Nasdaq Seeks Regulatory Approval for Diversity Listing Requirement

December 04, 2020

Nasdaq has requested regulatory approval to require boards of listed companies to include at least one female director and one director from an underrepresented minority group.

Under the proposal most listed companies would be required to have at least two diverse directors, including a female director and a director that is a member of an underrepresented minority or identifies as LGTBQ+.  If they do not have such directors, they would be required to explain why they do not.  The proposal defines underrepresented minorities as one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, and mixed racial/ethnic ancestries.  Foreign and smaller reporting companies could meet the requirement if they have at least two female directors.  Companies would also be required to disclose statistical information on directors' self-identified race, gender, and if applicable, self-identification as LGBTQ+ within one year. 

The timeframe to meet the minimum diversity expectations will be based on a company’s listing tier: 

  • All companies would be expected to have one diverse director (either based on gender or race/ethnicity) within two years of the SEC’s approval of the listing rule.

  • Companies in the two largest listing tiers (by capitalization), the Nasdaq Global Select Market and the Nasdaq Global Market, would be expected to have two diverse directors within four years. 

  • Companies listed on the Nasdaq Capital Market would be expected to have two diverse directors within five years. 

Failure to meet those deadlines would result in delisting, unless a company can disclose why it chose not to meet the requirement.  It is not clear whether there would be a method to evaluate a company’s rationale for not having met the requirement.  Further, it is not clear how cases such as resignation or retirement of diverse directors would be handled if such events cause a company to fall below the threshold.

Outlook:  This proposed listing requirement is in line with recent efforts from both investors and state/local entities (such as Arjuna Capital and the NYC Comptroller) to drive companies to increase board diversity.  It broadly mirrors the recently enacted laws in California requiring increased gender and ethnic board diversity for companies headquartered in the state.  While the headline is splashy, the specific provisions of the requirement and the given timeframe are not overly burdensome.  In fact, Nasdaq could be criticized for providing such an extended timeframe to comply.  Due to changes to the SEC with the incoming administration, including the departure of SEC Chairman Jay Clayton at the end of 2020, it may be some time before the proposed listing standard receives approval.