By: Alexandria E. Kane and Jeremy M. Miller
Following the lead of California, Illinois and other states, Nasdaq, which is home to some of the largest companies in the world including Amazon, Google and Facebook, may require diversity on the board of directors of those companies. Earlier this month, Nasdaq submitted to the Securities and Exchange Commission (SEC) its proposal to require at least two diverse board members and certain disclosure requirements on the 3,000+ public companies that trade on the Nasdaq exchange. Currently more than 75% of Nasdaq’s listed companies do not meet this requirement.
If approved in its current form, Rule 5605(f) would require existing Nasdaq-listed companies to:
- within two years, have at least one diverse board member who self-identifies either as female, an underrepresented minority or LGBTQ+;
- within four years, and with respect to companies listed on Nasdaq’s Global Select and Global Markets, have at least two diverse board members, including at least one female member and one member that comes from an underrepresented minority group or who identifies as LGBTQ+; and
- within five years, and with respect to companies listed on Nasdaq’s Capital Market, have at least two diverse board members, including at least one female member and one member that comes from an underrepresented minority group or who identifies as LGBTQ+.
Alternatively, a company that does not satisfy the requirements will need to provide an explanation in its proxy statement or on its website (and notify Nasdaq) with the reasons for not complying with the diversity requirements.
According to the proposal, (i) a “female” is defined as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth;” (ii) an “underrepresented minority” is defined as “an individual who self-identifies as one or more of the following: 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;” and (iii) “LGBTQ+” is defined as “an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community.”
There would be slightly relaxed requirements for smaller reporting companies as well as foreign issuers, which would also be deemed compliant if they had at least two female directors. If adopted, companies would be obligated to disclose diversity statistics for its board and Nasdaq has a form of statistical matrix for use. Companies that fail to comply with the diversity and related disclosure requirements could face substantial penalties, including potential delisting from the Nasdaq exchange.
This proposal will likely be controversial to many that are comfortable with the existing state of affairs, but many have voiced support for changes in the boardroom. Earlier this year Goldman Sachs made its support clear for more diversity on the board when they declared it will not assist a company in going public unless the company has at least one diverse member of the board. While this level of advocacy from a major player in the marketplace is a great sign of things to come for proponents of progressive corporate governance changes, opponents will argue that diversity in the boardroom is already happening on its own, companies have already taken substantial steps towards diverse representation and more “regulatory action” is not what’s needed.
Commenting on the proposal, Nasdaq’s President and CEO, Adena Friedman, said “[o]ur goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
If this proposal were to be approved it could cause a major shift in corporate governance and policy over the coming years. The level of disclosure required by the proposal would effectively force public companies trading on Nasdaq to focus on diversity. But, at the heart of the proposal, the end goal is to have decision-makers look like the backbone of the company – their diverse workforce.
If you have questions or would like more information, please contact Alexandria Kane (email@example.com; 212.631.4409), Jeremy Miller (firstname.lastname@example.org; 212.631.4414) or another member of our Corporate and Securities Group.