Mintz on Air: Predictions and Practical Policies- Mandatory Metrics

In the latest episode of the Mintz on Air: Predictions and Practical Policies Podcast, ESG Co-chair Jen Rubin hosts an in-depth discussion about mandatory diversity metrics and their relevance following the Fifth Circuit’s recent decision to vacate Nasdaq’s board diversity rules. This episode is part of a series of conversations aimed at helping employers navigate workplace changes under the upcoming Trump administration.

Jen is joined by Member Melanie Levy, and together they explore the rules and the court’s recent decision, covering topics such as:

• The origin and purpose of Nasdaq's diversity disclosure rules
• The impact of the Fifth Circuit’s ruling on diversity reporting requirements
• Why some companies may continue to voluntarily disclose diversity information
• The strategic and fiduciary considerations for boards in pursuing diversity as a business imperative
• Practical advice for boards aiming to align diversity initiatives with investor and stakeholder expectations

Listen to learn how corporate boards can adapt to evolving diversity reporting requirements and make informed decisions to benefit their organizations.

Mintz on Air: Predictions and Practical Policies- Mandatory Diversity Metrics and their Relevance Following Recent Legal Decisions Transcript

Jen Rubin (JR): Welcome to Mintz on Air, episode four of the Predictions and Practical Policies podcast. Today's topic is mandatory metrics. Should Nasdaq listed companies continue to report diversity data despite the recent decision striking down the show or tell rules? I'm Jen Rubin, Co-chair of the Mintz ESG practice and a bicoastal employment lawyer representing management and executives and advising corporate boards on governance and ESG matters.

If you've been following our Mintz on Air podcast, and I certainly hope you are, you know that we've been discussing some of the developments we expect under the second Trump administration. And as part of that discussion, we are providing our listeners with some practical suggestions about what to do to prepare for the change in administration and what we think is to come in the legal environment as we move forward.

If you're interested in accessing more of our content, please visit us at Mintz.com. That's M-I-N-T-Z.com.

So today I'm really pleased to be joined by my partner Melanie Levy, a capital markets practitioner with the Mintz Corporate Practice. Melanie counsels public and private companies regarding initial public offerings and other capital market transactions. She provides advice concerning mergers, corporate governance and public company reporting and like me, has followed with keen interest some of the diversity related regulations that are applicable to public companies.

Welcome, Melanie, and thanks for joining the Mintz on Air program.

Melanie Ruthrauff Levy (ML): Thank you very much for having me.

Nasdaq Diversity Rules Overturned

JR: Our topic today is mandatory metrics, reporting diversity data concerning board members. And Melanie, I know you're familiar with the recent en banc decision that the Fifth Circuit issued in mid-December. That decision, in Alliance for Fair Board Recruitment versus the SEC, struck down some regulations that the SEC had approved for Nasdaq listed companies. First, can you briefly explain what those regulations required and tell us the impact of the court's decision going forward?

ML: To take the first question, what the regulations required are really what the regulations did, I would sort of divide into three buckets. Number one, the regulations required companies to ask their board members to self-identify their diversity characteristics, and that could be gender, orientation, national origin. So the first part of that regulation was really ask your board members how they would identify.

And it's important to remember, board members didn't have to tell you. They could decline. And then when a board member identified was to produce a matrix in your proxy statement or on the Nasdaq website that followed the Nasdaq form of matrix disclosing those diversity characteristics for board members. So that was the first part of the rule. The second part of the rule was if a company did not have at least a certain number of diverse board members, it was required to explain why not.

So again, this was not a mandate. It was what is called sort of a disclose or explain regime, where if a board did not have a certain number of diverse members and the number varied, whether you were a small board or a larger board, explain why. And the final thing that Nasdaq did based on a lot of feedback was, okay, companies now have to have diverse board members. So, Nasdaq created sort of a recruiting service that was designed to help connect existing boards with diverse candidates. So those were sort of the three things that the Nasdaq rules said.

JR: So now I understand, you know, the show or tell aspect. Disclose or explain. And then of course, there was that, service that they were providing to help source, hopefully individuals who are skilled and have the right capabilities to serve on corporate boards. But perhaps coming from underrepresented communities or people that traditionally wouldn't be considered for board memberships. So the decision struck down those regulations, right?

ML: Right.

JR: So, what is the impact of that ruling in that Fifth Circuit decision?

ML: This this is a big question, but I think in order to really answer the question, we need to go back. We need to go back to when this rule was proposed and when this rule was thought about. And I want to remind readers and listeners, because this is very important, that Nasdaq created this rule as a result of public pressure.

