Proposed Nasdaq Rules Aim to Increase Board Diversity

Securities Law

On December 1, 2020, the Nasdaq stock exchange filed with the Securities and Exchange Commission (SEC) a proposal1 to adopt new listing rules concerning the diversity of Nasdaq-listed companies’ boards of directors. Under the proposed listing rules (Rule 5605(f) and Rule 5606), all Nasdaq-listed companies would be required to publicly disclose “consistent, transparent diversity statistics regarding their boards of directors.”2 The rules would also mandate that most Nasdaq-listed companies have a minimum of two “diverse” directors, including at least one self-identified female and one self-identified “underrepresented minority or LGBTQ+” director.3 The text of the proposed rule change defines “female” as  an “individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth”; “underrepresented minority” as an “individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities”; and “LGBTQ+” as an “individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community.”4

If a Nasdaq-listed company does not comply with the rules, the company would have to explain why it lacks diverse directors as specified. Companies classified as foreign companies and smaller reporting companies would have more flexibility in complying with the rules by having two female directors.

Regarding timing, all Nasdaq-listed companies must publicly disclose board diversity statistics within one year of when the SEC approves the proposed rule. A company’s Nasdaq listing tier will determine the time frame in which the company must meet the proposal’s minimum board composition expectations, as follows:

  • Nasdaq Global Select Market—two diverse directors within four years of SEC approval
  • Nasdaq Global Market—two diverse directors within four years of SEC approval
  • Nasdaq Capital Market—two diverse directors within five years of SEC approval

Note that Nasdaq will expect all listed companies to have one diverse director within two years of the SEC’s approval of the rule. Companies not positioned to meet the expectations outlined above “will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.”5

The proposal’s goal is to give stakeholders a “better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors.”6 Nasdaq made reference to an analysis of numerous studies that “found an association between diverse boards and better financial performance and corporate governance.”7

Members of Nasdaq leadership provided their rationale behind the proposed listing rules. Adena Friedman, Nasdaq president and CEO, stated: “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”​8 Nelson Griggs, Nasdaq president, stated: “Corporate diversity, at all levels, opens up a clear path to innovation and growth. We are inspired by the support from our issuers and the financial community with this effort and look forward to working together with companies of all sizes to create stronger and more inclusive boards.”9

California’s board diversity laws

The Nasdaq proposed rules arrive shortly after similar mandates from California. On September 20, 2020, California Governor Gavin Newsom signed into law Assembly Bill No. 97910 (AB 979), which requires that a publicly held domestic or foreign corporation whose principal executive office is located in California have at least one “director from an underrepresented community” by the end of 2021. “Director from an underrepresented community” means an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.11 Further, by the end of 2022, such a corporation with more than four but fewer than nine directors must have at least two directors from underrepresented communities, and such a corporation with nine or more directors must have a minimum of three directors from underrepresented communities. The bill authorizes the California secretary of state to levy fines for violations of AB 979.

AB 979 builds on California Senate Bill No. 82612 (SB 826), which was signed into law on September 30, 2018. SB 826 currently requires a publicly held corporation headquartered in California to have at least one female on its board of directors. And by the end of 2021, the bill requires at least two female directors if the corporation has five directors, or three female directors if the corporation has six or more directors. Corporations not in compliance with SB 826 may face significant fines.

What this means

The proposed Nasdaq rules dovetail with the existing California regulations. Companies subject to the California rules are already faced with the need to focus on reconstituting their existing boards to meet the requirements to not only add female board members, but to be mindful of the additional condition that the board must also become more diverse. The Nasdaq rules could also have a substantial impact on corporate diversity, since over 3,000 companies are listed on Nasdaq.13 Currently, over 75% of Nasdaq’s listed companies may not meet the proposed requirements.14 Smaller companies, which tend to have less diverse boards, would be more impacted by the proposed rules.15

While the new Nasdaq requirements under the proposed rules would not apply immediately upon SEC approval, Nasdaq-listed companies are advised to begin compiling diversity statistics for their boards and considering diverse candidates for director seats.

This client alert is a brief summary of a lengthy SEC filing and state law. It does not constitute legal advice. Please consult the full text of the Nasdaq proposal and the California bills for exact requirements and deadlines.

1 Proposal Filed December 1, 2020.

2 Nasdaq Press Release: Nasdaq to Advance Diversity through New Proposed Listing Requirements.

3 Id.

4 Proposal Filed December 1, 2020, Page 7.

5 Nasdaq Press Release: Nasdaq to Advance Diversity through New Proposed Listing Requirements.

6 Nasdaq Press Release: Nasdaq to Advance Diversity through New Proposed Listing Requirements.

7 Id.

8 Id.

9 Id.

10 AB 979.

11 Id.

12 SB 826.

13 Nasdaq Proposes Board-Diversity Rule for Listed Companies.

14 Id.

15 Id.



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