Nasdaq to Require Increased Board Diversity Disclosure by Listed Companies

By | December 1, 2020

Exchange operator Nasdaq has proposed new rules for listed companies around board diversity and disclosure.

According to a filing with the Securities and Exchange Commission (SEC), the new listing rules, approved by Nasdaq directors on Nov. 5, would require all companies listed on Nasdaq’s U.S. exchange to “publicly disclose consistent, transparent diversity statistics regarding their board of directors.”

The rules would also require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.

(An “underrepresented minority” is an individual who self-identifies in 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 or two or more races or ethnicities.)

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Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors.

The goal is to provide stakeholders with a better understanding of a company’s current board composition and “enhance investor confidence that all listed companies are considering diversity in the context of selecting directors,” either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective, Nasdaq said in its announcement.

“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” said Adena Friedman, president and CEO, Nasdaq. “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”

Under the proposal, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics within one year of the SEC’s approval of the listing rule. Specifically, all companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have two diverse directors within four years of the SEC’s approval of the listing rule. Companies listed on the Nasdaq Capital Market will be expected to have two diverse directors within five years of the SEC’s approval.

Companies that are not in a position to meet the board composition objectives within the required timeframes will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.

The proposal comes at a time when some corporations are being sued over a lack of diversity and there are increasing calls for more diversity and disclosure. Nasdaq also cites actions by states including California regarding corporate diversity.

The SEC has from 45 to 90 days to approve or disapprove the rule, which is available in the Federal Register for comment.

Research Findings

Nasdaq, a U.S.-based global exchange operator and technology and data firm, said it conducted an internal study among its listed companies and found that while some companies have made progress in diversifying their boardrooms, “the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.”

Nasdaq said it also found that current reporting of board diversity data lacks consistency. “As such, investors are not able to readily compare board diversity statistics across companies,” the proposal notes.

Nasdaq’s SEC filing includes an analysis of more than two dozen studies that it says showed that “diverse boards are positively associated with improved corporate governance and financial performance.”

According to the proposal, research has found that gender-diverse boards in particular are associated with more transparent public disclosures; better reporting discipline; a lower likelihood of manipulated earnings; a lower likelihood of non-compliance or omission of information; and a lower likelihood of securities fraud. In addition, studies found that having at least one woman on a board is associated with a lower likelihood of material weaknesses in internal control over financial reporting and a lower likelihood of material financial restatements.

Nasdaq said it believes that increased diverse representation on boards will also strengthen the integrity of the market; enhance capital formation, efficiency, and competition; and build investor confidence.

“Diversity of experience, gender, race, knowledge, and perspective means that a company is more capable of seeing the full picture, assessing risk and overcoming challenges with forward-looking, innovative solutions,” Michael Splinter, chairman, Nasdaq, said in prepared remarks.

The organization said that while gender diversity has improved among U.S. company boards in recent years, the pace of change has been gradual, and the U.S. still lags behind other jurisdictions that have imposed requirements related to board diversity. Also, progress toward bringing underrepresented racial and ethnic groups into the boardroom has been even slower, according to the organization.

Nasdaq said it is unable to provide definitive estimates of the number of listed companies affected by the proposal due to the inconsistent disclosures and definitions of diversity and the limited disclosure of race and ethnicity information – an information gap the proposed rule seeks to address.

Nasdaq has more than 4,200 total listings with a market value of more than $18 trillion on its U.S., Nordic and Baltic exchanges, representing industries such as retail, health care, finance and technology.

Nasdaq is also introducing a partnership with Equilar, a provider of corporate leadership data, to aid Nasdaq-listed companies with board composition planning challenges.

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