Nasdaq Aims to Require Listed Companies to Disclose Diversity on Their Boards

The exchange operator has submitted a proposal, which would also require boards to have two diverse directors, to the SEC.

Nasdaq has filed a proposal with the Securities and Exchange Commission (SEC) to impose new listing rules that would require all companies listed on the Nasdaq exchange to disclose diversity statistics regarding their boards of directors. Additionally, the rules would require most Nasdaq-listed 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 underrepresented minority or LGBTQ. Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors.

The goal is to provide stakeholders with a better understanding of companies’ current board compositions and to enhance investor confidence that all listed companies are considering diversity in the context of selecting directors. As part of the rationale for the new requirements, Nasdaq points to more than two dozen studies that found an association between diverse boards and better financial performance and corporate governance.

The companies would be required to make these disclosures within one year of the SEC approving the rule. All companies would be required to have one diverse director within two years of the SEC approving the rule.

Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market would be expected to have two diverse directors within four years of the SEC’s approval of the listing rule, and companies listed on the Nasdaq Capital Market would be expected to have two diverse directors within five years of the SEC’s approval. Those companies that do not have diverse members of their board will not be delisted if they provide a public explanation of their reasons for not meeting the objectives.

“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” says Adena Friedman, president and CEO of Nasdaq. “We believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”

Anthony Romero, executive director of the American Civil Liberties Union (ACLU), hailed the move, saying, “By pushing its listed companies to address racial and gender equity in corporate boards, Nasdaq is heeding the call of the moment. Incremental change and window-dressing aren’t going to cut it anymore, as consumers, stakeholders and the government increasingly hold corporate America’s feet to the fire. With increased representation of people of color, women and LGBTQ people on corporate boards, corporations will have to take actionable steps to ensure underrepresented communities have a seat at the table.”

Mary Jane McQuillen, managing director and head of environmental, social and governance (ESG) investment at ClearBridge Investments, said, “We know there’s a lot more work to be done on social justice issues in the U.S. The tragedies that have taken place in 2020 were a wake-up call for many. We work with a company called Equileap from the Netherlands that tracks gender equality. We’ve also been doing our own work on racial equality at companies we invest in because there is still not a lot of disclosure on racial diversity. Only 4% of companies in the S&P 500 currently disclose racial diversity metrics, so there is a lot of room for improvement.”

Tom Quaadman, executive vice president, Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, said, “We appreciate the leadership of Nasdaq in developing a business-led solution to resolving diversity issues on corporate boards. This proposal will help accelerate the developments that are already underway and is a positive and balanced way to get to the end result of allowing boards to be more representative of a business’s consumer and employee base.”