The case against SEC board diversity mandates

The Securities and Exchange Commission (SEC) is pushing forward a series of bureaucratic mandates that would fundamentally limit public companies’ ability to operate in the best interests of shareholders and other stakeholders. These mandates also threaten to hurt the very people the rules claim to benefit.

Most recently, the SEC has supported the Nasdaq Board Diversity rule, which requires all Nasdaq-listed firms to have directors who are female, non-white, gay or transgender, or else explain why they do not. The rule, which the 5th Circuit Court of Appeals just declined to review, would also require companies to report board diversity statistics.

As our recent policy brief outlines, a large body of research evidence highlights that corporate board gender diversity mandates are a net negative to firms, shareholders and other stakeholders, including the very women whom these initiatives are supposedly designed to benefit.

Mandatory gender quotas ignore the substantial organic growth in the representation of women on boards. Catalyst data show that in 1995 the share of female CEOs, executive officers and directors of Fortune 500 firms were zero, 8.7 and 9.5 percent, respectively; these shares had risen to 6, 40 and 30 percent by 2022. Moreover, the number of S&P 500 firms led by female CEOs is expected to double by 2025, and organic growth, such as the 29.3 percent share of female directors in Russell 3000 firms, reflects the increasing supply of women directors, in part due to the increase in female MBA students and pipeline of qualified female directors with extensive business experience. Furthermore, the number of S&P 500 firms led by female CEOs is expected to double by 2025.

Mandatory board gender quotas often lead to the appointment of female directors with political or family connections. One striking example is French manufacturer of military aircraft and business jets Dassault Aviation’s appointment of Nicole Dassault, wife of the controlling shareholder. Other female board appointments in France spotlight the role of political and family connections, such as former First Lady Bernadette Chirac’s appointment to the board of luxury conglomerate Moët Hennessy Louis Vuitton, as well as the appointments of the wives of the former minister of Labor and former minister of Defense to the boards of luxury conglomerate Hermès and broadcaster Canal Plus. Recent evidence from India indicates a preference for celebrity female directors.

The sheer scale of the SEC-proposed overreaches will lead firms to reduce their exposure, with one probable response being that publicly traded firms will go private and delist from the U.S. market. Delisting is hugely detrimental to the public, as the average American will no longer have the ability to invest in these companies.

Evidence from Norway indicates that the board gender quota preceded the delisting of several firms from the Oslo Stock Exchange. Another study reviews evidence from Norway that the number of publicly listed companies decreased 23 percent and that Norwegian firm incorporations quadrupled, concluding that “firms most affected by the quota chose to avoid the law through a change in incorporation.”

Domestically, large institutional investors such as BlackRock have pushed for this type of bureaucratic social engineering in the U.S. marketplace because they stand to benefit the most from the likely strategic responses from affected companies. If American companies opt to mirror Norwegian firms, and privatize to avoid board gender quotas, institutional investors will have exclusive access to the companies worth investing. This shift will leave the general public at a significant disadvantage with respect to investment capabilities.

As the U.S. and many other economies around the world slide into an economic slowdown and recession, the priority of the SEC, the European Union and other governments should be to help firms succeed, rather than to introduce new obstacles in the form of counterproductive and stifling legislation and regulations.

David McIntosh is president of Club for Growth Foundation. Siri Terjesen is associate dean of research & external relations at Florida Atlantic University.