You may recall that in 2019, 2018, the early 2020s, that there was a lot of pressure from not Nasdaq and not necessarily the SEC, although there was some there, but there was a lot of pressure from investor groups, groups that were investing in companies or groups that were advising those investors on their portfolio for more diverse board membership and probably one of the most important aspects of the Nasdaq rule with respect to those efforts was this idea of having standardized disclosure.

JR: And what do you mean by standardized disclosure?

ML: Standardized disclosure, the matrix was an agreed upon form that had to appear in one of two places. I want you to kind of go on a journey with me to explain to you why this was really important. So Jen, I want you to imagine that it's years ago when you just graduated from college.

You're starting work at an investment portfolio management fund, and you go in on your first day ready to do a great job. And your first assignment is, I want you to look at these 300 companies and tell me the diversity characteristics of their board so we can make reasoned investment decisions about whether or not those diversity characteristics in the diversity initiatives of those boards align with our client's investment desires and goals.

JR: And how would I do that?

ML: I don't know! I think that's the question. When you looked at what went into the disclosure matrix and why it was there is imagine you’re Jen and you want to do a great job. Are you going to call all those 300 people?

JR: Yeah, I don’t think so.

ML: Are you going to be able to look at pictures on websites? That's questionable and possibly not an appropriate way to determine a person's diversity characteristics. It created a huge issue where these investors wanted simply the ability to track. And that is standardize disclosure. And to be frank, that's not a new idea.

If you look at a person or a company's 10-K or 10-Q, those are examples of standardized disclosures. We don't permit publicly traded companies to enter a stage and provide a narrative soliloquy of how their financial statements and other things are going. No, it's divided by item. You can include your financial statements, but you also included a management's discussion and analysis of those.

These follow certain forms. And the reason is not because, quite frankly, those forms are enjoyable to read in that particular order, but rather because in having a standardized disclosure, the information is accessible to readers who are evaluating large numbers of companies. Because, let's face it, most investors aren't going to make an investment in one company's stock. They don’t. They invest in a bunch.

Investor Needs vs Regulations

JR: Let me just stop and ask you this question about that, though. So, they want to create the standardized disclosure; to make it easier for everybody and I would assume level the playing field for the investing public. But according to the SEC decision or the Fair Alliance decision, this is not important in terms of what investors really want to know about companies.

In other words, the court basically said the SEC has overstepped because this is not something that really goes to regulations that are important to the investing public. It's not what these regulations were intended to do. So how do you marry these two concepts?

ML: I'll be honest with you, I can't. I don't know how. I can't. So I represent a number of public companies, I represent public companies who have discussions with ISS who have what we call stakeholder discussions. And these investors are asking questions about diversity. And for some investors and again, every company is different. Some investors may not care about it, but institutional investors have expressed a desire for this disclosure. And so I can't. I can't reconcile it.

It's odd to me after having sat in on conversations where stockholders asked this very question before there were even rules. I don't understand. I feel like I'm in an alternate reality. To me, that is not an accurate description. Now, it may not be relevant for every company and every investor. That's certainly true. But I think it was relevant to a large number. And it probably and here's the kicker, is still relevant to many investors.

JR: Before we get to that, because I do want to ask about that. Isn't it a fact that there already is a disclosure requirement with respect to the gov non-process, with respect to the SEC? So, does that regulation continue in effect?

ML: Yes. There's item 407 of regulation S-K. And sorry for using a bunch of numbers and letters to those of you who aren't lawyers, but basically that one does describe if a board has a policy with respect to diversity to describe it, and you could describe it narratively, but it goes back to the assignment we give the fresh Jen Rubin right out of college, are you now going to read those 300 narratives to determine whether what a company says is what a company is actually doing, and without the standardized disclosure, that's a very difficult exercise.

I don't envy those who have to do it and I think what we might see, and this is just a guess, but I think what we might actually see is some advisory services, some pension fund managers, some major stakeholders may go back and say, okay, well, perhaps this isn't a Nasdaq rule that you put this in your proxy statements, but I would not be surprised if in the next year or two years, we have new positions from these advisory services that say, we want you to include the matrix. And if you don't include the matrix, we're going to penalize you with respect to what's known as an ISS score. And an ISS score is a way without going too far into it, for pension fund managers and people to quickly evaluate the characteristics of companies that are potential investments or existing investments.

Balancing Voluntary Disclosures, Legal Risks, and Investor Expectations

JR: Let me ask you this question because this is something I’m very interested in. This particular court, The Fifth Circuit, has stricken these regulations; they are no longer in effect. What, if anything, either prevents or suggests that a company should disclose or shouldn't disclose this information? In other words, are there good reasons for companies to voluntarily disclose this information, or can companies get into legal trouble for voluntarily disclosing this information?

