12/2/2020 The Woke Nasdaq - WSJ

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OPINION | REVIEW & OUTLOOK

The Woke Nasdaq

The exchange decides it is in the gender and racial quota business.

By The Editorial Board

Dec. 1, 2020 6 39 pm ET

A view of the exterior of the Nasdaq market site in New York in 2016.
PHOTO: SHANNON STAPLETON REUTERS

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3 minutes

With all the ways for business to raise capital nowadays, listing on a U.S. stock exchange
has lost much of its appeal. Enter the Nasdaq on Tuesday with a proposal to make itself
even less competitive.

The second largest exchange in the world has asked the Securities and Exchange
Commission for permission to impose a quota system on the boards of its listed
companies. The new rule would mandate that corporate boards have a minimum of one
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woman director and one who is a minority or LGBTQ. Small companies and foreign
companies could get by with two women. No mention of whether directors should know
something about the business.

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Like much of corporate America today, the Nasdaq is virtue signaling at the expense of
someone else. This is far from its reason for being, which is a marketplace to raise money
while spreading the benefits of capitalism and corporate ownership. Imposing its own
identity politics on some 3,300 listed companies meddles in corporate management and
will harm economic growth and job creation.

A free society looks at the skill and talent of individuals, not their physical appearances.
Companies have an interest in discovering talent wherever they can find it. Smart
companies know a diverse workforce can be a competitive advantage. But beyond
demanding honest management and transparency for shareholders, the exchange has no
role in dictating personnel decisions. Imposing quotas is contrary to good corporate
governance and puts politics ahead of the purposes of a stock exchange.

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In its filing with the SEC, according to the Wall Street Journal, Nasdaq “cited multiple
studies which found that greater diversity on boards is associated with improved
corporate governance and financial performance.” But if that’s true, companies hardly
need the Nasdaq to mandate the board’s makeup. Or is the Nasdaq suggesting that
without its racial and gender orders, companies will eschew the profit motive?

In a speech last year in San Diego, SEC commissioner Hester Peirce addressed the pros
and cons of diversity objectives, noting that “boards that make a concerted effort to be
creative in looking to fill substantive gaps are likely to look in places they would not
traditionally have looked.” But she warned against “formulations from the government
[that] improperly override private sector decisions” and “an improper federalization of
corporate governance.”

She also observed that “external micromanagement of board composition adds yet
another cost to the already high cost of being a public company.” She’s right, and it comes
when the number of public companies listed on U.S. stock exchanges is down 25% since
the mid-1990s. Many founders prefer private placements, private equity and venture
capital or even the OTC Market, a trading system for non-exchange listed equities. The
Nasdaq is not the only place to raise capital.

The current SEC is unlikely to grant Nasdaq’s request, but Joe Biden’s appointees
probably will, given the demands of identity politics in the Democratic Party. Once upon a
time the Nasdaq was an outlet for capital for sprightly entrepreneurs. Its identity diktats
suggest it is now about enforcing the political fashions of the day on private owners and
management.

Appeared in the December 2, 2020, print edition.

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