Nasdaq’s efforts to promote diversity on boards has received support from a variety of constituencies, with a number of commenters approving of its ‘comply-or-explain’ approach.
The exchange operator last month filed a proposal with the SEC to adopt new listing rules that would require 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 under-represented minority or LGBTQ+.
Foreign companies and smaller reporting companies would be able to comply with the rule by having two female directors. Listed companies would also have to disclose consistent, transparent diversity statistics regarding their board.
Nasdaq defines an under-represented minority as a person 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. This reflects the US Equal Employment Opportunity Commission’s categories.
The proposal has attracted dozens of comment letters. In one, Council of Institutional Investors (CII) general counsel Jeffrey Mahoney notes that the group believes corporate governance best practices include the expectation that boards will reflect the diversity of their communities, customers and employees, and that diverse boards can boost financial performance.
CII, however, believes diverse boards can be created without quotas, which it says may led to ‘check-the-box’ diversity. ‘We support the proposal’s comply-or-explain model that provides a transparent framework for listed companies to present their board composition, with the flexibility to explain why the Nasdaq proposed standards cannot be met,’ Mahoney writes. He adds that any burden for companies to comply with the planned requirement for disclosing board-level diversity statistics would be outweighed by the benefits of the information to investors.
New York City Comptroller Scott Stringer also voiced support for Nasdaq’s plan, writing that the proposed rules would ‘provide investors with vital information to inform investment and proxy voting decisions, as well as improve shareowner value by fostering increased board racial and gender diversity without imposing mandates or quotas.’
At the same time, Stringer recommended that the proposal go further by requiring companies to identify their directors as individuals, not in aggregate, and that the proposed director matrix requirement be widened to describe not only each director’s self-identified gender and race/ethnicity, ‘but also [his/her] skills, experience and attributes that are most relevant to the company’s overall business, long-term strategy and risks.’
Stringer last year led a campaign that resulted in 34 S&P 100 companies agreeing to release the composition of their workforce by race, ethnicity and gender through their annual EEO-1 report data.
On the corporate side, Microsoft backs the proposal and notes in its comment letter that, as a Washington state corporation, it supports the Women on Corporate Boards Act, enacted last year, which requires public companies incorporated in the state to have at least 25 percent of their board members be identifying as women by 2022, or provide to their shareholders a report on their board diversity and analysis.
‘We believe Nasdaq’s proposal is consistent with the goals of the Washington statute, and uses similar disclosure mechanisms to enable shareholders to make informed voting and investment decisions that can include consideration of a company’s approach to diversity on its board,’ writes Dev Stahlkopf, corporate vice president, general counsel and secretary at Microsoft.
Another tech company, Facebook, also supports the Nasdaq initiative. COO Sheryl Sandberg writes that Facebook was one of the first major companies to adopt a formal board diversity policy that requires it to:
- ‘Consider candidates with diverse backgrounds in terms of knowledge, experience, skills and other characteristics
- ‘Ensure the initial list of candidates from which new director nominees are chosen by the board includes candidates with a diversity of race, ethnicity and gender.’
Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC), in another letter writes that the group ‘commends Nasdaq for promoting a private sector-based solution to foster greater diversity among boards of directors. The proposal encourages companies to think critically about how to incorporate diversity into their corporate leadership, which is a goal the chamber shares.’
Quaadman notes that the proposal acknowledges not all companies may be able to meet new listing standards on the same schedule, and the CCMC suggests Nasdaq conducts a continuing assessment of the new rules’ potential impacts on emerging-growth companies and IPOs.
Gary LaBranche, president and CEO of NIRI, writes in the group’s letter that it traditionally has been wary of disclosure mandates or ‘overly prescriptive SEC rules that try to address societal problems.’ Rather, LaBranche says, NIRI generally favors principles-based disclosure rules that offer compliance flexibility and welcomes Nasdaq’s approach along those lines.
‘While some companies may question the feasibility of meeting Nasdaq’s diversity goals (or explaining their board selection policies) or believe that diversity should not be part of an exchange listing standard, we believe the potential benefits from Nasdaq’s proposal would outweigh these concerns,’ LaBranche writes.
David Bell, co-chair of the corporate governance practice at Fenwick & West, raises a concern about the disclosure requirements, arguing that the statistical data sought might create privacy concerns for some directors.
‘The proposed format for the board diversity matrix requires companies to provide information on each director’s voluntary, self-identified gender and racial/ethnic characteristics and LGBTQ+ status,’ he writes. ‘[But] because the gender information is also required for each racial/ethnic category there is the potential for an individual director’s characteristics to be unintentionally identified through the board diversity matrix, losing the anonymity afforded by aggregating such information.’
Bell suggests this potential issue could be avoided by modifying the board diversity matrix. For example, he says: ‘Instead of providing columns for each racial/ethnic category to disclose the number of directors based on gender identification, just the total number (regardless of gender category) can be included for each racial/ethnic category in the same way that LGBTQ+ is currently presented in the board diversity matrix. Gender categories could then be presented separately showing the total number of men, women, non-binary and undisclosed, each in its own row.’
Another tweak to the proposal is suggested by CFA Institute, which generally support Nasdaq’s plan. Institute officials write that although Nasdaq does not preclude companies from disclosing other diverse attributes of its board members, they encourage Nasdaq to consider whether the proposed diversity definition could be improved by adding factors such as disability and veteran status.
‘This expanded definition would be consistent with state legislation and legislation considered or passed in the US Congress on a bipartisan basis, as well as with our own observations of the investment management industry’s experience in defining diversity,’ they explain.