![handle is hein.crs/goveeyu0001 and id is 1 raw text is: Nasdaq's Board Diversity Directive
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December 10, 2021
Corporate board directors have critical roles in the
operation of publicly traded firms. Some of those
responsibilities include (1) decisionmaking as fiduciaries on
behalf of the company's shareholders and oversight of
senior corporate management; (2) finding, hiring, and firing
senior executives; (3) formulating senior executive
compensation; (4) voting on corporate acquisitions and
mergers; (5) determining dividend policy; and (6) deciding
on whether to authorize stock buybacks.
Research has been conducted on board diversity. For
example, in 2021, the Conference Board, a business
membership and research group, reported that among the
firms in the Russell 3000 index (a stock index that
encompasses the majority of publicly traded firms with
98% of the weighted market capitalization of the stock
market in mid-2021) that disclosed their board diversity
statistics: (1) women represented 24.4% of board members;
(2) African Americans represented 10.9% of board
members; (3) Hispanics represented 4.4% of board
members; and (4) Asian, Hawaiian, and Pacific Islanders
represented 4.9% of board members. Many observers assert
companies would benefit from greater diversity on their
boards. However, rules requiring certain disclosures from
companies about diversity are controversial. This In Focus
examines one such rule implemented by the Nasdaq U.S.
exchange.
Nasdaq's Diversity Directive
Nasdaq is the second-largest stock exchange in the world,
with approximately 3,700 firms listed on it. Among those
are Costco, T-Mobile U.S., Qualcomm, Broadcom, Cisco
Systems, PepsiCo, Adobe, Intel, Comcast, Netflix, PayPal,
Nvidia, Facebook, Tesla, Alphabet, and Amazon.
In December 2020, Nasdaq stated that it intended to
provide stakeholders with a better understanding of the
[listed] company's current board composition and enhance
investor confidence that all listed companies are
considering diversity in the context of selecting directors.
To that end, it proposed new company listing rules that the
Securities and Exchange Commission (SEC) approved in
August 2021 as new Nasdaq Rule 5605(f). Some observers
think that the protocol will pressure firms to add more
diverse directors due to their public nature.
Upon voting to approve the rules, SEC Chair Gary Gensler
remarked: These 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 .... These rules reflect calls from investors for
greater transparency about the people who lead public
companies, and a broad cross-section of commenters
supported the proposed board diversity disclosure rule.
What the New Rule Will Do
Under the new Nasdaq rule:
* Listed firms will be required annually to publicly
disclose board member diversity based on their
self-identification (non-Binary, African American,
Alaskan Native or Native American, Asian,
Hispanic or Latinx, Native Hawaiian or Pacific
Islander, White, Two or More Races or Ethnicities,
Underrepresented Individual in the home country
of foreign issuers).
* Most Nasdaq-listed companies will be required to
have, or explain why they do not have, at least two
diverse directors, which will include a director
who self-identifies as female and one who self-
identifies as either an underrepresented minority
(one of the aforementioned groups) or as
LGBTQ+.
* Firms with boards of five or fewer directors will
only be required to have at least one self-identified
diverse director. If such firms have such a small
board before becoming subject to the board
diversity rule, they will be allowed to add a sixth
diverse director in fulfillment of the requirement
for smaller boards. If, however, a company board
grows to more than six directors, it will be subject
to the two-diverse-directors mandate.
* An additional Board Recruiting Service Rule will
give Nasdaq-listed firms without a specified
number of diverse directors access to a service that
provides a network of diverse director candidates
for one year.
* If a firm fails to provide for the specified number
of diverse directors or to explain why it has not, it
will have until its next annual meeting or 180 days
from the event that caused the deficiency to cure
the deficiency (such as the exit of a diverse
director). A company that did not regain
compliance within the applicable cure period
would be subject to delisting by the exchange.
The phase-in date for the board diversity data disclosure is
August 8, 2022, or the date that a company files its proxy or
annual statement for the year. The earliest phase-in date for
the protocol in which Nasdaq-listed companies must have,
or must explain why they do not have, (1) at least one
diverse director is August 7, 2023, or the date the company
files its proxy or information statement for 2023; and (2) at
least two diverse directors is August 6, 2025, or the date the
company files its proxy or information statement for 2025.
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