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Nasdaq Proposes Board Diversity Requirements

Earlier this month, Nasdaq submitted a proposal (the “Proposal”) to the Securities and Exchange Commission (“SEC”) that would require listed companies to meet certain board diversity metrics.  In response, the SEC has issued a Notice of Filing of Proposed Rule Change to Adopt Listing Rules Related to Board Diversity, summarizing the Proposal and outlining next steps (the “Notice,” available here).

As the basis for the Proposal, Nasdaq submits that, while some companies have already taken significant steps to voluntarily diversify their boardrooms, the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional board diversification. Nasdaq also submits that that current reporting of board diversity data is not provided in a consistent manner or on a sufficiently widespread basis, limiting the ability of investors to meaningfully evaluate such information.  In support of the Proposal, Nasdaq presents academic research, discussed in detail in the Notice, suggesting a positive association between board diversity and shareholder value, investor protection and decision-making.

The Proposal would require most Nasdaq-listed company boards to have, or explain why they do not have, at a minimum, one director who self-identifies as female and 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 two or more races or ethnicities, or as LGBTQ+. Smaller reporting companies and foreign issuers would also be required to have at least one director who self-identifies as female, or explain why they do not have such a director. Smaller reporting companies would be required to have a second director who self-identifies as female, an underrepresented minority, or LGBTQ+, or explain why they do not have a second diverse director. Foreign Issuers would be required to have a second director who self-identifies as female, a minority based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction, or LGBTQ+, or explain why they do not have a second diverse director. The Proposal would also require companies to provide, in a proposed uniform format, statistical information on the company’s board of directors related to a director’s self-identified gender, race, and self-identification as LGBTQ+ on a going forward basis (the “Statistical Information”).

If approved by the SEC, the Proposal would be phased-in over several years. After the first year, companies must disclose their board composition, consistent with the required format of the Statistical Information. After the second year, companies must have, or explain why they do not have, at least one diverse director, and after four years (five years for Nasdaq Capital Market companies), companies must have, or explain why they do not have, at least two diverse directors.

The Proposal is reminiscent of similar requirements that have gone into effect in recent years in California and, to a lesser extent, Illinois. Specifically, each publicly traded company incorporated in California must have on its board at least (1) one female director and (2) one director from an underrepresented community. Illinois requires public companies incorporated in that state to make annual disclosures with respect to board composition and diversity; currently, Illinois stops short of requiring particular board composition.

At present, over 75% of Nasdaq companies do not satisfy the diversity requirements of the Proposal. Advocates of corporate diversity point to similarly low statistics in California prior to the adoption of board diversity requirements in that state, and note that the percentage of California boards with diverse members has increased significantly following the implementation of those requirements. Nasdaq is hopeful that the Proposal, if adopted, would yield similar results on a national scale.

The SEC will hold a period of public comment on the Proposal, to conclude within 45 days following the publication of the Notice in the Federal Register, before arriving at a decision. Comments may be submitted via the following methods:

Electronic comments:

  • Use the Commission’s Internet comment form (available here); or
  • Send an e-mail to rule-comments@sec.gov. Please include File Number SR-NASDAQ-2020-081 on the subject line.

Paper comments:

  • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

The SEC will post all comments on its website (available here). Any personal or confidential information should not be included in submitted comments.

For additional information related to anything contained in this Client Alert, please contact Margaret F. Farrell, James R. Burke, Kaitlin M. Humble, or any member of our Securities Law Practice Group.


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