NASDAQ against Shareholder Rights

A man wears a mask to avoid exposure to the coronavirus as he walks past the New York Stock Exchange in New York, March 17, 2020. (Lucas Jackson / Reuters)

The function of a stock exchange is to provide an orderly market for the trading of securities. As part of this, a stock exchange typically insists that a listed company agree to comply with certain financial disclosure requirements designed to ensure that investors have sufficient information to make an informed decision about whether to buy, sell, sell or sell. ‘avoid or detain.

A stock exchange may also set rules (number of shareholders, market makers, etc.) intended, as far as possible, to lay the foundations for a liquid market in listed securities.

A stock exchange will also insist that a listed company comply with various governance rules.

So, for example, NASDAQ requires this:

[A listed] the board of directors of the company must be composed of a majority of independent directors.


[A listed] The company is required to have an audit committee composed only of independent directors who also meet the requirements of SEC rule 10A-3 and who can read and understand the fundamental financial statements. The audit committee must have at least three members. A member of the audit committee should have experience which translates into the financial sophistication of the individual.


So far, so good.

This, however, is not so good.

the the Wall Street newspaper:

Nasdaq Inc. pushes to demand thousands of companies listed on its stock exchange to include women, racial minorities and LGBT people on their boards of directors, in what would be one of the most aggressive steps yet to bring greater diversity to American businesses.

The brokerage firm on Tuesday filed a proposal with the Securities and Exchange Commission that would require listed companies to have at least one woman on their board of directors, in addition to a director who is a racial minority or who is identifies as lesbian, gay, bisexual, transgender, or queer. Companies that do not meet the standard would be required to justify their decision to remain listed on the Nasdaq.

California banks, asset managers, and lawmakers have taken various steps to diversify the predominantly white and male boards of directors of U.S. corporations. The Nasdaq’s decision could have a bigger impact because of its ability to set rules for the nearly 3,000 publicly traded companies.

NASDAQ, a private institution, of course has the right to set its own rules, just as (to quote the Newspaper) “Banks and asset managers” have the right to try to get their clients or portfolio companies to change their behavior. Nonetheless, it is difficult to miss the mission creep that is currently taking place in a wide range of institutions, some private, others parastatal (take a look at the increasing effort being made by central banks in climate change) to impose different aspects of a “progressive” agenda on private companies without worrying about going through the usual democratic mechanisms. In fact, they erode, in different ways, the right of shareholders to have the final say on how their businesses are run.

Traditionally, denying shareholders that last word has been justified by prudential reasons directly related to the core function of the body that sets the rules – it is clear, for example, that the NASDAQ insists that listed companies meet certain requirements. of disclosure. The question is entirely different, however, when the reason for restricting the ultimate decision-making right of shareholders is, in one way or another, political.

If shareholders’ rights are to be eroded for political reasons, then in a democracy the decision to erode these rights should be made by a democratically elected body. In a corporatist (or something more authoritarian) regime things would be arranged differently, but hopefully the United States hasn’t reached that point yet.

the Newspaper refers to a measure taken by California lawmakers.

CNN has Explain what it was:

Beginning next year, state-owned companies headquartered in California will be legally required to diversify their boards racially, ethnically, and in terms of sexual and gender identity.

The law, which was signed by California Governor Gavin Newsom on On Wednesday, companies are expected to have at least one board member from an under-represented community by the end of 2021 and at least two or three – depending on the size of the board – by the end of 2022.

People from under-represented communities are defined in the bill as anyone who identifies as black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Hawaiian, or native of Alaska, or who identifies as gay, lesbian, bisexual. or transgender.

“This new law represents a big step forward for racial equity … It is a win-win because boards of directors of various ethnicities have shown that they outperform those who lack diversity,” said in a release California State Assembly Member Chris Holden, co-author of the legislation.

The new law is likely to set a new minimum threshold for business diversity across the country, as will the state Law 2018 requiring a minimum number of female directors.

I do not agree with this new law (AB 979), or, for that matter, its 2018 predecessor (SB 826), both of which appear (to me) to be unwarranted intrusions into the right of a business to steer. As such, they represent direct attacks on the property rights of the shareholders of that company. Nonetheless, these laws were approved after California had gone through the appropriate democratic processes, and they are subject to constitutional review. These are the rules of the democratic game in this country. It’s enough.

What the NASDAQ is offering is quite different.


Senator Pat Toomey (R-PA) has since commented:

“A quasi-regulatory body like NASDAQ should not create and enforce social policy in America. It is the domain of democratically elected representatives who are accountable to the public. As Berkshire Hathaway CEO and Democrat Warren Buffet said, board members should be chosen on merit, not quotas. The responsibility of a board of directors is to oversee management and govern in the best interests of the people who hire them – the shareholders. America’s corporate boardrooms are not the place for social engineering. Ultimately, these types of initiatives reduce the number of public companies, reduce access to capital, and slow economic growth, which means fewer jobs and missed opportunities for retail investors. “