Yesterday, Nasdaq announced that it has filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. If approved, it would likely be a game changer. The new listing rules would adopt a "comply or explain" mandate for board diversity for most listed companies and require companies listed on Nasdaq's U.S. exchange to publicly disclose "consistent, transparent diversity statistics" regarding the composition of their boards. The announcement indicates that the goal is to "provide stakeholders with a better understanding of the company's current board composition and 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." In its 271-page filing, Nasdaq explains its rationale by presenting an analysis of over two dozen studies that "found an association between diverse boards and better financial performance and corporate governance." According to Nasdaq's President and CEO, Adena Friedman, "Nasdaq's purpose is to champion inclusive growth and prosperity to power stronger economies....Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America."
Under the proposal, new Rule 5605(f), Diverse Board Representation, would require Nasdaq-listed companies, subject to certain exceptions,
- to have at least one director who self-identifies as a female, and
- to have at least one director who self-identifies as an Underrepresented Minority or LGBTQ+. The term "Underrepresented Minority" reflects the EEOC's categories and will be construed in accordance with the EEOC's definitions. The term includes Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, and two or more races or ethnicities.
Of course, California already imposes these board diversity mandates relating to both gender and "underrepresented communities" on public companies, including foreign corporations with principal executive offices located in California. This Nasdaq chart highlights the differences. (See this PubCo post and this PubCo post.)
If a company does not satisfy the new diversity "expectations," it would be required to explain, in its annual proxy statement or on its website, why it "does not have at least two directors on its board who self-identify in the categories listed above." Nasdaq "would not assess the substance" of the company's explanation, but would verify that the company has provided an explanation that satisfies the rule. (One of the FAQs (1771) provides examples of explanations that may work in some situations.) According to the NYT, "[o]ver the past six months, Nasdaq found that more than 75 percent of its listed companies did not meet its proposed diversity requirements." Foreign companies and smaller reporting companies would have additional flexibility to satisfy the requirement with two female directors. See also this Nasdaq summary.
In addition, under new Rule 5606, Board Diversity Disclosure, Nasdaq-listed companies, subject to certain exceptions, would be required to provide annually, in a proposed Board Diversity Matrix format, statistical information regarding the company's board of directors related to a director's self-identified gender, race and self-identification as LGBTQ+. The disclosure would be required in either the company's proxy statement for its annual meeting or on the company's website. A director who elects not to disclose a gender or race or to identify as LGBTQ+ would be categorized as "Gender Undisclosed" or "Undisclosed." The defined terms for the race and ethnicity categories in the instructions to the Board Diversity Matrix disclosure format would be substantially similar to the terms and definitions used in the EEO-1 Report.
As proposed, all Nasdaq-listed companies would be required to publicly disclose the required board-level diversity statistics within one year of SEC approval of the proposed rules. The time allowed to satisfy the board composition "expectations" would depend on the company's listing tier:
- all companies would be expected to have one diverse director within two years of SEC approval;
- Nasdaq Global Select Market companies and Nasdaq Global Market companies would be expected to have two diverse directors within four years of the SEC approval;
- Nasdaq Capital Market companies would be expected to have two diverse directors within five years of SEC approval.
Companies that do not provide the required disclosure on a timely basis would ultimately be subject to delisting. However, companies that did not meet the expectations for board diversity on a timely basis would "not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives." [Emphasis added.]
Nasdaq will also be there "to aid Nasdaq-listed companies with board composition planning challenges." Through its new partnership with consultant Equilar, Nasdaq expects to help companies "access a larger community of highly-qualified, diverse, board-ready candidates to amplify director search efforts" via the Equilar BoardEdge platform, and the Equilar Diversity Network. It will also continue existing services through the Nasdaq Center for Board Excellence.
According to the NYT, Nasdaq "lobbied" to persuade the SEC to take a leading role by mandating diversity disclosure for all companies. Apparently, that effort did not pan out, but that result could change with a new Administration next year.
Originally Published by Cooley, December 2020
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