The Nasdaq Stock Market has developed a reputation for being the hip securities exchange, technologically and otherwise. In many ways, it deserves this reputation. For example:
- In 1991, Nasdaq became the world’s first electronic stock market.
- In 1992, it joined with the London Stock Exchange to form the first intercontinental linkage of capital markets.
- In 1998, using the slogan “the stock market for the next hundred years,” Nasdaq became the first U.S. stock market to trade online.
- In 2016, Adena Friedman was promoted to chief executive officer, becoming the first woman to run a major exchange in the U.S.
So it is not particularly surprising that, once again, in August 2021, Nasdaq took center stage and became the first major stock exchange to adopt a board diversity rule for its listed companies.
WHY THIS RULE? WHY NOW?
The answer to the first question is clear. Notwithstanding widespread acknowledgement by corporate America that board diversity leads to greater innovation, smarter decision-making, and improvements to the bottom line, actual board diversity remains elusive. As of 2020, only 20.9% of Fortune 500 board seats were held by White women, and a mere 5.7% were held by Black and Latina women; and while 2021 saw gains of 300% in new directors who are Black and 200% gains in Latino directors, 80% of all Fortune 500 board members are White, and 70% are male.[1] So even though the new rule will not create “instant” diversity, it will create measurable board diversity goals, forcing companies that have given lip service to diversity to act – or to disclose that they have failed to act.
Why now? Personally, I ask, “Why not before?” The answers to those questions, however, are beyond the scope of this blog. For this moment, I am cautiously optimistic that Nasdaq’s new diversity rule can be a catalyst for meaningful change that leads to the bona fide board diversity that corporate America has been incapable of accomplishing thus far.
WHAT DOES THE RULE REQUIRE?
The new board diversity rule provides, generally, that companies listed on Nasdaq’s U.S. exchange must have at least two diverse directors, including one director who self-identifies as female, and one who self-identifies as either an underrepresented minority or LGBTQ+. The rule falls short of a mandate, however. If a company does not have the minimum number of diverse directors, the rule only requires that the company provide an explanation. Furthermore, while Nasdaq will verify that a company has provided an explanation, it will not judge the integrity of the explanation.
Additionally, Nasdaq listed companies must disclose the gender, race/ethnicity, and sexual orientation its board members, based upon those directors’ self-identifications. The rule defines specific diversity categories, which are available on Nasdaq’s website at:
https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Matrix.pdf.
Where a director chooses not to self-identify, the rule provides that the company must disclose the number of directors who elected not to provide information regarding gender, race/ethnicity, or sexual orientation. Reporting companies listed on Nasdaq should review and potentially revise their D&O questionnaires in advance of the 2022 proxy season in order to elicit the information needed to comply with the new rule. In fact, our understanding is that many companies, including those not listed on Nasdaq, began to do this in 2021. Further, as the SEC noted in approving the rule, companies may wish to provide additional disclosure regarding their directors’ diversity characteristics, such as military service, disability status, language and/or culture; accordingly, consideration should be given to including additional diversity questions in their D&O questionnaires.
PRESENTATION OF DISCLOSURES
The new rule is designed to produce standardized board diversity statistics that are comparable across companies. Consequently, listed companies are required to employ the rule’s template Board Diversity Matrix for the presentation of its diversity data.[2] The template and instructions for the preparation of the template are available on Nasdaq’s website at: https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Matrix.pdf.
ACCOMODATIONS AND EXCEPTIONS
The rule permits Smaller Reporting Companies and foreign issuers (including Foreign Private Issuers) to satisfy the diversity objective by including two female directors on their boards (in lieu of one female director and one underrepresented minority or LGBTQ+ director). In addition, companies with five or fewer directors can satisfy the rule’s diversity objective with the inclusion of only one diverse director on their boards (and such companies are permitted to add a sixth director who is diverse in order to meet the one diverse director requirement, without losing their small board status under the rule).
The rule also exempts various categories of companies. SPACs are not required to provide the board diversity matrix or to meet, or explain why they do not meet, the board diversity objective until after a business combination has been consummated. Limited partnerships, closed end funds, management investment companies and issuers of non-voting preferred securities and debt securities that do not have equity securities listed on Nasdaq, among others, are also exempt.
WHEN AND WHERE IS DIVERSITY DISCLOSURE PROVIDED?
Companies are required to report their board diversity statistics annually, either in their proxy statements or on their websites.[3] For the initial year of disclosure, a company need only present board diversity statistics for the current year. After the first year, disclosure of board diversity statistics is required for the current year and the immediately preceding year.
