On August 6, 2021, the U.S. Securities and Exchange Commission (the “SEC”) approved Nasdaq Stock Market (“Nasdaq”) board diversity listing rules. These rules, which Nasdaq initially proposed in December 2020 and then revised in February 2021, were adopted without any changes. Subject to transition periods and limited exceptions (including for SPACs prior to their business combinations), Nasdaq-listed companies are required to (i) publicly disclose a board diversity matrix in 2022 and (ii) have, or disclose why they do not have, at least one diverse director on their board by 2023 and a second diverse director by 2025 or 2026 depending on the company’s listing tier. Companies that repeatedly fail to comply with Nasdaq’s board diversity rules could be delisted. 

The Board Diversity Matrix

Nasdaq Rule 5606 will require companies to disclose, in a standardized matrix as set forth in the rule or in a substantially similar format, (i) the total number of company board members and (ii) the total number of board members who self-identify in gender identity categories, predefined race and ethnicity categories, and as LGBTQ+. Matrices do not need to name individual directors and how they self-identify, and directors who chose not to identify as a member of any group can be counted in the matrix as “undisclosed.” A company can include the board diversity matrix in its SEC-filed proxy or information statement, or instead provide the disclosure on its website, subject to certain timing and notice requirements. 

All Nasdaq-listed companies must comply with the board diversity matrix disclosure rule by the later of (i) August 8, 2022 or (ii) the date the company files its proxy statement for its 2022 annual meeting of shareholders (or if the company does not file a proxy statement, in its annual report on Form 10-K). This means most calendar year-end companies will first have to comply in their proxy statements for their 2022 annual meetings. After the first year of publishing the diversity statistics, companies must disclose the board diversity matrix for both the current and the immediately preceding year on an annual basis. 

Comply or Explain

Nasdaq Rule 5605(f) will require companies to have at least two diverse board members or to explain the company’s reasons for not meeting this diversity objective. For U.S. issuers, (i) one diverse director must self-identify as female, and (ii) another director must self-identify as an underrepresented minority (Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or as part of two or more races or ethnicities), or as a member of the LGBTQ+ community. Smaller reporting companies also will be required to have two diverse directors, at least one of whom identifies as female, but companies can satisfy the diversity requirement with a second person that also identifies as female. 

All Nasdaq-listed companies are expected to have, or explain why they do not have, at least one diverse director by August 7, 2023. Companies listed on the Nasdaq Global Select Market or Nasdaq Global Market have until August 6, 2025 to have two diverse directors, and companies listed on the Nasdaq Capital Market have until August 6, 2026 to appoint, or explain why they have not appointed, a second diverse director. Companies with boards of five or fewer directors, regardless of their Nasdaq listing tier, can meet the board diversity objective by having only one instead of two diverse directors, but must do so by August 7, 2023. 

Similar to the disclosure requirements for the board diversity matrix, companies must publish any explanation as to why they have not met the diversity objectives in their annual meeting proxy statement or on their website, subject to certain timing and notice requirements. In an effort to help companies comply with the board diversity listing rules, Nasdaq is offering listed companies access to a free board recruitment service. 

Next Steps 

Nasdaq’s board diversity rules mark the next step in a series of actions with respect to changing board diversity in the United States. California was the first to require publicly held companies headquartered in the state to include females and now persons from underrepresented communities on their boards, and several other states have since followed. Proxy advisory firms such as ISS and many large institutional investors also have made changes to their voting guidelines or policies related to diversity, and will recommend or vote against certain directors where the company’s board has no apparent gender, racial or ethnic diversity. Looking forward, the SEC has stated that it intends to propose new rules regarding board and director nominee diversity disclosures as soon as October 2021. 

In light of the newly approved Nasdaq board diversity rules and general diversity trends in the United States, companies should assess their board composition and director succession planning early on. Companies should carefully consider how to request and disclose self-identification information from directors. Lastly, companies should formalize best steps for identifying and recruiting qualified candidates to achieve their corporate and diversity goals and meet any applicable diversity rules or policies timely.  

SEC Approval Order: https://www.sec.gov/rules/sro/nasdaq/2021/34-92590.pdf