Nasdaq’s New Board Diversity Rule
In nearly every industry, leaders have recognized the need to practice diversity and inclusion on their staff and in their boardrooms. It seems that Nasdaq is no different.
On Friday, August 6, 2021, Nasdaq’s new Board Diversity Rule was approved by the Securities and Exchange Commission (SEC). This rule requires that listed companies have at least two board members defined as diverse, or they must explain their inability to meet that requirement. The rule also states that companies must publish statistics that detail the diversity of their board members. The goal of the Board Diversity Rule is to encourage transparency and promote diversity on corporate boards. This information can also help investors as they decide what companies to support.
How the Rule Works
The Board Diversity Rule falls short of being a mandate because although it champions diversity, it allows companies to offer explanations for why they cannot meet the guidelines. In general, one diverse board member must be female (self-identifying, regardless of their gender at birth), and one must be LGTBQ+ or a member of an underrepresented ethnic or racial minority.
Companies that do not have two board members who meet that definition must provide a written explanation of failing to meet those diversity goals. Such a statement should be issued before annual shareholders’ meetings as a proxy statement, provided as an informational statement, or appear on the company website.
In addition, companies must disclose statistics regarding the demographics of all board members. They must share the number of members who are female, male, non-binary, or chose not to disclose gender. Those same gender-based statistics must be broken down by ethnicity and race.
What the Exceptions Are
While the rule intends to bring about change, it is understood that different companies may face various challenges, so the following exceptions apply.
- Smaller companies (with specific asset limits) can satisfy the requirement by having two female board members.
- Companies with five or fewer board members are allowed to have only one diverse member.
- Foreign companies are allowed to have one female board member and another who is female, identifies as LGBTQ+, or is a member of an underrepresented group, noting that such a group may differ from what is considered diverse in the United States.
- Other companies are exempt based on their types, such as acquisition companies, cooperatives, and management investment companies.
When the Rule Goes into Effect
Depending on their Nasdaq exchange listing, companies must comply with the new rule according to different timelines.
Those on the Nasdaq Global Market or Nasdaq Global Select Market must have two diverse board members (or explain why they do not) by August 6, 2025, or the date they file their proxy statements or information statements for 2025 annual shareholders’ meetings, whichever is later. Those on the Nasdaq Capital Market must have two diverse board members (or explain why they do not) by August 6, 2026, or the date they file their proxy statements or information statements for 2026 annual shareholders’ meetings, whichever is later. Companies listed on three markets must have at least one diverse board member (or explain why they do not) by August 6, 2023, or the date they file their proxy statements or information statements for 2023 annual shareholders’ meetings, whichever is later. Newly listed companies will be phased into the rule based on which markets they are listed.
Companies must comply with statistical requirements by August 6, 2022, or the date they file their annual shareholders’ meeting proxy or information statements, whichever is earlier.
Overarching Goals of the Rule
In the short term, the Board Diversity Rule will provide more information for investors so they can compare board diversity statistics and make educated decisions about which companies to endorse. In the long term, Nasdaq hopes that the new rule will advance diversity, which has been shown to enhance innovation, sustainability, and company performance.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.