On August 6, 2021, the U.S. Securities and Exchange Commission approved rule changes proposed by The Nasdaq Stock Market LLC related to board diversity and disclosure. The board diversity proposal, as approved by the SEC, requires each Nasdaq-listed company (subject to certain exceptions) to (i) have at least two Diverse (as defined below) directors or explain why it does not and (ii) disclose, in aggregated form, information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board.

Key Takeaways

• Most Nasdaq-listed companies will be required to (i) have at least two Diverse directors or explain why not and (ii) disclose certain aggregated board-diversity data.
• The new board Diversity rule provides for phased-in compliance for Nasdaq-listed companies based on a company’s listing tier:
  • August 7, 2023: Deadline for all covered Nasdaq-listed companies to have, or explain why they do not have, one Diverse director.
  • August 6, 2025: Deadline for companies listed on the Nasdaq Global Select Market and the Nasdaq Global Market to have, or explain why they do not have, two Diverse directors.
  • August 6, 2026: Deadline for companies listed on the Nasdaq Capital Market are required to have, or explain why they do not have, two Diverse directors.
• A covered company will be required to disclose in a matrix format aggregated board-diversity data by the later of (i) August 8, 2022 or (ii) the date the company files its proxy or information statement for its annual meeting of shareholders (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the 2022 calendar year.
• The failure to meet the diversity requirements triggers disclosure but no other Nasdaq- or SEC-imposed consequence.
• Nasdaq will provide certain Nasdaq-listed companies with one year of complimentary access to a board-recruitment service to connect companies with qualified Diverse candidates.

Background

In December 2020, Nasdaq first submitted to the SEC the board diversity proposal to promote increased transparency into the board diversity of public companies. Nasdaq amended the proposal in February 2021 after the SEC received over 200 comment letters from issuers, investors, asset managers and other stakeholders. In its approval of the proposal, the SEC determined that the proposal would contribute to the maintenance of fair and orderly markets and “promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national system, and protect investors and the public interest.”

Board Diversity Requirement

New Nasdaq Rule 5605(f)(2) will require each Nasdaq-listed company with a board consisting of more than five members (subject to certain exceptions) to have, or explain why it does not have, two members who are “Diverse.” Under the SEC’s order, “Diverse” is defined to mean an individual who self-identifies in one or more of the following categories: (i) Female, (ii) Underrepresented Minority or (iii) LGBTQ+.

• “Female” is defined to mean “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.”
• “Underrepresented Minority” is defined to mean “an individual 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.”
• “LGBTQ+” is defined as “an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.”

Under Rule 5605(f)(2)(D), Nasdaq-listed companies with boards of directors of five or fewer members (referred to in the SEC order as “Companies with a Smaller Board”) will be required to have, or explain why they do not have, at least one director who is Diverse.

In addition to the dispensation for Companies with a Smaller Board, the new rules provide more flexibility for Smaller Reporting Companies (as defined in Rule 12b-2 under the Securities Exchange Act of 1934) and foreign issuers to meet the diversity objective. Smaller Reporting Companies can meet the diversity objective with two Female directors, or one Female director and one director who is an Underrepresented Minority or LBGTQ+. Foreign issuers can meet the diversity objective with two Female directors, or with one Female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the foreign issuer’s principal executive offices, or who is LBGTQ+.

Special purchase acquisition companies (SPACs) will not be required to provide disclosure information or to have, or disclose that they do not have, any minimum number of diverse directors until their business combination.

For companies that do not achieve the board-diversity targets, disclosure of this fact and the reasons why such companies did not achieve the board-diversity targets must be provided in advance of the applicable company’s next meeting of shareholders either (i) in a proxy or information statement (or, if a company does not file a proxy, in its Form 10-K or 20-F), or (ii) on the company’s website (and submitted concurrently with its proxy statement with notice to Nasdaq within one business day after posting). Nasdaq will verify that listed companies have provided an explanation, but will not assess the merits of the explanation.

Aggregated Data Requirement

Commencing on later of (i) August 8, 2022 or (ii) the date the company files its proxy or information statement for its annual meeting of shareholders (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the 2022 calendar year, Nasdaq Rule 5606(a) will require that each Nasdaq-listed company annually disclose, in a matrix format, its aggregated board-level diversity information, including:

1. the number of directors based on gender identity (Female, male or non-binary) and number of directors who did not disclose gender;
2. the number of directors based on race and ethnicity (African American or Black, Alaskan Native or Native American, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, While, or two or more races or ethnicities), disaggregated by gender identity (or non-disclosure of gender);
3. the number of directors who self-identify as LGBTQ+; and
4. the number of directors who did not disclose a demographic background under item (ii) or (iii) above.

The board diversity matrix may be disclosed in advance of the company’s next annual meeting of shareholders in any proxy statement or any information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) or on the company’s website (and submitted concurrently with its proxy statement and with notice to Nasdaq within one business day after posting).

Board Recruiting Service Proposal

In addition to its approval of the board diversity proposal, the SEC also approved a second Nasdaq proposal to establish a system to provide certain Nasdaq-listed companies with one year of complimentary access to a “board recruiting service” that will provide access to “a network of board-ready diverse candidates for companies to identify and evaluate.” Under the SEC order, this service will be made available to any Nasdaq-listed company that represents that it does not have: (i) at least one director who self-identifies as Female; and (ii) at least one director who self-identifies as an Underrepresented Minority, LGBTQ+ or both.

Nasdaq has established partnerships with recruiting services Equilar, Athena Alliance and BoardList. To take advantage of these services, companies should refer to these Nasdaq resources:

• Equilar Fact Sheet.
• Athena Alliance.
• BoardList.

Transition Periods

The following transition rules apply to current Nasdaq-listed companies:

• Nasdaq Global Select Market and Nasdaq Global Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023, and two diverse directors by August 6, 2025
• Nasdaq Capital Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023 and two diverse directors by August 6, 2026.
• Companies with boards that have five or fewer directors, regardless of listing tier, are required to have, or explain why they do not have, one diverse director by August 7, 2023.

Takeaways

The SEC’s approval of the board diversity proposal represents the adoption of a new disclosure framework and does not set mandatory quotas on the Nasdaq-listed company boards. Nevertheless, the new rules will likely cause Nasdaq-listed companies, public companies listed on other exchanges, and companies exploring public listings to contemplate board diversity. As stated by SEC Chair Gary Gensler, “the rules reflect calls from shareholders for greater transparency regarding companies’ leadership, and are part of broader investor demand for ‘consistent and comparable data’ needed to make investment decisions.” While Nasdaq-listed companies remain free to select who they perceive to be the most qualified director candidates, the SEC’s approval of the board diversity proposal is expected to elevate the importance of diversity considerations in identifying and selecting director candidates.