August 13, 2021
The SEC has approved Nasdaq’s plan to require listed firms to diversify their boards or explain why they have not. Once the rule is implemented, Nasdaq-listed companies will have to include (or explain why they do not include) at least two diverse directors: one female and one belonging to an under-represented minority or LGBTQ+ group.
Listed companies will also have to disclose board-level diversity statistics through Nasdaq’s own proposed disclosure framework within one year.
Background to the new rule: Nasdaq revised its submission in February to be more lenient for smaller boards, newly-listed companies, and companies that no longer meet the goals due to a vacancy on the board. Nasdaq also confirmed it will not “verify” the attestation of disclosures and will accept the accuracy of any director’s self-identification. The exchange maintains that the proposal is not a quota or unavoidable delisting for companies, because the option to simply explain why diversity goals aren’t met is always available.
Opposition: The Republican members of the Senate Banking Committee strongly opposed the rule and it may yet be subject to challenge in the courts or further review by the SEC. Republican Commissioner Hester Peirce voted against approving the rule and Commissioner Elad Roisman submitted a partial dissent.
Timeline: Companies have until after August 8, 2022, or the date the company files its proxy for its 2022 annual meeting to comply with the diversity data disclosure. Nasdaq is hosting several webinars to help companies understand the new rule and has created an FAQ for listed companies on implementation. The timeline to achieve the target of two diverse directors will differ based on company size—larger companies have until August 7, 2023 to have one diverse director and until August 6, 2025 to have two diverse directors. Nasdaq has partnered with Equilar to help companies meet their board diversity goals by accessing BoardEdge and the Equilar Diversity Network, Equilar’s new platform for board-ready diverse director candidates.
Outlook: The approval of the rule signals the SEC’s willingness to engage on issues like board diversity, with Chair Gensler stating that the rules “reflect calls from investors” for greater transparency and “consistent and comparable data” on the topic. We expect this last phrase to become an SEC favorite when discussing ESG and human capital metrics disclosures in the near future.