Nasdaq Files Rule Requiring Diverse Representation on Boards of Listed Companies

Ballard Spahr LLP

SUMMARY

On December 1, 2020, The Nasdaq Stock Market filed a proposed rule with the U.S. Securities and Exchange Commission (SEC), which, if approved, will require listed companies to disclose the racial, LGBTQ+ status, and gender makeup of their boards of directors and have a minimum number of diverse directors or explain why they could not—or elected not to—achieve the established targets. Read the filing here.

THE UPSHOT

  • Each Nasdaq-listed company, unless otherwise exempt, would be required to have at least two diverse directors: one who identifies as a woman and one who identifies as an underrepresented minority or as LGBTQ+.  
  • If the company does not satisfy the diversity requirements, it must explain why in its proxy statement or on its website.
  • Nasdaq-listed companies would be required to report the statistical breakdown of the gender, race/ethnicity, and sexual orientation or gender identity of the members of their boards of directors.   

THE BOTTOM LINE

After SEC approval, each company would have two years to appoint at least one diverse director and four years to have at least two diverse directors, if listed on the Nasdaq Global Select or Global Market tiers. Companies listed on the Nasdaq Capital Market tier would have five years to meet requirements.

FULL ALERT

Nasdaq, as one of two listing exchanges in the United States, is exerting its unique regulatory influence to address the lack of diversity on corporate boards. On December 1, 2020, Nasdaq filed a proposed rule with the U.S. Securities and Exchange Commission (SEC), which, if approved, will require listed companies to have a minimum number of diverse directors or explain why they could not achieve the established targets.

After the initial implementation phase, if the rule is approved, Nasdaq-listed companies will be required to have at least two diverse directors: one who identifies as a woman and one who identifies as an underrepresented minority or LGBTQ+. Underrepresented minorities include board members who identify 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.

If the company fails to satisfy the diversity requirement, it may explain in its proxy statement or on its website why it opted against adding two diverse directors to the board or why it was unable to do so.  No particular explanation is required. The proposal also would require Nasdaq-listed companies to report the gender, race/ethnicity, and sexual orientation or gender identity of the members of their boards of directors.

As explained in the proposal, Nasdaq completed an extensive review prior to filing, including an internal study, third-party research, and interviews of relevant stakeholders, ultimately concluding that diversity improves corporate governance as well as financial performance. Investors and state and federal legislators also have increased the pressure for corporations to diversify their boards. For example, Washington recently passed a law requiring public companies to have a gender diverse board. California has taken a similar approach and requires gender and racial diversity in the boards of public companies.

Despite the substantial research supporting diversity, women, People of Color, and members of the LGBTQ+ community still are underrepresented on boards. Because progress in this area has continued to move slowly, Nasdaq determined that regulatory intervention was necessary to achieve meaningful change.

After the rule is approved, each company listed on the Nasdaq Global Select or Global Market tiers will have two years to appoint at least one diverse director and four years to appoint two. Companies listed on the Nasdaq Capital Market tier will have five years to comply with the requirement.

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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