Compliance Reminder: Nasdaq Board Diversity Rules

Wilson Sonsini Goodrich & Rosati
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Wilson Sonsini Goodrich & Rosati

[co-author: Barbara Novak]

On August 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved the proposed rules submitted by the Nasdaq Stock Market (Nasdaq) relating to diversity on the boards of directors of Nasdaq listed companies (the Nasdaq Board Diversity Rules), as further discussed in our prior client alert.

As the August 8, 2022 deadline for initial compliance for certain aspects of the Nasdaq Board Diversity Rules approaches, companies should be aware of the timeline for complying with the rules and the resources that Nasdaq provides to assist companies with compliance.

Specifically, as discussed below, most Nasdaq-listed companies that did not disclose, or do not plan to disclose, a board diversity matrix in their proxy statement for their annual meeting of stockholders filed with the SEC prior to August 8, 2022 will need to include a board diversity matrix on their company's website no later than August 8, 2022 and inform Nasdaq that they have done so.

Nasdaq Board Diversity Rules

There are two primary components of the Nasdaq Board Diversity Rules:

  • The requirement to publicly disclose aggregate statistics regarding board-level diversity in a standardized format, which is set forth in Nasdaq Rule 5606 (the Board Matrix Requirement)
  • The requirement to have two diverse directors on the board of directors (with some exceptions) or explain why the company does not have two such directors, which is set forth in Nasdaq Rule 5605(f) (the Comply or Explain Requirement)

Both components are subject to applicable transition periods and compliance dates as further described below.

The Board Matrix Requirement

Under the Board Matrix Requirement, companies must disclose aggregate statistics about the diversity of their board of directors on a standardized format following these Board Matrix Instructions provided by Nasdaq. Nasdaq also provides Board Diversity Matrix Requirements and Examples, which include seven acceptable examples of how to comply with the rule, two unacceptable examples, examples of satisfactory matrixes from 2022 proxy statements, and a discussion of how to address certain hypothetical situations.

A company must include statistics for the current year in its initial matrix, and in subsequent years, must include statistics for the current year and prior year. The matrix must appear either in a company's proxy or information statement for an annual meeting (or Form 10-K or 20-F, if there is no proxy or information statement) or on the company's website. We note that in anticipation of the August 8, 2022 compliance date, many Nasdaq-listed companies included the diversity matrix in their proxy statements for annual meetings held in 2022.

If a company decides to make the disclosure on its website, Nasdaq provides a fillable PDF for U.S. companies and a fillable PDF for foreign issuers that companies may (but are not required) to use. A company must clearly label the disclosure on its website as the Board Diversity Matrix. Although Nasdaq does not mandate a particular place on the website, it recommends putting it on the company's investor relations webpage or other webpage where governance documents are stored. Following the initial 2022 compliance date, the company will be required to publish the matrix on its website concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting by completing Section 10 (Board Diversity Disclosure) of the Company Event Form. Nasdaq also offers Website Disclosure of Board Diversity Matrix: What Companies Need to Know, which provides further information.

Compliance Dates for the Board Matrix Requirement

The dates by which companies must comply with the Board Matrix Requirement are as follows:

  • One Year After Listing for Newly Listed Companies
    • This includes companies that were listed on Nasdaq on or after August 6, 2021, which is the date that the Nasdaq Board Diversity Rules were approved by the SEC.
  • August 8, 2022 for other companies
    • A company that is not a Newly Listed Company must provide its initial diversity matrix disclosure by August 8, 2022.
      • Caveat. If a company files its proxy statement for its annual shareholder meeting during 2022 after August 8, 2022, the company has until the date of its proxy statement to disclose the initial diversity matrix.
    • If a company files its 2022 proxy or information statement before August 8, 2022 and does not include the diversity matrix, the company will have until August 8, 2022 to disclose its diversity matrix.

The Comply or Explain Requirement

Under the Comply or Explain Requirement of the Nasdaq Board Diversity Rules, listed companies with more than five directors must either:

  • have two diverse directors (one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+, as such terms are defined in Nasdaq's Rule 5605(f)(1)) or
  • explain why they do not have two such directors.

