The movement to make company boards more inclusive and diverse is picking up steam this year. Nasdaq just filed a proposal with the Securities and Exchange Commission (SEC) to adopt new listing rules that would require companies to disclose the composition of their board of directors, as well as have at least two diverse directors.
With the leading new proposal, Nasdaq’s goal is to provide greater transparency to market participants of the composition and diversity of corporate boards.
“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+,” stated Nasdaq in a recent press release. “Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors.”
While the process could still take a couple of years to implement, this announcement marks a big first step by a U.S. exchange to make inclusion and diversity of boards of directors more mainstream. Other exchanges could be expected to follow Nasdaq’s lead in this area.
“We know there’s a lot more work to be done on social justice issues in the U.S., said Mary Jane McQuillen, managing director, portfolio manager, and head of Environmental, Social, and Governance at ClearBridge Investments. “The tragedies that have taken place in 2020 were a wakeup call for many. They instigated national reflection on where we are in terms of corporate diversity and inclusion, which is something investors already spend time thinking about.”
The disclosure requirements would need to be met by all Nasdaq-listed companies within one year after the SEC approves the new listing rules. However, the exact timing will depend on what listing tier the company belongs to.
Nasdaq exchange lists companies under three distinctive tiers: Nasdaq Global Select Market, Nasdaq Global Market, and Nasdaq Capital Market ranked from the most to the least stringent listing status. While all firms will need to have at least one diverse director within two years of the SEC approval, each tier will determine the specific timing to have two diverse directors.
The stock exchange also said that firms that are not able to meet the requirements within the required time frames will not be delisted if they can publicly disclose the reasons why.
“This proposal and partnership gives companies an opportunity to make progress toward increasing representation of women, underrepresented minorities, and the LGBTQ+ community on their boards,” said Nelson Griggs, president of Nasdaq Stock Exchange.
Nasdaq noted that this decision came from a detailed analysis of over two dozen studies that confirm that firms with more diverse boards result in better financial performance and corporate governance.
Several groups, organizations, and companies endorsed the plan.
“As a national organization who advocates for more Hispanics inclusion at all levels of corporate America, especially on corporate boards, we stand with Nasdaq in its effort to take tangible steps toward ensuring diversity and inclusion in corporate America. We strongly encourage the SEC to adopt these proposed rules for Nasdaq-listed companies,” said Cid Wilson, president, and CEO of the Hispanic Association on Corporate Responsibility. “We call on the New York Stock Exchange to consider similar measures to create a more equitable corporate world and provide transparency to its listing companies’ stakeholders.”
According to data compiled by Nasdaq over the past six months and reported by New York Times, over 75% of the more than 3,000 listed companies on the exchange did not meet the diversity and inclusion criteria of the proposed ruling.
“Nasdaq’s diversity proposal marks a transformative moment in a larger movement toward greater representation of women and people of color in the boardroom and beyond,” said Alfred Zollar, director at Nasdaq.