In the latest development in what has become a widespread push toward greater board diversity, Nasdaq has filed a proposal with the SEC that would require Nasdaq-listed companies to disclose whether the companies meet Nasdaq-specified board diversity requirements. If approved, the new listing rules would require companies to have at least one female director and one director who is a racial minority or who self-identifies as LGBTQ+, or to provide an explanation why they do not. A copy of Nasdaq’s December 1, 2020 proposal can be found here. Nasdaq’s December 1, 2020 press release concerning the proposal can be found here.
The proposal document provides an explanation for the Nasdaq initiative, as well as an explanation of the initiative’s goal. The proposal opens by noting that over the past year, “the social justice movement has brought heightened attention to the commitment of public companies to diversity and inclusion,” and has “underscored the need for board diversity.” The proposal notes that calls for greater board diversity have come from a wide range of constituencies, including companies, investors, legislators, and even the SEC commissioners.
The proposal notes that “an extensive body of academic research demonstrates that diverse boards are positively associated with improved corporate governance and financial performance.” However, the proposal notes, while there has been progress toward greater gender diversity, the “pace of change has been gradual,” and the “progress toward bringing underrepresented racial and ethnic groups into the boardroom has been even slower.”
The goal of Nasdaq’s proposed listing requirement, according to the accompanying press release, is to “provide stakeholders with a better understanding of the company’s current board composition and to enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective. “
The proposal seeks to add two listing rules. The first, relating to Diverse Board Representation, would require Nasdaq-listed companies to have at least one director who self-identifies as female and to have at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or as who self-identifies as lesbian, gay, bisexual, transgender or queer. Companies that do not meet these standards would be required to “explain why the company does not have at least two directors on its board who self-identify in the categories listed.”
Foreign Issuers and Smaller Reporting Companies will have more flexibility and may satisfy the requirement by having two Female directors. Non-U.S. companies could also satisfy the diversity requirements by appointing board members from groups that are underrepresented in their home countries. For a Foreign Issuer, an “Underrepresented Individual in Home Country Jurisdiction” is defined as a person who self-identifies as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the Company’s home country jurisdiction. A Smaller Reporting Company is “an issuer that is not an investment company, an asset-backed issuer … or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) Had a public float of less than $250 million; or (2) Had annual revenues of less than $100 million and either: (i) No public float; or (ii) A public float of less than $700 million.”
The second of the two proposed list rules, relating to Board Diversity Disclosure, would require Nasdaq-listed companies to “provide statistical information in a proposed uniform format on the company’s board of directors related to directors’ self-identified gender, race, and self-identification as LGBTQ+.” The proposed Nasdaq disclosure template can be found here.
All Nasdaq-listed companies would be required to publicly disclose board-level diversity statistics through the Nasdaq disclosure framework within one year of the SEC’s proposal of the listing rule. The timeframe for compliance with the board composition requirements depends on each company’s listing tier. All companies are expected to have at least one diverse director within two years of the SEC’s listing rule, or to provide an explanation why they do not. Companies listed on the Nasdaq Global Select Market and Nasdaq global market will be expected to have two diverse directors within four years of SEC approval of the proposed rules, or to provide an explanation why they do not. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval, or to provide an explanation why they do not.
Companies that “are not in a position to meet the board composition objectives” within the required timeframe “will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objective.”
As a means to assist Nasdaq-listed companies meet the proposed rules’ requirements, Nasdaq has entered a partnership with Equilar, to “aid Nasdaq-listed companies with board composition planning challenges.” Among other services, the Equilar partnership will provide companies with access to over one million profiles, in order to facilitate access to “highly-qualified, diverse, board-ready candidates.”
Discussion
Nasdaq’s proposal potentially represents an enormous step in the overall move toward board diversity. As the New York Times Dealbook notes in its December 1, 2020 article about the proposal (here), there are 3,249 companies listed on one of the Nasdaq exchanges. However, the article notes that there may be an even larger objective behind the initiative; the article quotes Nasdaq’s CEO, Adena Friedman, as saying that the “ideal outcome” would be for the SEC to set out its own board diversity and disclosure requirements, since an SEC rule would be applicable to all companies.
From a practical perspective, the push toward greater board diversity embodied in the proposed rules arguably represents a significant hurdle for companies overall. Nasdaq’s own internal research suggests that more than three-quarters of Nasdaq-listed companies currently would fall short of the proposed requirements. As many as 80% to 90% of companies had at least one female director, but only about one quarter of companies had a second director that would meet the proposal’s other diversity requirements (although Nasdaq also noted that because of inconsistencies in the way companies report the data, precise determination of current board diversity is difficult at best).
The proposed rules are now subject to review by the SEC and a public-comment process before the rules are taken up for approval or rejection, meaning that it could be months before the rules would go into effect. On the FAQ page about the proposed rules on the Nasdaq website, Nasdaq says the following about timing: “The SEC will provide a minimum of 21 days from the time they publish the proposed rule changes in the Federal Register for the public (including investors, companies, and their representatives) to have an opportunity to comment on the proposals. After publication in the Federal Register, the SEC has 30 to 240 calendar days to approve the proposal.”
Special thanks to the several loyal readers who sent me links to the Nasdaq proposal.