The Securities and Exchange Commission late Friday, Aug. 6, in a split decision approved a controversial proposal submitted by Nasdaq Inc. (NDAQ) requiring larger companies listed on the exchange to install at least two director candidates that would enhance board diversity — or explain why they have not done so.
Specifically, the Nasdaq proposal requires that its bigger listed corporations with larger boards have at least one director who is a woman and at least one director who “self-identifies as an underrepresented minority or LGBTQ+” — or explain why they don’t. A new provision in the final rule, which emerged following industry participant comments, allows smaller Nasdaq-traded companies with five or fewer directors to only bring on one such candidate, rather than two, or explain why they haven’t done so.
There are 674 Nasdaq-listed companies, including SPACs, that have five or fewer directors, according to relationship mapping service BoardEx, a sister company to The Deal.
Nasdaq also is providing its companies a one-year complementary access for two users to a board recruitment service that would provide access to a “network of board-ready diverse candidates.”
Many Nasdaq-listed companies will need to have at least one director meeting the requirements within two years, by August 2023, or explain why they don’t. Corporations listed on Nasdaq’s largest exchange, Nasdaq Global Select Market, and its midsize exchange, Nasdaq Global Market, will need to seek to have two such candidates within four years of the SEC’s Friday approval or explain why not, while smaller companies on the Nasdaq Capital Market will be expected to meet the requirement within five years.
In addition, all companies listed on Nasdaq are required to produce and disclose statistics about diversity of their board members.
The SEC approval of the Nasdaq requirements also sends a message to activist investors thinking of nominating candidates that gender and racial diversity can give them leverage in board contests at corporations that haven’t met the new listing requirements.
One of the two SEC Republican commissioners opposed the proposal while the other only gave it partial support. GOP SEC Commissioner Hester Peirce opposed the measure, arguing it “relies on crude categorizations of people into racial, gender, ethnic, and LGBTQ+ status boxes that deprive the people being categorized of their individuality and their professional, educational, experiential and personal complexity.”
The agency’s other GOP commissioner, Elad Roisman, supported the Nasdaq proposal’s efforts to promote diversity, noting that “public company boards of directors should not be private clubs with membership limited to narrow social circles.”
Roisman, however, opposed the provision requiring disclosure of board diversity for listed companies. Roisman said he believes the disclosure proposal has “delisting implications for companies” and should have included a “more thorough discussion” about whether it could be considered “state action.”
At issue is a concern that Nasdaq would delist corporations that fail to disclose publicly in proxy statements or periodic reports their board diversity.
Democratic SEC Commissioners Caroline Crenshaw and Allison Herren Lee backed the proposal, arguing in a statement that it is “a step forward for investors on board diversity.” They added, however, there is “more work to be done,” noting that more diversity and transparency should be implemented for senior management and the workforce more broadly.
California and proxy adviser Institutional Shareholder Services Inc. last year issued their own separate demands for board diversity.