The following table summarizes the requirements and the transition periods for companies listed on Nasdaq prior to August 6, 2021:
| Nasdaq Market: | Disclosure of Board Matrix |
Requirement for One Diverse Director |
Requirement for Two Diverse Directors |
| Nasdaq Global Select or Global Markets |
August 8, 2022 or the date the company files its 2022 proxy, whichever is later |
August 7, 2023 (2 years) |
August 6, 2025 (4 years) |
| Nasdaq Capital Market |
August 6, 2026 (5 years) |
||
| Boards with five or fewer directors | N/A |
The requirements and transition periods for companies that list on Nasdaq on or after August 6, 2021, but before the initial phase-in period expires, are as follows:
| Nasdaq Market: | Disclosure of Board Matrix |
Requirement for One Diverse Director |
Requirement for Two Diverse Directors |
| Nasdaq Global Select or Global Markets |
1 year from date of listing |
August 7, 2023 or 1 year from date of listing, whichever is later | August 6, 2025 or 2 years from date of listing, whichever is later |
| Nasdaq Capital Market |
No specific milestone | August 6, 2026 or 3 years from date of listing, whichever is later | |
| Boards with five or fewer directors | August 7, 2023 or 2 years from date of listing, whichever is later | N/A |
Companies that file their proxy statements after the dates in each respective calendar year, as set forth in the above tables, will be required to explain why they meet, or do not meet, the requirement at the time of their respective proxy filings. Any company that does not file a proxy statement should provide the required disclosure in its Form 10-K or Form 20-F, as applicable.
FAILURE TO COMPLY
In the event that a company does not have the required number of diverse directors and it fails to provide the required explanatory disclosure within the timeframes for meeting the diversity objective or providing the explanation, the company will have until the later of (i) its next annual stockholder’s meeting, or (ii) 180 days from the event that caused the deficiency, within which to cure the non-compliance. A company can cure noncompliance either by meeting the applicable minimum diverse board requirement or providing the required explanation. If the company fails to comply with the diversity disclosure requirements during the rule’s cure period, then, upon notice from Nasdaq, the company will have 45 days within which to provide Nasdaq with a plan to bring the company into compliance. The failure to timely submit a plan to Nasdaq, or the submission of a plan that is not acceptable to Nasdaq may result in a company’s delisting. Further, if a company fails to gain compliance within the timeframe of its approved plan, it will also become subject to delisting.
ASSISTANCE AND RESOURCES
Nasdaq is providing information, assistance, and complementary services to help its listed companies achieve compliance with the new requirements, including FAQs on its Listing Center at https://listingcenter.nasdaq.com/Material_Search.aspx?mcd=LQ&cid=157&sub_cid=&years=2020&criteria=1&materials. There is also a dedicated mailbox for questions: drivingdiversity@nasdaq.com. In addition, Nasdaq is partnering with board recruiting firms, and for a limited time, listed companies will be granted free access to these services.[4] See, Nasdaq’s guide, “Advancing Board Diversity” at https://listingcenter.nasdaq.com/assets/Advancing%20Boardroom%20Diversity.pdf. Companies interested in the complementary recruiting services should act quickly, because the deadline to request free access, December 1, 2021, is fast approaching.
AND IF YOU’RE NOT LISTED ON NASDAQ?
Of course, there are many companies that are not listed on Nasdaq. However, just as other exchanges have followed Nasdaq’s innovations in other areas, it would not be surprising if they did so with respect to board diversity as well. And even if that does not happen, companies have begun to provide extensive disclosure on board diversity despite the fact that it is not required. So, regardless of where your company is listed, it seems advisable to consider increasing your board’s diversity and providing robust disclosure on the subject; your investors will almost certainly expect or even demand it, and it also has the virtue of being the right thing to do.
[1] https://news.bloomberglaw.com/banking-law/board-diversity-is-critical-to-protect-shareholders-bottom-line.
[2] If a company uses a different matrix format, the format used must be substantially similar to the matrix template in the new rule. Examples of acceptable and unacceptable matrices can be found on Nasdaq’s website.
[3] If a company does not file a proxy statement or otherwise chooses to disclose the Board Diversity Matrix on its website, the company must also complete a short form, through Nasdaq’s Listing Center, which includes a URL link to the company’s website disclosure.
[4] Companies and organizations offering board recruiting services to Nasdaq listed companies are: Equilar, Athena Alliance, Him for Her, Heidrick & Struggles, and theBoardlist.