Companies with five or fewer directors may comply by having one diverse director. Smaller reporting companies (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) that have more than five directors can comply by having two female directors, or one female director and one director who is an underrepresented minority or LGBTQ+. Foreign Issuers that have more than five directors may comply by having two female directors, or 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 company's principal executive offices, or LGBTQ+," which differs from the definition of underrepresented minority for U.S. companies.

A company that decides to meet the Comply or Explain Requirement by explaining why it does not have the requisite one or two diverse directors, as applicable, must also specify the provisions of the rules to which it is subject. Its explanation could include a description of a different approach. Nasdaq has stated that it will verify that the company has given an explanation but will not evaluate or assess its merits. See Nasdaq FAQ 1771 for examples of explanations.

The company must provide its disclosure in its proxy statement, information statement for its annual shareholder meeting, or on the company's website. Similar to the submission of a diversity matrix on the company's website, if a company decides to disclose the explanation on its website, then it will be required to publish it concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting. In addition, the company must disclose the diversity matrix and the explanation at the same time and in the same manner.

Compliance Dates for the Comply or Explain Requirement

The dates by which a company must either have the applicable number of diverse directors or explain why not are as set forth below.

Companies listed Prior to August 6, 2021:

  • August 7, 2023 – Must have one diverse director (or provide explanation)
  • August 6, 2025 – Must have two diverse directors (or provide explanation) if:
    • The company is listed on the Nasdaq Global Select or Global Markets and
    • The board has more than five directors
  • August 6, 2026 – Must have two diverse directors (or provide explanation) if:
    • The company is listed on the Nasdaq Capital Market and
    • The board has more than five directors

Newly Listed Companies (listed on or after August 6, 2021 but before expiration of the initial phase-in periods set forth below):

  • August 7, 2023 or one year from the date of listing, whichever is later – Must have one diverse director (or provide explanation) if:
    • The company is listed on the Nasdaq Global Select or Global Markets
    • The board has more than five directors
  • August 7, 2023 or two years from the date of listing, whichever is later – Must have one diverse director (or provide explanation) if:
    • The board has five or fewer directors
  • August 6, 2025 or two years from the date of listing, whichever is later – Must have two diverse directors (or provide explanation) if:
    • The company is listed on the Nasdaq Global Select or Global Markets
    • The board has more than five directors
  • August 6, 2026 or two years from the date of listing, whichever is later – Must have two diverse directors (or provide explanation) if:
    • The company is listed on the Nasdaq Capital Market
    • The board has more than five directors

Caveat to Comply or Explain Dates for Later Proxy Filing in Same Year. If a company files its proxy or information statement after any of the deadlines set forth above that are applicable to the company, but in the same calendar year as such date, the company will have until the time of its proxy filing (or, if the company does not file a proxy or information statement, its Form 10-K or 20-F filing) to fulfill the Comply or Explain Requirement.

Newly Listed Companies That List After the Initial Phase-In Period Expires. Companies listing on Nasdaq after the initial phase-in periods expire must meet the applicable Comply or Explain Requirement by the later of two years after listing or when the company files its proxy statement or information statement for the company's second annual meeting of shareholders after listing.

Additional Nasdaq Resources

In addition to the resources already referenced in this client alert, the compliance dates and other information relating to the Nasdaq Board Diversity Rules are further discussed in:

Nasdaq also provides answers to a List of Frequently Asked Questions to help companies comply with the Nasdaq Board Diversity Rules as well as a dedicated mailbox at drivingdiversity@nasdaq.com, where companies can email their questions regarding the new rules.

To assist companies in finding diverse director candidates, Nasdaq provides access to a number of free or discounted board recruiting services. To date, Nasdaq has established partnerships with the following organizations: African American Board Leadership Institute (AABLI); Athena Alliance; theBoardlist; BoardReady; Equilar; Extraordinary Women on Boards (EWOB); Heidrick & Struggles; and Him for Her. Nasdaq's Advancing Boardroom Diversity guide provides further details or companies can email their Nasdaq relationship manager for further information.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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