Risk & Compliance

Nasdaq Proposes Board Diversity Rule

If approved, most companies listed on the exchange would be required to have at least two diverse directors.
Lauren MuskettDecember 1, 2020
Nasdaq Proposes Board Diversity Rule

The Nasdaq stock exchange has filed a proposal with the Securities and Exchange Commission for a new rule that would require companies to meet diversity standards for their boards of directors and publicly disclose “consistent, transparent diversity statistics” regarding board composition.

If approved, most companies listed on the exchange would be required to have at least two diverse directors, including one board member who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ. Companies that do not meet the diversity requirements would have to explain why. Foreign companies and smaller reporting companies would have more flexibility to implement the rules.

In proposing the rule, the exchange cited some two dozen studies that have found an association between diverse boards and better financial performance and corporate governance.

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“We’re taking the leadership here because there has been so little action on this front, and we do think it’s an important thing for us to do, to create a more inclusive capitalist society and we think this is a step forward,’” Nasdaq chief executive Adena Friedman said in an interview. “But we would welcome the opportunity for the New York Stock Exchange and for the SEC to take an active role here as well.”

A 2018 study from the Alliance for Board Diversity and Deloitte found women held 22% of Fortune 500 seats, compared with 66% for white men. African Americans held 9% of seats in 2018.

All companies would be expected to have one diverse director within two years of the SEC’s approving the rule. Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market would be expected to have two diverse directors within four years. For companies on the Nasdaq Capital Market, the requirement would be two directors within five years.

Said Christopher Davis, chair of the investor activism group at law firm Kleinberg Kaplan: “I think it represents a rapidly coalescing societal consensus that greater diversity is required and is not happening fast enough absent top-down requirements. My guess is that these and similar mandates will be broadly popular with investors and so will meet with minimal resistance. The popularity will grow, and acceptance will be internalized, if issuers experience an associated bump in performance after implementing the rule.”

The Nasdaq is the second-largest exchange by market capitalization, behind the New York Stock Exchange.