ML: Well, I think the one thing that is unfortunate is there's always a debate when you put something in a registration statement or a proxy statement about whether or not it's filed such that you have liability for it. So, I would think number one and this is the advice I would give all my clients, if you're going to put something in a proxy statement or a registration statement or even say something publicly, it needs to be true.

I think as long as companies continue to allow persons to voluntarily disclose this information, I defer to you from an employment perspective, if you could make that mandatory, I suspect that might be challenging. But as long as you allow persons to voluntarily disclose this information, that you could continue to disclose it. And I think you could continue to disclose it on your website. Or perhaps if you wished, in your proxy statement, in a way that's going to be easy for an advisory service or someone evaluating a large number of investments to find.

JR: Toward that point, I want to remind our listeners that, the EEO regulations, which are still in effect and for those of you interested in those issues, go back and listen to my podcast with Corbin Carter about these issues, do require certain employers to disclose information about the racial and gender and other makeup of their workforce, to the federal government.

But again, a reminder, a director of a board is not an employee of the company. So, the typical regulations governing the employment relationship do not apply to a board member, typically. There's some exceptions to that around the edges. But with respect to these issues, in terms of voluntary disclosure, that they do not have the same type of sensitivities that may surround some of the employment relationships.

I totally get you want to make sure if you're going to disclose it, that it's accurate and certainly is part of your gov non-process if you are using these disclosures or these issues are important to you to make sure that you are following those processes. Is there any other advice, Melanie, you can give to gov/nom committees, corporate boards, who are interested in making sure that they're complying with these regulations or they're otherwise, giving themselves what I would call competitive advantage by making sure their boards are representative of the communities they serve? Or are there other things that boards can do to promote diversity in the boardroom?

ML: It goes back to something or a concept that I think I learned from my parents is sometimes you do the right thing, even if there's not a rule telling you what the right thing is. And again, boards get to make their own decisions. You know, we don't preach morality. A board gets to make its own decision about what it values and what it finds value in its business. And it is protected by Delaware law under the business judgment rule in that way. My advice, and what I would do if I were a board member, and I believed that having a diverse board and having diverse representation on that board that represented the communities that I served, I would follow the rule that has been struck down. I'd probably continue to do that.

JR: That's no longer in effect.

ML: That's no longer in effect. I would follow that rule, and then I would aggressively continue to seek diverse representation on the board and that would be important to me. I'll give you an example. You may remember, California had a rule, which wasn’t a Nasdaq rule, but California had a rule which was actually a quota.

It was a mandate. And it required companies that had a principal place of business, to have at least a certain number of women board members and then a certain number of diverse board members. And that rule was struck down by the court because it was a quota. However, what I find in many boardrooms where diversity is important to the company and perhaps even more importantly, to investors, that boards, particularly those in California that lived under that regime, they still act as if that rule was in effect.

I don't know that it will be very different here. And it won't be the same for every company. Some companies, they do really seek and rely on investment from institutional investors. They're larger cap, they're mid-cap, they are looking to get government contracts, they get investments from pension funds. For those companies, even if it's not your moral belief, you may make an economic decision that, that it is perhaps wise that I try to follow what has been very explicitly said is the desire of many of these investors. If you're a smaller cap company where your investors maybe are more technical or they may be perhaps don't care as much, I suppose you could make the decision there about what the value is to your business.

But, I would say that it is very important to consider this in light of your investor base, who your customers are and how generally you believe you want your company to be perceived and behave. And this is really important, too, because I think this gets lost in the discussion. There is a debate and I have an opinion. I won't say what it is, about “does diversity actually matter”? Are we doing this for fairness, or does actually having different points of view from people with different lived experiences in a boardroom running a business add value to the company? That in and of itself, if you're a director, your fiduciary duty is to maximize value for all stakeholders. So, the mere fact that a court has thrown out a rule, if you believe that to be true, if that is what your reasoned business judgment tells you, then you have a fiduciary duty to pursue that.

JR: And you know, in terms of that, I have to say, revisiting the mission and revisiting the strategy and the purpose, and in addition to what the stakeholders demand are all very important when it comes to designing these programs or to throwing a program out the window. So really looking at the data and understanding what the purpose is of these programs I think, is probably among the most important obligations of a board member.

Thank you, Melanie Levy, really appreciate this conversation today. Very, very interesting issues. As we move forward into 2025, there's going to be a lot of questions about these issues. And we're here to give answers for those of you who need the guidance.

Once again, I'm Jen Rubin. Thank you to those who've tuned in to our Predictions and Practical Policies podcast, and visit us at Mintz.com for more information and content that's not only focused on the incoming administration, but on the legal environment moving forward.

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