In a very significant move for companies, the SEC has approved Nasdaq’s plan to require listed firms to diversify their boards. Once the rule is implemented, Nasdaq-listed companies will have to include (or explain why they do not include) at least two diverse directors: one female and one belonging to an under-represented minority or LGBTQ+ group. Listed companies will also have to disclose board-level diversity statistics through Nasdaq’s own proposed disclosure framework within one year. Both Democratic Commissioners voted in favor of the proposal, while Republican Commissioner Hester Peirce voted against and Commissioner Elad Roisman submitted a partial dissent.
Nasdaq revised its submission in February to be more lenient for smaller boards, newly-listed companies and companies who no longer meet goals due to a vacancy on the board. Nasdaq also confirmed it will not “verify” the accuracy of disclosures and will accept the accuracy of any director’s self-identification, and maintains that the proposal is not a quota or unavoidable delisting for companies, as the option to simply explain why diversity goals aren’t met is always available. Despite this, the Republican contingent of the Senate Banking Committee strongly opposed the rule and it may yet be subject to challenge in the courts or further review by the Commission. However, once the rule is implemented, companies will have two to five years (depending on listing tier) to achieve diversity targets and one year to disclose diversity statistics. Nasdaq has partnered with Equilar to help companies meet their board diversity goals by accessing BoardEdge and the Equilar Diversity Network, Equilar’s new platform for board-ready diverse director candidates.
The approval of the rule signals the SEC’s willingness to engage on issues like board diversity, with Chair Gensler stating that the rules “reflect calls from investors” for greater transparency and “consistent and comparable data” on the topic. We expect this last phrase to become an SEC favorite when discussing ESG and human capital metrics disclosures in the near future.