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Latest Twists in Long and Winding Road to Board Diversity Disclosure

The House Committee on Financial Services met virtually on April 20, 2021 to consider legislation that, among other things, would require public companies to annually disclose the voluntarily, self-identified gender, race, ethnicity and veteran status of their board directors. The Committee cited a 2017 board diversity survey finding that increased board diversity improves companies’ ability to innovate and enhances overall business performance.

In the meantime, the wait continues for an SEC decision on Nasdaq’s proposed “comply or explain why not” mandate that would require public disclosure of board diversity statistics for most Nasdaq-listed companies, initially proposed in December 2020.   The SEC most recently acted on these rules on March 10, 2021, when it issued an “Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes, as Modified by Amendment No. 1” (the “Order”).  The Order postponed the date, which had already been extended, by which the SEC is required to make its decision regarding the proposed rules, as amended, until possibly as late as August 2021. 

Some speculated that the delay was, at least in part, to allow time for Gary Gensler to be named SEC Chair.  The Senate confirmed Gensler’s nomination on April 14, 2021, and he was sworn in as a member of the SEC on April 17, 2021, so many expect movement on the Order this summer.  Comments continue to trickle in to the SEC website, and the SEC Office of the Investor Advocate continues to meet by telephone

Nasdaq amends its board diversity proposal

On Friday, Nasdaq submitted a revised proposal that addresses board diversity membership for listed companies.  As discussed in our prior alert, Nasdaq had originally called for public companies – over a two-to-four year phase-in period — to include two diverse directors on their boards and to disclose in a “diversity matrix” certain anonymous aggregate data regarding gender identity, race, ethnicity and sexual orientation.

Based on comments, including criticism as discussed here, Nasdaq has modified the proposal in a variety of areas:

  • Smaller boards. Companies with five or fewer directors would only need to include one diverse director, instead of two.
  • Grace period for vacancies. A one-year grace period would be provided for companies that no longer meet the diversity objective as a result of a vacancy on the board.
  • Timing of disclosure. Diversity information would need to be made publicly available before annual shareholder meetings, to align with disclosures for other proxy-related governance matters.
  • Extra time for newly-listed companies. Newly-listed companies that become listed after the phase-in period for the new rules ends would have an additional two-year period after the phase-in period to fully meet the diversity objective.
  • Trigger date. The operative date for disclosure would be the later of (1) one calendar year from the date of SEC approval of the revised proposal or (2) the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.
  • Location of disclosure. Companies could choose to disclose

Nasdaq Board Diversity Proposal Faces Backlash

Nasdaq’s recent proposal mandating board diversity faces backlash, as 12 Republican senators on the U.S. Senate Banking Committee last week urged the SEC not to approve the proposed rules, which would require all U.S. Nasdaq-listed companies to disclose board diversity statistics and to have, or explain why they do not have, at least two diverse directors: one woman and one who self-identifies as either an underrepresented minority or LGBTQ.

While many anticipated that the SEC’s approval of the proposed rules would be a “slam dunk” given the current social climate, certain recent events suggest that approval may not necessarily be guaranteed.  These events include the senators’ disapproval and the SEC’s extension of the end of the comment period from January 25, 2021 to March 11, 2021.  Nasdaq and others, however, continue to fervently support the proposed rules.  In a letter dated February 5, 2021 to the SEC, counsel for Nasdaq reported that, by its count, 86% of the comment letters then submitted had supported adoption of the rules.  As reported in our December 2, 2020 post, Nasdaq believes its proposal would benefit investors and the public interest and cites in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  Nasdaq also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

In the letter urging the SEC not to approve the proposed rules, the senators noted that Nasdaq appears to them

New Nasdaq Listing Proposal: Add Diverse Directors or Explain Why Not

Nasdaq yesterday announced a proposed new listing rule that would require all Nasdaq-listed companies to publicly disclose consistent, transparent board diversity statistics in a specified form of matrix.  In addition, the proposed rule would require Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors:  one woman and one person who self-identifies as either an underrepresented minority or LGBTQ.

Nasdaq believes its proposal would benefit investors and the public interest, citing in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  It also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

If the rule is approved by the SEC, companies would be required to disclose board-level diversity statistics within one year of the SEC’s approval of the listing rule.  In addition:

  • All operating companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule (non-operating companies, such as asset-backed issuers, cooperatives, limited partnerships and investment management companies, as well as certain specified issuers of non-equity securities, would be exempt from the proposed rule).
  • Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have a second diverse director within four years of the SEC’s approval.
  • Companies listed on the Nasdaq Capital Market will be expected to have a second diverse director within five years of the SEC’s
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