SEC gives green light to Nasdaq board diversity plan

Aug 09, 2021
Exchange takes ‘comply or explain’ approach

The SEC on Friday approved Nasdaq’s plan to promote diversity on boards.

The move opens the door for Nasdaq to require companies listed on the exchange to have – or explain why they do not have – at least two diverse board members, including one who self-identifies as female and one who self-identifies as either an under-represented minority or LGBTQ+.

Nasdaq-listed companies will also have to disclose in aggregate form the voluntary self-identified gender and racial characteristics and LGBTQ+ status of their boards.

In a regulatory filing, SEC officials write that the exchange’s plan ‘would establish a disclosure-based framework that would make consistent and comparable statistics widely available to investors regarding the number of diverse directors serving on a Nasdaq-listed company’s board. Board-level diversity statistics are currently not widely available on a consistent and comparable basis, even though the exchange and many commenters argue that this type of information is important to investors.’

They add: ‘As noted by the exchange and a number of commenters, a better understanding of why a company does not meet the proposed objectives would contribute to investors’ investment and voting decisions… [C]ommenters representing a broad array of investors have indicated an interest in board diversity information.

‘And, regardless of their views on those issues, the board diversity proposal would provide investors with information to facilitate their evaluation of companies in which they might invest. The [Nasdaq] proposal would therefore contribute to the maintenance of fair and orderly markets.’

In a statement responding to the commission’s decision, Nasdaq says: ‘We are pleased that the SEC has approved Nasdaq’s proposal to enhance board diversity disclosures and encourage the creation of more diverse boards through a market-led solution. We look forward to working with our companies to implement this new listing rule and set a new standard for corporate governance.’

The proposal, which was filed last December, received support from a variety of constituencies including for its ‘comply-or-explain’ approach. For example, the Council of Institutional Investors’ general counsel Jeffrey Mahoney noted in a comment letter 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.

‘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 wrote at the time.

The proposal also found favor on the issuer side. For example, Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, wrote in January 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.’

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