Nasdaq Inc. (NDAQ) on Tuesday filed a proposal with the nation’s securities regulator seeking to adopt listing rules requiring most listed companies to install at least two diverse director candidates over time – or explain why they have not done so.
The proposal, submitted to the Securities and Exchange Commission for review, represents the latest shot across the bow at U.S. corporations that don’t have women or demographically diverse directors. The state of California and proxy adviser Institutional Shareholder Services recently issued their own separate demands for board diversity.
The Nasdaq requirement also sends a message to activist investors thinking of nominating candidates that gender and racial diversity can give them leverage in board contests, experts say.
All Nasdaq-listed companies would need to have one diverse director within two years of the SEC’s approval of the standard. The proposal seeks to ensure companies have one female director and one director who self-identifies as an underrepresented minority or member of the LGBTQ+ community.
In addition, corporations listed on Nasdaq’s largest exchange, Nasdaq Global Select Market, and its mid-size exchange, Nasdaq Global Market, will need to have two diverse candidates within four years of the SEC’s approval of the standard. Companies on the smaller Nasdaq Capital Market will be expected to have diverse candidates within five years of the SEC’s approval.
Finally, companies that can’t meet the requirements will be required to explain why, in a public filing.
Shane Goodwin, associate dean and professor in the Department of Finance at the Cox School of Business at Southern Methodist University, argues that the public explanation provision will encourage companies to diversify their boards.
“Who wants to publicly say they couldn’t find someone qualified from an ethnic background?” Goodwin said. “Companies will not want to disclose that they couldn’t find a demographically-diverse candidates.”
Goodwin added that Nasdaq, ISS and the state of California are separately trying to catalyze companies into finding qualified diverse director candidates. However, he said the Nasdaq standard provision giving smaller companies more flexibility was important. He suggested that it often is difficult to find qualified diverse candidates at smaller businesses.
“You can find great diverse people who will serve on a Fortune 500 company board, but it may be harder to find a qualified demographically diverse candidate for a smaller board,” he said.
Goodwin also suggested that in some cases it might make sense to set up a secondary advisory board of senior employees or others who don’t vote but could include diverse members, some of whom could join the primary board later.
He also noted that Nasdaq may have submitted the proposal to the SEC knowing that the incoming Biden Administration would be more amenable. “The timing helps Nasdaq to do something like this because the Biden team have been promoting diversity,” Goodwin said.
He noted that the standard proposal also sends a message to activist investors and their proxy fight nominations. “This will apply to the activists. They will have to give consideration to gender and demographic diverse candidates,” he said.
In addition, Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics. Currently, there is no consistent framework for disclosing demographic diversity on boards, which policy experts contend makes it difficult to gauge how diverse they are.
According to relationship mapping service BoardEx, a sister company to The Deal, there are 539 Nasdaq-listed companies, including those headquartered outside of the U.S. but with their primary stock trading on Nasdaq, that do not have a women on their board.
ISS in the fall said it will start recommending in February 2022 that investors vote against the board nomination committee chairs – or other relevant directors – if boards don’t include identified ethnic or racially-diverse board members. ISS said it will focus on companies in the Russell 3000 and the S&P 1500 indexes.
California Gov. Gavin Newsom in September signed legislation requiring California-headquartered public corporations to appoint directors from underrepresented communities to their boards.