Regulating LGBTQ+ Inclusive Boardrooms

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Legislators and regulators respond to absence of LGBTQ+ individuals in boardroom diversity efforts and recruitment.

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In the past decade, shareholders have increasingly pressured U.S. publicly traded companies to diversify their boardrooms with some success. The representation of women and racial and ethnic minorities in Fortune 500 boardrooms, for example, increased from 25.5 percent in 2010 to almost 40 percent in 2020.

Despite this incremental progress, however, LGBTQ+ individuals still occupy only 0.4 percent of the more than 5,000 board seats in the Fortune 500—a sharp contrast with the more than 12 percent of U.S. residents who identify as LGBTQ+.

According to one global LGBTQ+ business network, the misalignment between LGBTQ+ boardroom representation and the overall population results from a history of exclusionary corporate practices. In a recent report, that network found that private and public boards of directors have consistently excluded LGBTQ+ individuals from their diversity recruiting efforts and failed to count LGBTQ+ self-identification as diversity in the boardroom.

In response, legislators, regulators, and stock exchanges are taking action to promote the inclusion of the LGBTQ+ community across wider boardroom diversity efforts for the first time.

The U.S. Securities and Exchange Commission (SEC), for example,  has approved mandatory board diversity and disclosure rules—which include recognition of the LGBTQ+ community—for companies listed on Nasdaq, a U.S. stock exchange based in New York City.

Under its new board diversity disclosure rule, the SEC permitted Nasdaq to require companies listed on its stock exchange to disclose directors’ LGBTQ+ self-identification.

Moreover, the SEC also permitted Nasdaq to require each of its listed companies to have, or to explain why it does not have, at least two diverse members on its board of directors, including at least one director who self-identifies as an underrepresented minority or as LGBTQ+.

In response, SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw applauded Nasdaq’s rule changes, which they claim addressed “a continued, harmful disparity in the representation of a wide range of communities in our capital markets,” including the LGBTQ+ community.

Moreover, state and federal legislators have also begun to introduce board diversity and disclosure requirements, with some focusing on the LGBTQ+ community.

The California legislature, for example, attempted to expand boardroom diversity requirements for corporations with principal executive offices located in the state. This law would mandate California-headquartered corporations to include at least one director from an underrepresented minority—individuals who self-identify as “Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native” or “gay, lesbian, bisexual, or transgender.” A California state court recently struck down the law, however, as a violation of the Equal Protection Clause of the California constitution, which the state has appealed.

In 2021, the U.S. House of Representatives passed the Corporate Governance Improvement and Investor Protection Act, which would require publicly traded companies to disclose the “racial, ethnic, gender identity, and sexual orientation” self-identification of any nominee for a company’s board of directors. The Act has since been referred to the U.S. Senate Committee on Banking, Housing, and Urban Affairs where it has stalled.

Opponents to these recent efforts to enhance board diversity and disclosure argue that mandates to include and disclose gender, racial and ethnic, and LGBTQ+ diversity—such as the recent SEC approved Nasdaq rules—amount to discrimination in violation of the U.S. Constitution and other federal civil rights.

In a brief before the U.S. Court of Appeals for the Fifth Circuit, for example, Texas Attorney General Ken Paxton and others argued that, in addition to requiring companies to overlook an individual’s qualifications, the “race and sex-based preferences” in the Nasdaq diversity rules are “crude and odious.”

But Susan M. Angele, Senior Advisor at consulting firm KPMG’s Board Leadership Centerdisagrees with Paxton’s claim. She argues that diversity and inclusion in the boardroom provide a unique competitive advantage and are critical to a company’s success. By building a strategically diverse board, companies develop valuable perspectives from their directors and also send a message to consumers, employees, and investors about the company’s priorities, according to Angele.

One nonprofit organization that studies corporate governance even concludes that, in the midst of the pandemic, companies with diverse boards of directors have tended to outperform their less diverse competitors in terms of revenue growth.

As a result, some observers argue that companies simply cannot afford to maintain the status quo around exclusionary LGBTQ+ board practices. By continuing to omit LGBTQ+ individuals from board diversity and recruiting efforts, companies incur substantial financial risks and thereby neglect their fiduciary duties to shareholders.

Despite continued debates surrounding the constitutionality and effectiveness of board diversity and disclosure rules, both public and private companies are rapidly working to diversify their boards of directors. Legislators and regulators appear to be joining with shareholders and other stakeholders in demanding greater representation of LGBTQ+ individuals in the boardroom.