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Efforts to mandate board diversity across corporate America have suffered a blow, as a federal appeals court overturned Nasdaq’s landmark board representation diversity rule.
The decision is a setback for diversity, equity, and inclusion (DEI) initiatives and raises questions about the future of DEI legislation in the US.
The ruling, delivered by the Fifth Circuit Court of Appeals in New Orleans, struck down the Securities and Exchange Commission’s (SEC) approval of Nasdaq’s 2021 board diversity requirements. The now-invalidated rule had mandated companies listed on the exchange to appoint at least one female board member and one board member identifying as either a racial minority or LGBTQ - or explain their absence.
In the 9-8 decision, Republican-appointed judges determined the rule conflicted with the Securities Exchange Act of 1934. “The diversity rules cannot be squared with the Exchange Act,” the court ruled.
It argued that the SEC had failed to prove the policy aligned with the act’s primary goal of protecting investors and promoting fair competition.
DEI proponents believe that the ruling overreached by interfering with Nasdaq’s private business decisions. “The SEC approved the rule because the reviewing scheme that Congress created doesn’t permit the SEC to displace Nasdaq’s private business judgment informed by investor behavior with agency policy priorities.”
DEI backlash continues
The decision highlights pockets of resistance to DEI policies in corporate governance, while the vast majority of Fortune 500 companies maintain support for them. Conservative voices have increasingly targeted corporate initiatives perceived as “woke,” with some companies scaling back diversity commitments under media pressure.
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Walmart, the nation’s largest retailer, announced last month that it would discontinue using the term “DEI” and phase out its $100 million Center for Racial Equity ahead of its planned 2025 closure. The company also ceased participating in the Human Rights Campaign’s corporate equality index and removed certain controversial products from its stores.
Other major firms, including Lowe’s, John Deere, and Tractor Supply, have made similar moves, retreating from DEI policies after criticism.
Implications for corporate America
The Nasdaq decision and the broader retreat from DEI initiatives signal a potential shift in how Wall Street approaches diversity. While some companies may view the case as a victory for shareholder interests and regulatory simplification, others warn it could deter progress on representation in leadership roles.
The ruling also raises challenges for HR departments tasked with maintaining inclusive practices amidst a changing regulatory and cultural landscape. Organizations will need to navigate certain complexities while balancing stakeholder expectations, compliance obligations, and employee engagement.
As DEI legislation faces renewed scrutiny, the future of diversity in corporate governance remains uncertain, with implications likely to reverberate throughout the Fortune 500 and beyond.
