Teresa L. Johnson
Partner Arnold & Porter Kaye Scholer LLP
Email: teresa.johnson@arnoldporter.com
Teresa is co-head of the firm's Capital Markets Transactions practice. Her practice includes advising corporations on corporate governance, securities and finance matters.
The dramatic reversal of diversity, equity, and inclusion (DEI) initiatives, following challenges from the Trump administration, is now extending to boardrooms. This represents a significant change in less than a decade. Starting in 2018, institutional investors like BlackRock were among the first to adopt voting policies supporting diversity of gender and underrepresented groups on corporate boards, in some cases requiring minimum numbers of "diverse" directors. Many other institutional investors, proxy solicitors, and stock exchanges followed suit, as did some regulators. In 2018 and 2020, California went so far as to enact Senate Bill 826 and Assembly Bill 979, which required diversity on the boards of publicly traded corporations headquartered in the state. Those laws were eventually struck down by the Superior Court in the Crest v. Padilla cases in 2022 as being unconstitutional. However, the overturning of those laws did not, at the time, appear to signal a change in attitude from institutional investors, proxy solicitors and exchanges, who continued to support board diversity in their policies and programs.
Now, however, those board diversity policies and programs have been and are continuing to be rolled back in the wake of the Jan. 21, 2025 issuance of Executive Order, "Ending Illegal Discrimination and Restoring Merit-Based Opportunity," and the Memorandum from Attorney General Pam Bondi on "Ending Illegal DEI and DEIA Discrimination and Preferences" on Feb. 5, 2025 - ordering the Department of Justice Civil Rights Division to " investigate, eliminate and penalize illegal DEI and DEIA preferences [and] ...programs."
While neither the Executive Order nor the memorandum from the Attorney General change any law related to DEI in the private sector, they illustrate the Trump Administration's plan to take a close look at DEI programs to assess potential illegality and a rigorous enforcement approach for any programs perceived to be illegal. In an aggressive enforcement climate, it is not surprising to see the investment community dialing back its board diversity programs.
The trend began with institutional investors. On Dec. 30, 2024, BlackRock removed language from voter proxy guidelines which had, since 2021, recommended that boards aspire to at least 30% diversity. BlackRock also no longer expressly asks for boards to consider gender or underrepresented groups in evaluating board composition.
In early February, Vanguard followed suit and revised its proxy voting guidelines for U.S. companies to eliminate a recommendation that boards contain "at minimum" a diversity of gender, race and ethnicity. John Galloway, Vanguard's global head of investment stewardship said, "We have never had quotas, and in the first instance look for boards to follow the listing standard and market expectations of the markets they are in." Vanguard's voting policy still includes language that boards should consider a range of personal characteristics to create the most effective board.
Also in early February, Goldman Sachs similarly dropped a requirement that the boards of directors of companies that they take public have at least two women or members of historically underrepresented groups, a policy they implemented in 2020, citing "legal developments." Goldman Sachs International CEO Richard Gnodde argued that the policy was meant to try to push companies to embrace diversity, and that the rule is no longer needed because "it has served its purpose."
Proxy solicitors are making similar changes in their voting policies. Institutional Shareholder Services, a major proxy solicitor, released a statement on Feb. 11, 2025 that [it] "will no longer consider the gender and racial and/or ethnic diversity of a company's board when making vote recommendations with respect to the election or re-election of directors at US companies," citing the changing legal landscape under the new Administration. The policy will go into effect for reports presented to investors on or after Feb. 25. On Feb. 18, 2025, Glass Lewis, another major proxy solicitor, announced plans to review its voting guidance on board diversity at U.S. companies (which currently considers a lack of board gender diversity, subject to certain conditions, in recommending votes against directors) and to publish any modifications to its current guidance on March 3, 2025.
Continuing the trend, one of the leading stock exchanges has dropped its board diversity requirements. On Jan. 24, 2025, NASDAQ announced the removal of its listing rules that would have required NASDAQ companies to either meet board diversity thresholds or explain their lack of compliance. This was hardly a surprise, given that the 5th Circuit Court of Appeals ruled in December 2024 that the NASDAQ rules violated federal securities laws. But it is notable that NASDAQ has now decided to abandon the rules altogether.
While as noted, many in the investment community are choosing to eliminate or roll back board diversity programs, it is important to remember that boards are not subject to the same legal restrictions on discrimination that apply to employees. Board members are not employees, and accordingly fall outside the restrictions of Title VII of the Civil Rights Act, which prevents employment discrimination based on race, color, religion, sex, and national origin.
The current situation presents uniquely challenging choices for investors and others in the investment community in considering board diversity policies. Legal programs may still pose a reputational risk if challenged. The drivers for diversity on boards have unquestionably changed. It is hard to predict exactly to what extent these recent changes in voting policies and programs will affect the diversity of boards in the future, and whether diversity advocacy from other stakeholders will provide a meaningful counterbalance. But in any case, it seems likely that the rollback in board diversity policies will result in boards being less diverse going forward.