Boards of directors of most Nasdaq issuers, including Canadian issuers listed on Nasdaq, will be required to include at least two diverse directors, at least one of whom must be female, under bold new rules approved by the SEC on August 6, 2021. Nasdaq becomes the first regulator in the world to mandate diversity beyond gender on public company boards with its requirement that U.S. issuers must have at least one director who is from an underrepresented minority.
On August 6, 2021, a majority of SEC Commissioners approved Nasdaq proposals to introduce new listing rules regarding board diversity for its listed issuers. The new rules require prescribed disclosure regarding the gender composition of the board and the demographic background of board members (Board Composition Disclosure) and establish a disclosure-based framework, not a mandate or quota. These requirements are being introduced on a staggered basis over the next four years and Nasdaq is providing additional support to enable issuers to recruit qualified diverse directors to their boards.
Board Diversity Listing Requirements |
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Application |
The new rules apply to all Nasdaq issuers other than
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Foreign Issuers and Smaller Reporting Companies |
Additional flexibility is provided to "Foreign Issuers" and "Smaller Reporting Companies" to comply with the new requirements. A "Foreign Issuer" is a company incorporated or organized under the laws of any country outside of the United States and the principal executive offices of which are located outside of the United States. A "Smaller Reporting Company" is defined with reference to Rule 12b-2 under the Securities Exchange Act of 1934, which generally defines a Smaller Reporting Company as an issuer that has (1) a public float of less than US$250 million; or (2) annual revenues of less than US$100 million and either: (i) no public float; or (ii) a public float of less than US$700 million. |
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Board Composition Disclosure
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Issuers must annually disclose information on the self-identified characteristics of its directors in a prescribed matrix format. Disclosure is to be based solely on self-identification. Foreign Issuers are also required to identify the country of their principal executive officers, whether or not they are a foreign private issuer, whether or not diversity disclosure is prohibited under their home country law and the total number of directors on their board. In 2022, an issuer can choose either to
The deadline for disclosure in 2022 is the later of August 8, 2022, or the date the issuer files its proxy circular for its 2022 annual meeting. In 2023 and subsequent years, the deadline is the date the issuer files its proxy circular for its annual shareholders meeting (or, if it does not file a proxy circular, in its Form 10-K or 20-F). In addition, diversity disclosure in such years must include not only current gender and demographic data, but also comparative data from the prior year. |
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Gender Diversity Disclosure |
Issuers (including Foreign Issuers) must disclose the number of directors who
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Demographic Disclosure |
For issuers other than Foreign IssuersFor each of the foregoing categories, the issuer must also disclose the number of directors in each of the following categories based on self-identification:
The racial or ethnic categories are consistent with the categories reported to the Equal Employment Opportunity Commission in the U.S. through the Employer Information Report EEO-1 Form and the proposed definition of LGBTQ+ is similar to the identities defined under California law except that it has been expanded to include the queer community. Issuers must include these categories, but can add additional categories (such as disability) if they wish. For Foreign IssuersDisclosure of demographic information is not required to be broken down for each of the gender categories. The Foreign Issuer must disclose the number of directors in each of the following categories based on self-identification:
Nasdaq does not provide further clarity to Foreign Issuers on what constitutes an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity. Issuers must include these categories, but can add additional categories if they wish. For example, issuers subject to diversity disclosure requirements under the Canada Business Corporations Act can separately break out the underrepresented minority category to address separate identification of the number of directors on the board who are visible minorities and Indigenous peoples and can add a row to the chart setting out the number of directors who are persons with disabilities. |
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Diverse Director Requirement |
Issuers must satisfy the applicable minimum diverse directors composition requirement or disclose why they do not. The requirements apply on a staggered basis.
If in any calendar year an explanation as to why the board does not satisfy the minimum diverse directors composition requirement is needed, the issuer can choose either
Nasdaq will assess whether an issuer has a board that satisfied the applicable minimum diverse directors composition requirement or provided disclosure as to why it does not. However, Nasdaq will not assess the merits of any explanation provided. |
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Minimum Diverse Directors Composition Requirement |
For issuers other than Foreign IssuersIf there are six or more board members, the issuer must disclose whether the board has
For Foreign IssuersIf there are six or more board members, the issuer must disclose whether the board has
For Smaller Reporting CompaniesSmaller Reporting Companies must disclose whether the board has at least two members who are diverse, including at least one diverse director who self-identifies as female. The second diverse director may include an individual who self-identifies as one or more of female, LGBTQ+ or an underrepresented minority. For smaller boardsIf there are five or fewer board members, the issuer must disclose whether the board has at least one director who self-identifies as female, an underrepresented minority or LGBTQ+. Meaning of "underrepresented minority"For issuers that are not Foreign Issuers, underrepresented minority means a director who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities. |
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Cure Period for Board Turnover |
If an issuer ceases to satisfy the Minimum Diverse Directors Composition Requirement due to a vacancy on its board of directors, the issuer has a cure period until the later of one year from the date of vacancy or the date the issuer files its proxy circular for its annual shareholders meeting (or, if it does not file a proxy circular, its Form 10-K or 20-F) in the calendar year following the year of the date of vacancy to satisfy the requirement. During this period, an issuer relying on the cure period may — and must prior to the date following the vacancy it next files its proxy circular for an annual shareholders meeting (or, if it does not file a proxy circular, in its Form 10-K or 20-F) — publicly disclose that it is relying on the cure period relief. Such disclosure may be provided in any proxy circular (or, if the issuer does not file a proxy circular, in its Form 10-K or 20-F) or by posting the disclosure on the issuer's website and providing a URL link to the disclosure through the Nasdaq Listing Center within one business day after such posting. |
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Newly Listed Issuers |
An issuer that is newly listed on Nasdaq and not previously subject to board composition disclosure or a diverse director requirement that is substantially similar to Nasdaq's requirements must
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As Nasdaq's new board diversity listing requirements will be a significant step-up in corporate governance for some issuers, the exchange has taken several affirmative steps to help issuers prepare for and comply with the new requirements. Issuers have access to free board recruiting services through partnerships Nasdaq has established with Equilar, Athena Alliance and the Boardlist to help their search for highly qualified, diverse, board-ready candidates. Issuers also have access to a list of frequently asked questions through the Nasdaq Listing Center website. Specific questions may be submitted to a dedicated mailbox at drivingdiversity@nasdaq.com.
The new board diversity listing requirements further the trend begun in Canada (see our earlier Osler Update on the topic) and continued in California of requiring diversity disclosure covering not only gender but other diversity characteristics. It reinforces the importance of encouraging diversity across multiple dimensions as a fundamental principle of good corporate governance.
Footnote
1. For Canadian Nasdaq-listed issuers that rely on the U.S.-Canada Multijurisdictional Disclosure System, we presume that the disclosure can be provided in the Form 40-F.
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