Nasdaq’s Decision: The Woke Exchange (Continued)

At the end of last year I wrote a short piece about this Wall Street Journal report at the suggestion of Nasdaq:

NasdaqInc.urges to demand the thousands of companieslisted on the stock exchange to include women, racial minorities and LGBT individuals on their boards, in what would be one of the most powerful steps yet to bring more diversity to American companies.

The stock operator filed a proposal with the Securities and Exchange Commission on Tuesday that would require publicly traded companies to have at least one woman on their boards, in addition to a director who is a racial minority or someone who self-identifies as lesbian, gay, bisexual, transgender. or queer. Companies that do not meet the standard should justify their decision to remain listed on the Nasdaq.

Banks, asset managers and lawmakers in California have taken several steps to diversify the predominantly white and male boardrooms of American companies. Nasdaq’s move could have a bigger impact due to its ability to set rules for the nearly 3,000 companies listed on the exchange…

This didn’t seem like a good idea to me. The board of a company is elected by the shareholders of the company, or, to put it another way, the owners. That is their right, and they should be left to go through with it without interference.

That Nasdaq felt it was appropriate to intervene in this way reflects how the principle of shareholder primacy is being eroded in an era where stakeholder capitalism, an insidious and increasingly influential ideology in its own right, has become entwined. with the particularly aggressive variant of “socially responsible” investing (SRI), known as ESG, which compares companies to various environmental (the “E”), social (“S”) and, more reasonably, governance (“G” ) benchmarks.

That said, I noticed that:

Nasdaq, a private institution, naturally has the right to set its own rules, just as (tolog), banks and asset managers have the right to try to get their clients or portfolio companies to change the way they work.

But…

it’s hard to miss the mission creep that is currently taking place across a wide range of institutions, some private, some parastatal (look at the increasing efforts central banks are making on climate change) to pick up different aspects of a progressive agenda. to private companies without bothering to go through the usual democratic mechanisms. In fact, they gnaw at shareholders’ right to have the final say on how their companies are run in various ways.

Traditionally, it makes sense for Nasdaq to insist that publicly traded companies meet certain disclosure requirements. However, it is a very different matter when the reason for limiting shareholders’ ultimate decision-making power is somehow political.

If shareholder rights are to be eroded on political grounds, then in a democracy the decision to affect those rights must be taken by a democratically elected body. In a corporatist (or other even more authoritarian) regime things would be different, but I hope the US hasn’t reached that point yet

I came back to Nasdaq’s plans about a month later in another piece, noting, perhaps unkindly, that it also went to SRI as a source of revenue.

As I noted:

An entertaining feature of SRI, at least for cynics, is the rich ecosystem it has nurtured: consultants here, new funds there, and fees scattered everywhere.

Nasdaq wasn’t going to miss this bonanza.In an interview earlier this year, the CEO explained:

For example, our investor relations business is well established among corporate clients. They know they need to build great investor relationship opportunities, and they know that we have a lot of data and analytics to help them target investors appropriately. However, many were less certain that they would need ESG advisory services. Nevertheless, we launched an ESG advisory practice in 2019. We took a risk of launching it before the demand curve, but that business is growing now.

Fast forward to this month.

The Financial times:

Nasdaq-listed companies will have to face different boards after a divided Securities and Exchange Commission approves the unprecedented proposal from the US exchanges.

The SEC signed on Friday the listing rules proposed by Nasdaq, which would require companies to disclose consistent diversity metrics for board members and have two different directors, including one who identifies as female and one who identifies as an underrepresented minority or lesbian, gay, bisexual, transgender or queer.

If companies don’t meet that quota, they have to explain why

It’s a sign of the extent to which this was a political decision that the SEC’s two Republican commissioners disagreed.

And:

Republican senators had called on the SEC to reject Nasdaq’s proposal. All the risks associated with Nasdaq’s proposal could lead to some private companies not going public at all, Pennsylvania Republican senator Pat Toomey and 11 other conservatives said in a February letter to the agency. Nasdaq appears to be motivated by an inappropriate desire to influence social policy.

Those senators were right. It is not up to Nasdaq to pursue a political agenda. That the SEC has signed on to this move is just another sign of how politicized and thus degraded the agency has already become under its new chairman, Gary Gensler.

The FT:

Nasdaq’s new rules codify what major wealth managers and proxy advisors have been demanding from companies in recent years, said Betty Huber, an attorney at law firm Davis Polk & Wardwell.

Yes and no, I would say. Indeed, some of them would have demanded exactly this, but if they had, they would not have demanded very hard: there is nothing to prevent shareholders from voting for sufficiently diverse boards, and, if enough fellow shareholders thought about getting their way.

Maybe these shareholders didn’t have the votes to have their way or maybe they just didn’t care. Not That a lot of.

I will note, again perhaps unkindly, that law firms would do well to help their corporate clients navigate another set of rules.

The ecosystem is what it is.