Two sorts of diversity must be distinguished: one that develops on the market and in other forms of free interpersonal relations in response to the different preferences, values, and discoveries of individuals; and another one, decreed by a government, public institution, or public authority, representing a majority or a minority of voters, on the basis of what it thinks that diversity should be. A decree, of course, is not a pious wish: everybody must legally comply. “Be diverse, or else!”
An example of the second sort is illustrated by a news item in The Economist (“Business This Week,” August 14, 2021):
America’s Securities and Exchange Commission approved a controversial requirement by the Nasdaq for companies that list on its markets to disclose statistics on the diversity of their boards and to have at least two “diverse directors”, or explain why they do not. One director must be a woman and the other from a racial or sexual minority.
It is important to realize that, probably since Franklin D. Roosevelt, exchanges such as today’s Nasdaq are not private associations, but organizations that enforce state controls and decrees and, as we see in this case, must have their policies explicitly or implicitly approved by their real boss, Big Brother himself. It is apparently part of a general trend whereby the federal government indirectly imposes measures that would be constitutionally forbidden or doubtful if imposed directly.
One point that is perhaps not crystal clear in The Economist‘s blurb is that it is indeed the “gender” composition of boards, not its sexual composition, that is targeted: anybody may self-identify as a man, a woman, or a non-binary. Membership in the racial or ethnic groups, as well as in the sexual LGBTQ+ group, is also largely self-identified.
Of course, everybody is or should be free to identify as what he wants, provided he does not force others to recognize or reward his self-identification. (You may self-identify as a Great Turkey, but I should not be forced to treat you as such.) But in a free society, it would be unacceptable to coerce people into identifying with the groups in which some authority wants to imprison them.
More precisely, the Nasdaq proposed regulation that was was approved by the Securities and Exchange Commission (SEC), as published in the Federal Register, obliges any Nasdaq listed company
to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one Diverse director who self-identifies as Female and at least one Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+. Pursuant to proposed Rule 5605(f)(1), ‘‘Diverse’’ would be defined to mean an individual who self-identifies in one or more of the following categories: (i) Female, (ii) Underrepresented Minority, or (iii) LGBTQ+. Also pursuant to proposed Rule 5605(f)(1), ‘‘Female’’ would be defined to mean an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth; ‘‘Underrepresented Minority’’ would be defined to mean an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities; and ‘‘LGBTQ+’’ would be defined to mean an individual who self-identifies as any of the following: Lesbian, gay, bisexual, transgender, or as a member of the queer community.
Each corporation listed on Nasdaq now has to publish a Board Diversity Matrix providing the number of board members who self-identify with each of the regulatory categories and subcategories, as well as the number of individuals who declined to be fitted into these group identities.
The SEC’s Order (reminder: it’s an order, not a loving wish), which was also published in the Federal Register of August 12, also explains the purported usefulness of this new regulation:
The Commission finds that the Board Diversity Proposal would provide widely available, consistent, and comparable information that would contribute to investors’ investment and voting decisions. … The reduced cost and improved efficiency in collecting, using, and comparing such information could enhance investors’ investment and voting decision-making processes, and enhance investors’ ability to make informed investment and voting decisions. Because the proposal would make such information widely available on the same basis to all investors, the proposal would also mitigate any concerns regarding unequal access to information that may currently exist between certain (likely larger and more resourceful) investors who could obtain the information and other (likely smaller) investors who may not be able to do so. Accordingly, the Commission finds that the proposal is designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.
We see in action the principle that if you give Leviathan one inch, he will take a mile. The New Deal securities laws were justified by the goal of providing more information to investors. This information is now deemed to include the gender, sexual (“LGBTQ+”), racial, and ethnic composition of the Nasdaq-listed companies’ boards. One question is, in how many years will the government and its minion organizations impose discrimination mandates instead of mere information requirements?
For now, an actual or potential board member will be able to self-identify as belonging to any group on the list. A non-Diverse white male board member or candidate thereof could identify as a black woman. It is not totally inconceivable that a company wanting to show good PC statistics could exert gentle influence on a board member to check the right box. But these incentives may be muted, if only because a man who identifies as a woman “just for my career” might get objections from his wife or girlfriends. What is sure is that the price of the members of the favored groups on the list (that is, their compensation) will increase on the market for board members, compared to the price of non-favored board material.
What sort of discrimination is popular today may shift in the future. Now, just think how this kind of board diversity order would have been useful to bigots in the Jim Crow South by ratting on corporations with too many black directors.
At another level, what’s a better way to advance collectivism than to have government incentivize individuals to identify with a group? At any rate, it is pretty clear that the new regulation will further intensify the politicization of corporations and fuel the flames of race and identity wars. Changes in the official list of privileged groups have already been proposed.
Marx believed that capitalism would break down under its own contradictions. This fate is more likely to hit its degenerate, woke, crony fake.
READER COMMENTS
David Seltzer
Aug 17 2021 at 11:08am
Pierre: The nonsense forced on NASDAQ listed companies will be reflected in risk adjusted returns. A look at board composition and performance will tell me all I need to know. If forced diversity doesn’t yield risk adjusted returns I will of course SELL my position and reinvest elsewhere. I managed a mid-sized hedge fund. My sole fiduciary function was generating risk adjusted returns to those investors who trusted me with their futures.
Pierre Lemieux
Aug 17 2021 at 12:59pm
David: You’re right. But the systemic aspect of that (the woke like the word, don’t they?) should not be ignored: a general weakening of individualism and capitalism.
