On Dec. 1, 2020, the Nasdaq Stock Market (Nasdaq) submitted a proposal with
the U.S. Securities and Exchange Commission (SEC) that, if approved, would
require Nasdaq-listed companies to (1) have (or explain why they do not
have) at least two diverse directors and (2) publicly disclose certain
diversity statistics about their boards of directors on an annual basis.
The proposal is under review by the SEC, and public comments are due to the
SEC by Dec. 30, 2020.
Read on to find out how the proposal could create more diverse boards and
promote consistency and transparency in diversity reporting.
Background and Purpose
The recent social justice movement has brought an increased focus on and
commitment to diversity and inclusion on the boards of public companies. In
recognition of this, Nasdaq seeks to encourage its listed companies to
diversify their boards in more meaningful ways and enhance diversity
reporting requirements to produce consistency and transparency in company
disclosures. According to Nasdaq, the goal of the proposal “is to provide
stakeholders with a better understanding of the current board composition
of its listed companies and to enhance investor confidence that listed
companies are considering diversity and inclusion in the selection of
directors, either by including at least two diverse directors on their
boards or by explaining their rationale for not meeting that objective.”
Nasdaq also cited extensive research showing that diverse boards improve
financial performance and corporate governance.
Rule 5605(f) – Diverse Board Representation
Nasdaq’s proposed Rule 5605(f) requires each Nasdaq-listed company, with
certain exceptions, to have, or publicly explain why it does not have, at
least two diverse directors, including one who self-identifies as female
and one who self-identifies as an underrepresented minority or LGBTQ+.
For purposes of the proposal:
- “diverse” means an individual who self-identifies in one or more
of the following categories: female, underrepresented minority or LGBTQ+;
- “female” means an individual who self-identifies her gender as a
woman, without regard to the individual’s designated sex at birth;
- “LGBTQ+” means an individual who self-identifies as
lesbian, gay, bisexual, transgender and/or a member of the queer community;
- “underrepresented minority” means an individual who
self-identifies 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 a listed company does not have at least two diverse directors, as
described above, it will be required to explain the reasons why in its
proxy (or information) statement for its annual meeting of shareholders, or
on its website. If a company elects to provide the disclosure on its
website, it must notify Nasdaq where the information is available by
submitting the URL link through the Nasdaq Listing Center no later than 15
calendar days after the company’s annual meeting of shareholders. Nasdaq
indicates it would only verify that the company has provided the
information and would not assess its substance.
Rule 5606 – Board Diversity Matrix
Proposed Rule 5606 requires each Nasdaq-listed company, subject to certain
exceptions, to disclose on an annual basis statistical board diversity data
about the self-identified gender, race and LGBTQ+ status of the company’s
directors, in a table format substantially similar to the one below. Any
director who chooses not to disclose a gender would be included under
“Gender Undisclosed,” and any director who chooses not to identify as a
particular race or as LGBTQ+ would be included in the “Undisclosed”
category at the bottom of the table.
After the first year of publication, the listed company must disclose the
current and prior year’s diversity data. The information must be published
in the company’s proxy (or information) statement for its annual meeting of
shareholders, or on the company’s website. Disclosure on the website
requires the same process as described above for Rule 5605(f).
Consequences for Noncompliance
Companies that fail to comply with Rule 5605(f) or Rule 5606 will have
until the later of their next annual shareholder meeting, or 180 days from
the event that caused the deficiency, to cure the deficiency. If the
company does not cure the deficiency within the applicable cure period, it
will be subject to possible delisting.
Transition and Phase-In Periods
If approved by the SEC, Nasdaq-listed companies would be expected to comply
with these new requirements as follows:
- all companies must have, or explain why they do not have, at least one
diverse director no later than two calendar years after the date of SEC
approval (the approval date);
- each company listed on the Nasdaq Global Select Market or the Nasdaq
Global Market must have, or explain why it does not have, at least two
diverse directors no later than four calendar years after the approval
- each company listed on the Nasdaq Capital Market must have, or explain
why it does not have, at least two diverse directors no later than five
calendar years after the approval date; and
- all companies must report on an annual basis their board-level diversity
data one year after the approval date.
In addition, the proposal provides a one-year phase-in period for companies
newly listed on Nasdaq after the approval date that were not previously
subject to a substantially similar requirement by another national
securities exchange. Such companies would, in effect, have until the later
of the transition periods provided above or one year from the date of the
listing to satisfy the requirements.
Exemptions and Exceptions
Certain types of companies, such as special purpose acquisition companies,
asset-backed issuers, and other passive issuers and limited partnerships,
would be exempt from the Rule 5605(f) board diversity requirements and the
Rule 5606 statistical disclosure requirements.
Smaller reporting companies and foreign issuers would be permitted to
satisfy the proposed board diversity requirements by having two female
directors. In addition, foreign issuers would have the option to satisfy
the board disclosure requirements through an alternative board diversity
matrix format that would provide flexibility to determine diversity
categories based on the demographics of the foreign issuer’s home country.
The proposal is under review by the SEC, and public comments on the
proposal should be submitted to the SEC by Dec. 30, 2020. The SEC has 30 to
240 calendar days after publication in the Federal Register to approve the
Please see the
proposal and Nasdaq’s
FAQs for a more detailed account and explanation of the proposed changes.
For additional guidance on the information in this alert, please contact
any of the authors, any member of McGuireWoods’
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