Nasdaq Board Diversity Rule "extremely powerful", say legal experts 

D.C. Bar discussion focuses on Nasdaq requirement on listed companies and the potential impact 

16 December 2021


Nasdaq’s Board Diversity Rule, which requires listed companies to have at least two diverse board members or explain why they do not, is "extremely powerful" and a critical step on the path to transformational change, said Ben Wilson, chairman of law firm Beveridge & Diamond on a webinar hosted by the D.C. Bar Corporate, Finance and Securities Law Community. 

"My view is that when you have that diverse representation on boards, as contemplated by this Nasdaq rule, you will have voices in that board room who will seek accountability… and there is an aspect of private governance in board service that allows change to be even more transformational," said Wilson.  

"What's meaningful is not simply that there's diversity on the board but what you do when you get there. Do you make certain that there is the ability to be fairly considered and promoted within the company? Do you insist that the company uses its contracting power to involve minority businesses in ongoing projects? Do you insist that the professional firms that do work for the company are themselves diverse?" he said. 

"Someone asked here, isn't it disappointing that in 2021 – almost 2022 – such a disclosure rule is necessary. It is disappointing that it's necessary, but I'm reminded of the words of Dr. Martin Luther King Jr. – one need not see the whole staircase to take the first step, and this is a critical first step," said Wilson. 

Nasdaq's Board Diversity Rule, which was approved by the US Securities and Exchange Commission in August, will require Nasdaq-listed companies that do not have at least one director that self-identifies as female and at least one director who self-identifies as an underrepresented racial or ethnic minority or as LGBTQ+ to explain why they don't.

The explanations must be provided in advance of the company’s next annual shareholders meeting in either a proxy statement, in an information statement, or on the company’s website. While the explanation alone is mandatory, neither Nasdaq nor the SEC will evaluate the substance of any company’s explanation.  

"Nasdaq is not going to judge the merits of a company's explanation or assess the substance of the explanation. We'll simply verify that the company has provided some explanation, and then it's really up to investors to decide whether that information helps them to make informed investment and voting decisions," said Amma Anaman, Nasdaq's associate general counsel and legal relationship manager, on the webinar. 

Anaman said Nasdaq will require companies to meet its diversity rules within four years of the SEC's endorsement, or five years for companies listed on the Nasdaq Capital Market. Foreign companies have additional flexibility in satisfying the minimum diversity objective with two female directors, and companies with boards of five or fewer members can satisfy the requirement with one diverse director. 

The move is one of the most significant diversity requirements in the US since California passed laws in 2018 and 2020 that mandated diverse boards for companies headquartered in the state.  

De'Ana Dow, partner and general counsel at Capitol Counsel and moderator of the discussion, said three-quarters of Nasdaq-listed companies did not meet the standard adopted in the rule when it was proposed in December 2020 and around 70% of S&P 500 firms did not have a Black director on their boards. 

Speaking on the panel, Keisha Bell, managing director and head of diverse talent management and advancement at DTCC, said the Nasdaq rule is a starting point that establishes a key performance indicator for firms.

"An important aspect that has been missing from many diversity and inclusion efforts over the last 20 years has been a focus on the C-suite and the board level of an organization," she said. "If you think about boards and their responsibility, boards hire the CEO, and the CEO and the board determine the culture of inclusion in an organization," she said. "The Nasdaq rule is the first step, and it will drive incremental change because it is a measurement, it is a KPI, but ultimately equity and inclusion cannot be mandated. There has to be a culture change." 

As an aside, Bell pointed to a 2020 McKinsey survey, which showed that 39% of job applicants surveyed had turned down an offer or decided not to pursue an opportunity because of a perceived lack of inclusion at the hiring company.  

"We're all in a war for talent. One of the factors in that perceived lack of inclusion was looking at the makeup of the corporate board," she said. "The Nasdaq rule quantifies what a lot of candidates are looking at when they decide on where they're going to be employed," she said. 

The speakers also discussed claims from some firms that they have trouble reaching top-level diversity goals because there is a shortage of qualified minority talent. 

"There is no substance to that, there is a surfeit of qualified and able people of color and there are programs all across America," said Wilson, who founded the Diverse Partners Network in 2008 and the African American Managing Partners Network in 2009. "Harvard University has one, Northwestern has one, I'm affiliated with one at the Leavey School of Business at Santa Clara University. We have a black corporate directors cohort, one for women and one for Latinx, and there are many other programs.  

"Groups across America and around the world are making it clear beyond any doubt that there are very able, diverse people ready, willing and able to serve on boards."  

The 30 November D.C. Bar discussion can be viewed on-demand here

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