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ComplianceAugust 30, 2021

Nasdaq's new board diversity rule

Listed companies must report diversity statistics and meet diversity objectives or explain why they have not.

Concern about the lack of diversity on corporations’ boards of directors has grown, along with calls for changes to be made to make the boardroom more diverse. Last December, Nasdaq proposed a new Board Diversity Rule to address this issue for its listed companies. And on August 6, 2021, Nasdaq’s proposed Board Diversity Rule was approved by the SEC.

The Board Diversity Rule imposes two requirements on Nasdaq’s listed companies. One is to disclose diversity data, and the other is to meet diversity objectives or provide an explanation for not meeting those objectives. This rule, according to Nasdaq, “is a disclosure standard designed to encourage a minimum board diversity objective for companies and provide stakeholders with consistent, comparable disclosures concerning a company’s current board composition”. This article will take a closer look at this new rule.

Diversity reporting required

All operating companies listed on Nasdaq’s U.S. exchange will be required to disclose board-level diversity data. Companies must use Nasdaq’s Board Diversity Matrix, or a format substantially similar, for their annual disclosures.

Nasdaq’s matrix requires U.S. companies to set forth:

  1. the total number of directors,
  2. the number of directors who self-identify as male, female, non-binary, or who did not disclose their gender, and
  3. the demographic background of directors or that they did not disclose this information. (The matrix for foreign issuers is slightly different.)

Companies will provide this disclosure in their proxy statement or information statement — or if the company does not file a proxy, its Form 10-K or 20-F — or on the company’s website. A company that elects to provide the disclosure on its website must also complete a short form through the Nasdaq Listing Center that includes the URL link to the disclosure.

Nasdaq’s diversity objectives

Nasdaq’s Board Diversity Rule requires most Nasdaq-listed companies to either (1) have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+ or (2) explain why they do not have two diverse directors.

For companies incorporated in the U.S., "underrepresented minority" means 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.

Alternative diversity objective for certain companies

The rule provides additional flexibility for (1) smaller reporting companies, (2) foreign issuers, and (3) companies with five or fewer directors.

Smaller reporting companies and foreign issuers can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented minority or LGBTQ+.

Companies with five or fewer directors can meet the diversity objective by having at least one diverse director.

Companies can explain why they are not diverse

If a company chooses to explain why it does not meet the diversity objectives, it will provide its explanation in its proxy statement, information statement for its annual shareholder meeting, or on the company’s website. Nasdaq will verify that the company has provided an explanation but will not assess the merits of the explanation.

When does compliance with the board diversity rule begin?

Companies have until August 8, 2022, or the date the company files its proxy or information statement for the company’s annual shareholder meeting during 2022 to disclose their board-level diversity data.

Companies will have a transition period to meet the diversity objectives or explain their reasons for not meeting the objectives, and the timeframe is based on a company’s listing tier:

  • Nasdaq Global Select Market or Nasdaq Global Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023, and two diverse directors by August 6, 2025.

  • Nasdaq Capital Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023, and two diverse directors by August 6, 2026.

  • Companies with boards that have five or fewer directors, regardless of listing tier, are required to have, or explain why they do not have, one diverse director by August 7, 2023.

SPACS disclose after merger

SPACs are not required to provide disclosure information or to have, or disclose that they do not have, any minimum number of diverse directors until their business combination. Following the business combination, such companies must meet, or explain why they do not meet, the applicable diversity objectives by the later of two years from the date of listing or the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s second annual meeting of shareholders subsequent to the company’s listing.

Consequences of non-compliance

If a company fails to comply with the requirement of having the requisite number of diverse directors or explaining why it does not, the Exchange’s Listing Qualifications Department would promptly notify the company and inform it that it has until the later of its next annual shareholders meeting or 180 days from the event that caused the deficiency to correct the deficiency. If a company does not regain compliance within the applicable cure period, the Listings Qualifications Department would issue a Staff Delisting Determination Letter.

If a company fails to adhere to the requirement to annually disclose its board-level diversity data, the Exchange would notify the company that it is not in compliance with a listing standard and allow the company 45 calendar days to submit a plan to regain compliance. Upon review of such plan, the Exchange may provide the company with up to 180 days to regain compliance. If the company does not submit a plan or regain compliance within the applicable time periods, it would be issued a Staff Delisting Determination, which the company could appeal to a Hearings Panel.

Free recruiting services

The SEC also approved Nasdaq’s proposal to provide free access to board recruiting services. Under the "Board Recruiting Service Proposal," eligible companies (defined as those lacking a specified number of diverse directors) will be able to take advantage of one year of complimentary access to a board recruiting service, which would provide access to a network of board-ready diverse candidates for companies to identify and evaluate. Nasdaq has partnered with several recruiting agencies to help companies in the search for their qualified, diverse, board candidates.

Next steps

Nasdaq listed companies, and companies considering being listed on Nasdaq, need to evaluate the composition of their board of directors. All Nasdaq-listed companies will have to provide data on the makeup of their boards in 2022. Those that do not meet the diversity objectives of the new rule need to decide whether to change the composition of their board. Those that choose not to diversify should begin preparing their explanation for why not.

For More Information

The SEC’s approval of the Board Diversity Rule can be read in full here.

Further information provided by Nasdaq’s Listing Center can be found here.

Nasdaq’s Board Diversity Matrix can be accessed here.


Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.