The proposal encourages board diversity for companies listed on the exchange and provides stakeholders with consistent, comparable disclosures concerning board composition.

By Paul Davies, Paul Dudek, Colleen Smith, Andra Troy, and James Bee

On August 6, 2021, the US Securities and Exchange Commission (SEC) voted to approve Nasdaq’s proposed changes to its listing rules (the Board Diversity Objective), which seek to encourage board diversity for companies listed on the exchange and provide stakeholders with consistent, comparable disclosures concerning a company’s board composition.

The Board Diversity Objective requires companies listed on Nasdaq to:

• Publicly disclose board-level diversity statistics using a standardized template
• Have, or explain why they do not have, at least two “diverse” directors, including at least one director who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+[1]

In the context of the Board Diversity Objective, a “diverse” director is defined for most US companies as an individual who self-identifies as one or more of the following: (i) female, (ii) underrepresented minority (which is defined as 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), or (iii) LGBTQ+.

The form of the Board Diversity Objective approved by the SEC is slightly amended from the form Nasdaq initially proposed in December 2020. The final rule provides for additional flexibility with respect to compliance by smaller companies, which can meet the requirement with either (i) two female directors, or (ii) one female director and one Underrepresented Minority or LGBTQ+ director. Similarly, foreign issuers can meet the Board Diversity Objective with (i) two female directors, or (ii) one female director and one director who is from an underrepresented minority in the company’s principal location or LGBTQ+. In addition, companies with five or fewer directors can meet the requirements of the Board Diversity Objective with one director from an underrepresented group. The final rule also provides that pre-business combination SPACs are exempt from the requirements altogether.

When creating the original proposed rule in 2020, Nasdaq carried out a review and found that more than three-quarters of companies listed on its exchange would have fallen short of the proposed Board Diversity Objective.[2] SEC Chair Gary Gensler, when announcing the approval of the Board Diversity Objective, stated that “[t]hese rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.”

The Board Diversity Objective will not apply to issuers immediately. Instead, under a transition period based on the listing tier of a company, the requirements will become effective in a staggered manner between 2023 and 2026.[3] In order to assist issuers with compliance, Nasdaq has partnered with a number of organizations to provide free access to “highly-qualified, diverse and board-ready” candidates for a limited period of time.

The Board Diversity Objective did not find unanimous support among the SEC Commissioners, with one Commissioner voting against the proposal and another voting partially against. In his partial dissent, Commissioner Elad Roisman stated that while he “supports the goal of having more diverse and inclusive boards,” he did not feel that the SEC had undertaken its own “reasoned analysis” to evaluate the merits of the proposal.

In a statement following the SEC’s approval, Nasdaq said that it was “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.”

Latham & Watkins will continue to monitor developments in this area.

Endnotes

[1] Nasdaq has indicated that any explanatory disclosure as to why a company does not have two “diverse” directors should be included in a company’s proxy statement or on the company’s website. Nasdaq has also stated that it will only check to confirm that such disclosure is present, rather than assess its merits.

[2] The study was conducted using the December 2020 proposed rule, meaning that these figures did not take into account the small company and foreign issuer flexibilities included in the final version of the rule.

[3] The precise Board Diversity Objective will be phased in as follows:

Prior to August 8, 2022: Companies must disclose board diversity information following a template matrix.

Prior to August 7, 2023: Companies must have one “diverse” director on the board or explain why they do not.

Prior to August 6, 2025 (August 6, 2026 for Nasdaq Capital Market listed companies): Companies must have two “diverse” directors on the board or explain why they do not.