Nasdaq Proposes Board Diversity Requirements

Nasdaq has filed a proposal with the US Securities and Exchange Commission (SEC) to adopt new listing rules that would require all companies listed on the market operator’s US exchanges to publicly disclose consistent, transparent diversity statistics regarding their board of directors.

“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” Adena Friedman, president and CEO of Nasdaq, said in a statement. “We believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”

According to the proposal filed with the SEC, Nasdaq-listed companies would be required to have at least one director who identifies as female, and at least one director who identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaskan Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+. If a company doesn’t comply with the requirement, it needs to explain why. Nasdaq also noted that “female” refers to anyone who identifies as a woman regardless of the gender they were designated at birth.

“Over the past year, the social justice movement has brought heightened attention to the commitment of public companies to diversity and inclusion,” Nasdaq said in its proposal. “The benefits to stakeholders of increased diversity are becoming more apparent and include an increased variety of fresh perspectives, improved decisionmaking and oversight, and strengthened internal controls.”

Nasdaq conducted a study of board diversity among Nasdaq-listed companies based on public disclosures and found that the national market system and the public interest “would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.” It also found that current board diversity data reporting was not provided in a consistent manner or on a sufficiently widespread basis, and, therefore, investors are unable to compare companies’ board diversity statistics.

Nasdaq also said it reviewed dozens of empirical studies and found that an extensive body of academic research demonstrates that diverse boards are “positively associated with improved corporate governance and financial performance.”

It added that studies have found that companies with gender-diverse boards or audit committees are associated with more transparent public disclosures and less information asymmetry; better management reporting discipline; a lower likelihood of manipulated earnings; an increased likelihood of voluntarily disclosing forward-looking information; a lower likelihood of receiving audit qualifications due to errors, non-compliance, or omission of information; and a lower likelihood of securities fraud.

Additionally, Nasdaq cited studies that found that having at least one woman on a company’s board is associated with a lower likelihood of material weaknesses in internal control over financial reporting and a lower likelihood of material financial restatements.

“Studies also identified positive relationships between board diversity and commonly used financial metrics, including higher returns on invested capital, returns on equity, earnings per share, earnings before interest and taxation margin, asset valuation multiples and credit ratings,” Nasdaq said.

The company also said it is partnering with Equilar, a provider of corporate leadership data solutions, to help Nasdaq-listed companies with board composition planning. It said the partnership will allow companies that have not met the proposed diversity requirements to access a larger community of highly qualified, diverse, board-ready candidates when searching for directors.

“While gender diversity has improved among US company boards in recent years, the pace of change has been gradual, and the US still lags behind,” Nasdaq said. “Moreover, progress toward bringing underrepresented racial and ethnic groups into the boardroom has been even slower.”