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brendan mcdermid/Reuters

Nasdaq has, in its own words, embraced “the social justice movement.” The actual job of a stock exchange, however, is to ensure that trading is orderly and its listed companies follow standard governance rules. But doing that doesn’t earn the applause of the political left.

Progressive approval apparently means a lot to Nasdaq, which has officially proposed to its regulator—the Securities and Exchange Commission, newly chaired by

Gary Gensler

—to increase boardroom diversity through a “regulatory approach.” This proposal would require that Nasdaq-listed companies not only disclose the diversity characteristics of their existing boards, but also retain “at least one director who self-identifies as female,” and “at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, two or more races or ethnicities, or as LGBTQ+.” Noncompliant firms must publicly “explain”—in writing—why they don’t meet Nasdaq’s quotas.

Nasdaq’s discriminate-or-explain rule is unlawful, unconstitutional, and unsupported by the evidence. Quota systems like this unjustifiably classify people by arbitrary categories of sex and race in violation of equal-protection principles, and the “alternative” of explaining why a firm won’t discriminate compels speech in violation of the First Amendment. That is why we filed comments on behalf of the Project on Fair Representation and the Alliance for Fair Board Recruitment arguing that the SEC must disapprove the rule.

Under the Exchange Act, Nasdaq’s listing rules must be designed to achieve one of the lawful purposes of an exchange, such as preventing fraud or protecting investors. Aspirational statements of purpose are insufficient; Nasdaq needs to provide real evidence that its proposal is designed to further the purposes of an exchange. It doesn’t have the evidence.

Nasdaq claims board diversity protects investors because it might reduce the likelihood of “fraudulent and manipulative acts and practices” and increase shareholder value. But social scientists agree only that there is no agreement: Academic research hasn’t established a positive correlation between female board directors and firm performance. Even ambivalent studies that find a weak correlation aren’t evidence that having one or more women as directors improves shareholder value, which is what Nasdaq must prove. Nasdaq is also suspiciously silent about many other studies that undermine its argument. As Harvard professor

Jesse Fried

has pointed out, some of the best evidence suggests that pushing for increased diversity at the expense of other priorities hurts shareholder value.

Nasdaq doesn’t address these problems. Instead, it relies heavily on promotional materials from activists lacking even basic scientific or statistical rigor. Many of the materials it cites didn’t even ensure their results were statistically significant—the minimum measure that a study result didn’t arise by chance.

Together with University of Pennsylvania professor

Jonathan Klick,

our own examination of Nasdaq’s sources—and those it omits—shows that the effect of boardroom gender diversity on firm performance is inconclusive. Instead, Nasdaq cherry-picks the studies it reports, and then cherry-picks even among the results of those studies. Take its citation of a 2019 study as finding “a positive association between women on the audit committee with financial accounting expertise and the voluntary disclosure of forward-looking information.” Nasdaq doesn’t cite that same study’s ultimate conclusion: It is the financial expertise of committee members—not their sex—that improves reporting outcomes. Counter to Nasdaq’s narrative, the study concludes that “intrinsic characteristics linked to women” are “insufficient . . . to enhance voluntary disclosures.”

As sparse as the evidence is for its female director quota, Nasdaq has even less support for its catchall minority director mandate. Indeed, none of the sources Nasdaq cites to prove that board diversity enhances corporate governance even examine racial diversity. And not one of Nasdaq’s sources examined firms with LGBTQ board members.

Finally, Nasdaq’s proposal suffers from a stunning contradiction. Nasdaq admits it lacks data to determine the current levels of diversity of its own member companies’ boards. Hence, it is also proposing mandatory diversity disclosures for all its companies. But if Nasdaq believes current corporate diversity disclosures are “unreliable, unusable, and insufficient to inform investment and voting decisions,” as it says, it is unclear why Nasdaq also believes the academic data on board diversity shows diversity boosts corporate performance. If sophisticated investors and a stock exchange lack enough consistent data to measure boardroom diversity, wouldn’t the academics lack it, too?

The SEC has been down this cul-de-sac before. In Business Roundtable v. SEC (2011), an appellate federal court unanimously vacated the SEC’s proxy access rule for relying on, “at best,” mixed empirical evidence. The evidence here is far weaker (and totally absent, in the case of the minority director rule). The SEC should learn from the past and reject this proposal before the courts do it.

Mr. Gray has served as White House counsel and U.S. ambassador to the European Union. Mr. Berry has served as head of policy at the U.S. Department of Labor and a law clerk to Justice

Samuel Alito.

Wonder Land: More than 100 corporation leaders have done a Davos by laptop to vilify Republicans and validate their progressive credentials. Image: Getty Images/iStock Photo

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Appeared in the April 30, 2021, print edition.

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