The Securities and Exchange Commission (SEC) approved disclosure rules in 2021 that required most Nasdaq-listed companies to disclose information about board diversity. On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit struck down the rules in Alliance for Fair Board Recruitment v. SEC (No. 21-60626, 2024 WL 5078034).
It’s unlikely that the SEC, under presumptive incoming Chair Paul Atkins, will file an appeal with the U.S. Supreme Court. The Nasdaq also issued a statement, indicating it doesn’t intend to seek further review. Nonetheless, companies may voluntarily disclose diversity statistics to satisfy stakeholders’ interest in socially responsible business practices.
Diversity Disclosure Rules
Nasdaq Rules 5605(f) and 5606 were part of the stock market’s efforts to promote diversity and transparency about the composition of companies’ boards of directors. The rules required most Nasdaq-listed companies to report that they meet (or explain why they don’t meet) the following key requirements:
- At least one director who identifies as female, and
- At least one director who identifies as an underrepresented minority or LGBTQ+.
The rules define an underrepresented minority as someone who self-identifies as Black or African American, Hispanic or Latinx, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities. The rules also require companies to use a standardized matrix to ensure consistency in diversity disclosures.
The following phased timeline applied to these requirements:
| Disclosure requirement | Compliance deadline(s) |
| The company must provide a board diversity matrix. | December 31, 2022 |
| The company must have (or explain why it doesn’t have) at least one diverse director. | December 31, 2023 |
| The company must have (or explain why it doesn’t have) at least two diverse directors. | December 31, 2025, for Nasdaq Global Select Market and Global Market companies, or December 31, 2026, for Nasdaq Capital Market companies |
Different deadlines or exceptions may apply to foreign companies and smaller reporting companies. Many Nasdaq-listed companies have already complied with these rules in their public filings and/or on their corporate websites in accordance with the deadlines.
Federal court suspension
Shortly after the SEC approved the diversity disclosure rules in 2021, two not-for-profit organizations — the Alliance for Fair Board Recruitment and the National Center for Public Policy Research — sought review under the Administrative Procedure Act (APA). The nonprofits argued that the rules were unconstitutional violations of equal protection and free speech and that the SEC’s approval of the rules violated the APA and the Securities Exchange Act of 1934.
A three-judge panel of the Fifth Circuit affirmed the SEC’s approval of the rules in October 2023. However, the Fifth Circuit granted the nonprofits’ petition to review the case en banc. On December 11, 2024, the full court suspended the rules, finding they couldn’t properly “be squared” with the approval power granted to the SEC by federal securities laws.
The majority opinion states that Congress passed the Securities Exchange Act primarily to protect investors from “fraud, manipulation, speculation, and anticompetitive exchange behavior.” However, “the Act’s history makes clear that disclosure of any and all information about listed companies is not among them.” Moreover, the court called the requirement to explain why a company doesn’t have diversity on its board “a public-shaming penalty for a corporation’s failure to abide by the Government’s diversity requirements.”
Voluntary compliance
Although the Nasdaq’s diversity disclosure rules are currently suspended, many public and private companies may voluntarily decide to share such information with stakeholders. Moreover, Nasdaq-listed companies now have the freedom to do so using whatever format best suits their needs, rather than adhering to a standardized reporting matrix.
Investors, lenders, customers, employees and new recruits may want to know the extent to which boards and management teams are diverse in terms of race, ethnicity, gender and sexual identity. These groups recognize the quantitative and qualitative benefits that diversity offers.
In a corporate boardroom, diversity may enhance the audit committee’s ability to monitor financial reporting. Some academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable after poor financial performance. This concept may also extend to private companies: Management teams with people from diverse backgrounds and/or functional areas may expand the business’s abilities to respond to growth opportunities and potential threats.
On a broader level, getting input on major decisions from people from various backgrounds and experience levels may help enhance corporate value. Plus, providing an equitable and inclusive workplace is good corporate citizenship.
To disclose or not to disclose?
Diversity disclosures may be part of responsible corporate governance practices. Such transparency may help build goodwill with customers, investors and workers. Work with your financial and legal advisors to determine what fits your organization’s needs on this critical issue.
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