Diversity Mandates for Corporate Boardrooms

Joseph Klein, California’s mandate should be a wake-up call.

Crazy California is leading the progressive charge to mandate diversity on the boards of public companies. Its quota-driven edict should be a wake-up call for all Americans concerned about the progressive left’s government-run social justice agenda. Joe Biden and his team are no doubt taking notice as they pursue their own diversity policy goals. Biden is already boasting about the diversity of his economic policy team, by which he means diversity by identity group and not diversity of ideas.

Beginning in 2021, publicly held companies headquartered in California must have at least one director on their boards from a so-called “underrepresented community.” This means that the board of a California-headquartered corporation with shares listed on a major United States stock exchange will have to include “an individual 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 law builds on California’s already existing gender diversity law by considerably expanding the covered groups based on identity politics.

By the end of 2022, at least two directors for publicly held companies from the specified underrepresented communities must be appointed to their boards that have more than four but less than nine directors. There will have to be three directors from an underrepresented community for publicly held companies with nine or more directors. There are financial penalties for non-compliance.

“When we talk about racial justice, we talk about empowerment, we talk about power, and we need to talk about seats at the table,” California’s Democrat Governor Newsom said at an online signing ceremony for California’s first-in-the-nation corporate boardroom diversity law.

Judicial Watch President Tom Fitton had a very different take when explaining the basis of his group’s legal challenge to the law. “California’s government has a penchant for quotas that are brazenly unconstitutional,” Fitton said. “Gender quotas and now new quotas for numerous other groups for corporate boards are slaps in the face to the core American value of equal protection under the law.”

Here’s hoping that Judicial Watch is successful because, unfortunately, what happens in California does not always stay in California. On December 1st, for example, Nasdaq filed a proposal with the U.S. Securities and Exchange Commission (SEC) to adopt new listing rules that would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Moreover, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule.

“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” said Adena Friedman, President and CEO of Nasdaq. “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”​

House Democrats have introduced legislation along these same lines. With Joe Biden in the White House and a Democrat-controlled Senate as well as a Democrat-controlled House, we can expect such federal diversity mandates to become law. Even if the Republicans can hold on to the Senate, progressives are maneuvering for regulations and executive orders to achieve the same objective.

Defenders of a government-imposed social justice quota system for corporate boards claim that corporate board compositions should more closely resemble the demographic composition  of America today. Under this way of thinking, merit would become a much less important criterion for board selection than being able to check off a box on a government mandated diversity list.

If the objective is to make the corporate boards of America look more like America itself today, why stop with the categories the government social engineers have arbitrarily selected? Why not also require representation from self-identified religious minority groups as well as from those who do not identify with any religion? Why not mandate representation on corporate boards from different age groups? From different levels of education attainment? From the immigrant community (with no check on legal status)? The point is that selection for board membership based on government-defined identity groups is inherently arbitrary and runs counter to the notion of merit-based success in achieving the American Dream.

Defenders of a state-imposed social justice quota system for corporate boards will also have to grapple with how the self-identifying aspect of their board selection mandate would work. If, for example, Senator Elizabeth Warren decided to retire from the Senate and seek a seat on the boards of one or more publicly held California corporations, would she count as a self-identified Native American as well as a woman? Would a transgender woman on the board kill two birds with one stone, so to speak – satisfying the female representation requirement of California’s gender law as well as the transgender requirement of California’s new broadened diversity law? How would the government determine whether individuals who claim they fit into one of the “under-represented” groups are sincere or are doing so to game the system and get a seat on a board that carries with it some lucrative compensation?

Companies concerned about their brand and reputation, which ultimately translates into revenue, will have an economic incentive to open the door to more diverse board membership as their stakeholders – shareholders, customers and employees – become more diverse themselves. These stakeholders can express their frustrations with lack of diversity in the boardrooms through their actions. The marketplace, not government fiat, should rule.

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