On August 6, 2021, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposed rule that would require a listed company to comply with certain board diversity requirements, or explain why it does not (the Board Diversity Rules). Nasdaq proposed this rule late last year (see our blog post about Nasdaq’s proposed board diversity rules) to help make more transparent diversity in the boardroom.
Overview of Board Diversity Rules
In its approved form, the Board Diversity Rules set a “recommended objective” for most Nasdaq-listed companies with more than five directors to include at least one woman on their board of directors, along with one person who is an underrepresented minority or self-identifies as LGBTQ+. Smaller companies with five or fewer total directors may satisfy the recommended objective with one director from a diverse background rather than two. An “underrepresented minority” is defined as “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.”
Breakdown of Board Diversity Rules Compliance Phases and Dates
The Board Diversity Rules set out phased-in compliance for Nasdaq-listed companies based on a company’s listing tier on Nasdaq:
- August 7, 2023: All covered Nasdaq-listed companies must have, or explain why they do not have, one diverse director.
- August 6, 2025: Companies listed on the Nasdaq Global Select Market and the Nasdaq Global Market must have, or explain why they do not have, two diverse directors.
- August 6, 2026: Companies listed on the Nasdaq Capital Market must have, or explain why they do not have, two diverse directors.
If companies do not meet the “recommended objective” contained in the Board Diversity Rules, they will need to explain the reason for not doing so. The order approving the Board Diversity Rules noted that the SEC would not assess the substance of the company’s explanation in this regard.
Other Board Diversity Rules Requirements
Additionally, the Board Diversity Rules require Nasdaq-listed companies to provide on an annual basis statistical information about self-identified gender, race and LGBTQ+ affiliation characteristics of their board of directors. Covered companies will be required to disclose in a matrix format aggregated board-diversity data by the later of:
- August 8, 2022; or
- 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 and the SEC have highlighted the framework approach, in contrast to a mandate. As noted in the order approving the Board Diversity Rules, the policy “would establish a disclosure-based framework for Nasdaq listed companies that would contribute to investors’ investment and voting decisions. While the proposal may have the effect of encouraging some Nasdaq-listed companies to increase diversity on their boards, the proposed rules do not mandate any particular board composition.”
Regarding the Board Diversity Rules, SEC Chairman Gary Gensler stated, “These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.”