The topic of diversity on corporate boards has been the focus of a great deal of recent attention, discussion, and action. California has enacted legislation aimed toward more diverse boards; certain institutional investors have begun pushing for greater diversity in the boardroom; and there has even been litigation targeting companies whose boards are not diverse. In addition, last December, the Nasdaq securities exchange filed with the SEC a proposal requiring companies listed on its exchange to disclose whether the company is in compliance with the exchange’s diversity standards or to explain why it is not in compliance. On August 6, 2021, the SEC, in a vote split along party lines, approved the proposed Nasdaq guidelines, making the guidelines applicable to most of the nearly 3,000 Nasdaq listed company. The SEC’s August 6, 2021 order approving the guidelines can be found here.
Under the Nasdaq guidelines, each Nasdaq-listed company (other than a Foreign Issues, Smaller Reporting Company, and Companies with Smaller Boards) is required to have, or to 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+. Reporting companies are to report their compliance or non-compliance with the diversity requirements using a Board Diversity Matrix. The exchange also proposes to make available to exchange listed companies with complimentary access to board recruiting services, to provide access to a network of diverse candidates for companies to identify and evaluate.
In its August 6, 2021 Order, the Commission stated its conclusion that the Nasdaq’s proposed listing requirements are consistent with the requirements of the Securities Exchange Act of 1934 for the national securities exchanges to be designed to promote a free and open market and to protect investors and the public interest. In explaining the bases for these conclusions, the Order states that the guidelines would provide greater transparency and would contribute to investors’ investment and voting decisions.
In an explanatory August 6, 2020 memo about the guidelines’ requirements, Nasdaq states that there will be a transition period for most of its listed companies to meet the diversity objectives or explain why they do not. These companies will have two years from the SEC’s approval date to have, or explain why they do not have one diverse director, and two diverse directors within four years. Separate requirements apply to smaller companies, foreign issuers, and companies with smaller boards. The rules do not apply to SPACs .
SEC Chair Gary Gensler issued a statement in support of the Commission’s approval of the guidelines in which he stated that “Investors are looking for consistent and comparable data when making decisions about their investments.” The two other Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw also issued a statement in support of the approval of the guidelines.
The two Republican Commissioners, Hester Pierce and Elad Roisman, also issued separate statements, reflecting their opposition to the approval of the guidelines. Pierce’s statement can be found here and Roisman’s statement can be found here.
In his statement, Roisman praised the goal of greater boardroom diversity, but he said he does not believe the SEC’s order approving the guidelines makes the case for why the agency should approve the rules. He also expressed his concern that the guidelines could draw the agency into difficult legal disputes over discrimination. Roisman said “A serious concern is that the SEC – without any doubt, a state actor – may need to take future action in which the agency must consider disclosure of the racial, ethnic, gender or LGTBQ+ status of individual directors. After all, the Commission is the adjudicating body for exchange delisting decisions.”
Nasdaq’s comply or explain requirements are relatively easy to explain. Nevertheless, the new guidelines require significant changes. When Nasdaq issued the proposed guidelines last December, the exchange accompanied its release with the findings of a review the exchange had conducted of its listed companies. The exchange found that more than three-quarters of its listed companies would have fallen short of the proposed requirements. While around 80-90% of the companies had at least one female director, only about one quarter of the companies had a second one who would meet the diversity requirements.
The guidelines themselves may face challenges as well. An August 7, 2020 Wall Street Journal article detailing the SEC’s approval of the guidelines notes that critics of the Nasdaq guidelines have “warned that it could be challenged in court.” The article quotes conservative commentators who argue that the exchange’s diversity rule would violate the U.S. Constitution and civil-rights laws. The article also quotes Senator Pat Toomey, the ranking Republican member of the Senate Banking Committee as saying that Chairman Gensler is “turning a financial regulator into a laboratory for progressive social engineering.”
It does seem likely that the guidelines could face legal challenges from conservative groups or activist investors. However, the likelihood is that most Nasdaq companies that are not currently compliant with the disclosure guidelines are going to start taking steps to bring themselves into compliance. Indeed, the many Nasdaq companies based on California are already operating under the state’s board diversity statues and therefore already under pressure to adopt greater board diversity.
Even without these various requirements, many public companies are already under pressure from large institutional investors to diversify their boards. For example, the Journal article to which I linked above notes that large investors such as Black Rock and State Street Global Advisors to appoint women directors and to otherwise diversify their boards.
In other words, publicly traded companies today are operating in an environment where they are under pressure to diversify their boards. The Nasdaq guidelines, as controversial as they may be in certain quarters, represent just one more feature of the current environment in which social, political, and even economic interests are already pushing companies to diversify their boardrooms. There may well be legal challenges to the Nasdaq guidelines, which could have a practical impact on the implementation and enforcement of the guidelines’ requirements. But the various forces pushing companies toward increased board diversity will remain.