David Seltzer
Aug 17 2021 at 2:26pm
Pierre: Point well taken. A little history. Early on, investors traded stocks with other investors in coffee shops. For years, I made markets on the floor of The American Stock Exchange. It started life as the New York Curb Exchange in 1842. Brokers and traders gathered on the curb outside the New York Stock Exchange to trade stocks that didn’t qualify for listing on the NYSE. My point: As individualism and free markets continue to be eroded by these imposed woke policies, traders will return to technological coffee houses and curbs to speculate, trade, transfer risk, provide market liquidity and provide the opportunity for other agents to diversify their portfolios.
Mark Z
Aug 17 2021 at 11:34am
How is this not in violation of anti-discrimination law? If you’re a typical company with 6 or 7 board members that happen to be white (something any numerate person should see is perfectly plausible absent any discrimination), and you need to replace one, you are now compelled by Nasdaq to discriminate based on race (or sexual orientation). Is discrimination at the margin legal as long as it’s to enforce a quota rather than a hard rule against a demographic? Somehow I doubt that’s the case.
Pierre Lemieux
Aug 17 2021 at 12:57pm
Mark: Good questions. The problem with anti-discrimination laws is that they “naturally” (because of the power of special interests thus created, not to speak of Leviathan’s incentives) lead to discrimination in the name of non-discrimination. As alluded to in the SEC’s public hearings, the government can easily get away with this because it acts through a pretended private organization, Nasdaq.
Christophe Biocca
Aug 17 2021 at 2:11pm
I think the “or explain why it does not have” clause gives them an out on that front. If you have less than the quota you just have to “explain” it, and NASDAQ explicitly doesn’t care that the explanation makes sense, as long as it is one.
So an explanation saying “Preferentially hiring board members based on their gender/racial identity would violate anti-discrimination law.” would cover any company willing to write that down, even if the Supreme Court itself were to say the opposite. So would “Our board members that are actually diverse worry that identifying as such in public would expose them to harassment”, “Everyone on earth is white and male, which makes hiring diverse board members physically impossible”, and “We don’t feel like it”.
I think the idea is that almost any explanation you write is going to get you negative press coverage, so companies will prefer to “fix” their board composition rather than submit one.
Henri Hein
Aug 17 2021 at 2:30pm
I like your suggestion. Will the explanations be public? I realize even if they aren’t, at least some of them, and especially the most provocative ones, will probably find their way into the media anyway. Smaller companies might be able to get away with some insincere hand-waving.
Pierre Lemieux
Aug 17 2021 at 2:53pm
Henri: Yes, the explanation will be public:
BC
Aug 18 2021 at 3:39pm
Wouldn’t a generic explanation like the following suffice: “Firm non-discrimination policy requires all board searches to be conducted in an open and inclusive manner without regard to race, gender, sexual orientation, etc. Our non-discrimination policy also prohibits the use of racial, gender, sexual orientation, and other quotas.”
Pierre Lemieux
Aug 18 2021 at 6:07pm
BC: Good formulation! Perhaps you could become a capitalist corporation consultant. The question is, Would you have many customers? (Moreover, now that you have published your proposal on Econlog, it is free of charge.)
Christophe Biocca
Aug 17 2021 at 3:03pm
It’s a public disclosure:
It’s meant be published alongside their “how diverse” matrix.
They’ve got an FAQ of sorts online. The rule is dumb but they definitely had lawyers hammering out any ambiguous parts.
Pierre Lemieux
Aug 17 2021 at 2:39pm
Christophe: You’re right. Instead of imposing an overtly sexist and racist regulation, the government forces its targets, through a nominally private organization, to publicly confess their sins, counting on the woke mob to lynch the culprit and invade the corporate capitol.
Henri Hein
Aug 17 2021 at 1:33pm
One solution for a non-compliant board could be to recruit two dummy directors to fulfill the requirements. I wish somebody would do this. Make it blatant that the new members are purely to get around the new edict. Make them full members of the board, but give them one vote each and adjust the vote shares of the other members such that the dummy members either cannot or are extremely unlikely to ever decide a vote. (In some boards, I could see it being mathematically impossible to adjust the vote shares in such a way to make it impossible, while maintaining the existing proportional voting power. I’m sure they could find other ways around that.)
The government will surely react negatively to such a move. Be prepared to fight them in court, and expect the resulting legal battle to go on for years.
BC
Aug 18 2021 at 4:01pm
“at least one Diverse director…’Diverse’ would be defined to mean an individual…”
Off topic, I’ve noticed that it has become increasingly common, particularly among younger people, to describe *individuals* as “diverse” when they really mean racial minority, female, gay, transgender, etc. The word “diverse” means having a wide variety of people (say by race, gender, sexual orientation, etc.), i.e., it’s a property of a *group*. (I suppose one could describe a multi-racial individual as a racially diverse person, but that’s not what people mean.) Why did this start? Are even the proponents of quotas/balancing becoming squeamish about explicitly stating that they like a particular candidate because of his race so that saying they like the candidate because he’s “diverse” has become a euphemism? (If so, I would consider that a positive development because the use of euphemisms often indicates that the person has at least some awareness that what they advocate is not completely kosher.) Or, have people just seen groups described as “diverse” when they comprise a variety of minorities and have just misunderstood the term to describe the minorities in the group rather than the group itself?
Pierre Lemieux
Aug 18 2021 at 6:04pm
BC: Good questions. I think “Diverse” is mostly a euphemism for “a member of a preferred group, like in “Diverse director.” I am not sure if it implies any shame for most practitioners of “diversity.” (That the state intentionally helps its favorites at the accepted price of hurting others is at the center of de Jasay’s theory.)
Knut P. Heen
Aug 19 2021 at 5:56am
A board consisting of four directors cannot under represent a minority since few minorities constitute 25 percent of the population.
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