In recent years, corporate boardroom diversity efforts have gained momentum. This shift is fueled by growing recognition of the benefits that diverse perspectives bring to decision-making and corporate performance. However, there have been significant setbacks for the diversity of corporate boards in the US in recent months, strengthened by President Trump’s Executive Order terminating government DEI programs. For instance, Goldman Sachs’ decision to reverse its initial public offering (IPO) diversity mandate and the Fifth Circuit Court of Appeals’ decision to invalidate Nasdaq’s Board Diversity Rules both point to a potential change in corporate governance. Although these occurrences underscore the growing legal and commercial challenges to mandatory diversity programs, one key question remains: Will firms continue their efforts through voluntary means and market-driven incentives, or is the era of board diversity regulations really coming to an end?
The Fifth Circuit’s Decision on Nasdaq’s Board Diversity Rules
Originally approved by the Securities and Exchange Commission (SEC) in 2021, the Nasdaq Board Diversity Rules required that listed businesses report the diversity makeup of their boards and include at least one female member and one member from an underrepresented minority or the LGBTQ+ community. Companies that failed to meet these criteria were mandated to explain their reasoning.
The Fifth Circuit Court of Appeals, however, recently declared these regulations as unconstitutional. Although Nasdaq operates as a self-regulatory organization, the court ruled that it exceeded its authority by imposing rules that effectively demanded businesses to comply with requirements similar to affirmative action. The court also questioned the SEC’s approval of the rule, noting that the agency failed to demonstrate how the standards aligned with the Securities Exchange Act’s objectives, such as protecting investors, preventing market manipulation, and promoting competition. As a result, the Fifth Circuit ruled that the SEC exceeded its regulatory authority under the Act.
The court concluded that requiring disclosure of gender and race diversity on boards did not directly safeguard investors, and the comply-or-explain mandate had little to do with the main objectives of the Act. Through this action, the court applied the “major questions doctrine,” which holds that federal agencies must have clear congressional authorization for significant regulatory actions. Therefore, it ruled that the SEC lacked the explicit authority from Congress to regulate corporate board structures, particularly in politically sensitive areas. In other words, the court reasoned that the SEC had overreached its customary regulatory purview, which is centered on market manipulation and proxy voting, by approving Nasdaq’s Diversity Rules, infringing on issues that are under the purview of other authorities.
Goldman Sachs’ Reversal of IPO Diversity Requirements
By declaring in 2020 that it would not underwrite IPOs for businesses without at least one diverse board member, Goldman Sachs established itself as a pioneer in corporate diversity initiatives. The company’s dedication to enhancing corporate governance was demonstrated in 2021 when it increased the need to at least two diverse directors.
However, Goldman Sachs recently retracted this requirement in response to growing political and legal scrutiny. The firm cited client feedback and changing market conditions as justifications for dropping the mandate. The reversal implies that financial institutions are being more cautious about diversity standards out of concern about potential legal challenges or investor reaction against required measures.
The Road Ahead for Board Diversity
Institutional investors and shareholder activism will play a crucial role in shaping the future of board diversity. Beyond financial institutions withdrawing their diversity mandates, major institutional investors are now revising their board diversity policies. BlackRock’s 2025 policy removes numerical diversity targets, eliminating its prior disclosure-based proxy vote guidelines. However, it retains the option to take voting action against S&P 500 boards that deviate significantly from market norms. Vanguard has similarly softened its stance, replacing explicit gender, race, and ethnicity requirements with a broader emphasis on “cognitive diversity” and skill. However, it maintains the right to vote against nominating committee chairs if diversity-related disclosures are inadequate. State Street has taken the most significant step back by entirely removing numerical diversity targets and no longer voting against boards that fail to meet prior diversity standards. Instead, it now emphasizes that nominating committees should oversee board composition. In comparison, the global company BNP Paribas is strengthening its diversity policies for 2025, raising its gender diversity target to 40% female directors. The Fifth Circuit’s ruling, Goldman Sachs’ revised policy, and shifting institutional investor behaviors raise major questions about the future of board diversity. Although regulatory mandates for board diversity might be diminishing, the need for diverse leadership is expected to persist. The Fifth Circuit’s decision could create a precedent that dissuades exchanges or regulators from enforcing diversity mandates, causing companies to be reluctant in establishing formal diversity goals because of legal concerns.
However, other firms might see these changes as a chance to adopt a more proactive and voluntary strategy. Companies can advance their diversity objectives while staying within legal and regulatory boundaries by fostering a culture of belonging, setting internal diversity targets, and implementing inclusive hiring practices. Moreover, companies can gain an advantage in attracting elite talent, fostering customer loyalty, and enhancing their brand by committing genuinely to diversity and inclusion.
These challenges for board diversity mandates do not necessarily indicate the end of corporate diversity initiatives. Market-driven pressures, institutional investor activity, and voluntary corporate initiatives can sustain the momentum for diversity and inclusion, even though legal and regulatory restraints may limit the use of quotas and requirements. The attitude of businesses, investors, and stakeholders to value diversity as a moral and business necessity will ultimately determine the future of board diversity.
As the corporate world navigates this evolving challenge, one thing is clear: the pursuit of diversity and inclusion is far from over. The objective of making boardrooms more inclusive and equitable is still as crucial as ever, whether it is achieved through volunteer efforts or legal requirements. In light of tackling these challenges, the question is not whether board diversity is ending but rather how businesses can innovate and adapt to sustain diversity.