes discrimination and effectively forces corporations to “speak” in violation of the First Amendment by disclosing personal details of board members.
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“The board diversity rules compel speech in violation of the First Amendment,” Margaret Little, an attorney representing the National Center for Public Policy, told the 5th U.S. Circuit Court of Appeals during oral arguments on Monday.
“It is threatening to delist people who do not speak,” she added.
The U.S. Securities and Exchange Commission approved the NASDAQ diversity rule in August 2021, and a lawyer representing the government told the three-judge panel Monday that NASDAQ is a private entity and can create its own membership rules based on demand from its investors.
Tracy Hardin, representing the SEC, insisted it wasn’t the government acting in an unlawful manner regarding race, gender or speech.
“NASDAQ is a private, for profit industry,” she said. “It is simply not the same as a government agency.”
“This is a private initiative initiated by NASDAQ,” she added.
But opponents of the mandates say NASDAQ has no business imposing them and the SEC had no statutory authority to approve them.
“It is unconscionable to see discrimination so blatantly put on display by requiring these companies to hire employees based solely on race, sex and sexuality,” Texas Republican Attorney General Ken Paxton said in an amicus brief to the Fifth Circuit Court of Appeals. “The SEC’s quotas violate the Constitution and federal civil rights laws by requiring that companies overlook a person’s relevant qualifications under the guise of promoting diversity.”
A spokesperson from NASDAQ, which ranks second behind only the New York Stock Exchange in the market capitalization of the companies on its trading board, declined to comment on the lawsuit.
The case is National Center for Public Policy Research v. SEC, and it’s pending before three judges at the 5th Circuit, all appointed by Democratic presidents.
It’s not the only legal battle involving racial and gender quotas in the business sector before the courts this year. California courts have recently stuck down two similar state laws — one related to requiring women representation and another for minorities on corporate boards.
A 2018 state law mandated that all publicly held corporations headquartered in the state — roughly an eighth of all U.S. firms — had to have at least one woman director by the end of 2019. By the end of 2021, the statute required boards with five members to include at least two women, and at least three women on boards with six or more directors.
Supporters of the mandates point to scholarly studies in the U.S. and Europe that they say back the argument that boards with greater racial and gender diversity return more value to shareholders than those without such diversity. The average share of women on boards of California companies went from 12.9% in 2016 to 23.2% in 2020 after the laws were passed.
The NASDAQ challenge was argued just about two months before the Supreme Court will hear arguments against affirmative action policies at Harvard and the University of North Carolina, challenging race as a factor when considering a student’s application for admissions.
Those are slated for Oct. 31, and a ruling from the high court is expected by June 2023.