The Corner

Economy & Business

NASDAQ against Shareholder Rights

A man wears a mask to prevent exposure to the coronavirus while walking past the New York Stock Exchange in New York City, March 17, 2020. (Lucas Jackson/Reuters)

The function of a stock exchange is to provide an orderly market for the trading of securities. As part of that, a stock exchange will generally insist that a listed company will agree to meet certain financial disclosure requirements designed to ensure that investors have sufficient information with which to make an informed decision on whether to buy, sell, avoid, or hold.

A stock exchange may also set rules (number of shareholders, market-makers, and so on) intended, so far as possible, to set the basis for a liquid market in the listed securities.

A stock exchange will also insist that a listed company complies with various governance rules.

So, for example, NASDAQ requires that:

[A listed] company’s board of directors is required to have a majority of independent directors.


[A listed] company is required to have an audit committee consisting solely of independent directors who also satisfy the requirements of SEC Rule 10A-3 and who can read and understand fundamental financial statements. The audit committee must have at least three members. One member of the audit committee must have experience that results in the individual’s financial sophistication.

And so on.

So far so good.

This, however, is not so good.

The Wall Street Journal:

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.

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. Nevertheless, 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.

The Journal referred to an action taken by Californian lawmakers.

CNN has explained what that was:

Starting next year, public companies headquartered in California will be legally required to diversify their boards racially, ethnically and in terms of sexual and gender identity.

The law, which was signed by California Governor Gavin Newsom on Wednesday, requires companies to have at least one board member from an underrepresented community by the end of 2021 and at least two or three — depending on the board’s size — by the end of 2022.

People from underrepresented communities are defined in the bill as anyone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.

“This new law represents a big step forward for racial equity… This is a win-win as ethnically diverse boards have shown to outperform those that lack diversity,” California State Assemblyman Chris Holden, a coauthor of the legislation, said in a statement.

The new law is likely to establish a new minimum threshold for corporate diversity across the country, much like the state’s 2018 law requiring a minimum number of women directors.

I don’t agree with this new law (AB 979), or, for that matter, its 2018 predecessor (SB 826), both of which seem (to me) to be unwarranted intrusions in the right of a company to run itself. As such, they represent direct attacks on the property rights of the shareholders in that company. Nevertheless these laws were approved after California went through the proper democratic processes, and they are subject to constitutional review. Those are the rules of this country’s democratic game. Fair enough.

What NASDAQ is proposing is something altogether different.


Senator Pat Toomey (R-PA) has since commented:

“A quasi-regulatory body like NASDAQ should not be creating and enforcing social policy in America. This is the realm of democratically-elected representatives who are accountable to the public. As Berkshire Hathaway CEO and Democrat Warren Buffet has said, corporate board members should be chosen by merit – not quotas. The responsibility of a corporate board is to oversee management and govern in the best interests of the people who hire them — shareholders. America’s corporate boardrooms are not the place for social engineering. Ultimately, these kinds of initiatives decrease the number of companies going public, reduce access to capital, and slow economic growth, which means fewer jobs and missed opportunities for retail investors.”


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