Nasdaq’s Board Diversity Directive
December 10, 2021
Nasdaq’s Board Diversity Directive
Corporate board directors have critical roles in the
companies, and a broad cross-section of commenters
operation of publicly traded firms. Some of those
supported the proposed board diversity disclosure rule.”
responsibilities include (1) decisionmaking as fiduciaries on
behalf of the company’s shareholders and oversight of
What the New Rule Will Do
senior corporate management; (2) finding, hiring, and firing
Under the new Nasdaq rule:
senior executives; (3) formulating senior executive
compensation; (4) voting on corporate acquisitions and
Listed firms will be required annually to publicly
mergers; (5) determining dividend policy; and (6) deciding
disclose board member diversity based on their
on whether to authorize stock buybacks.
self-identification (non-Binary, African American,
Alaskan Native or Native American, Asian,
Research has been conducted on board diversity. For
Hispanic or Latinx, Native Hawaiian or Pacific
example, in 2021, the Conference Board, a business
Islander, White, Two or More Races or Ethnicities,
membership and research group, reported that among the
Underrepresented Individual in the home country
firms in the Russell 3000 index (a stock index that
of foreign issuers).
encompasses the majority of publicly traded firms with
Most Nasdaq-listed companies will be required to
98% of the weighted market capitalization of the stock
have, or explain why they do not have, at least two
market in mid-2021) that disclosed their board diversity
diverse directors, which will include a director
statistics: (1) women represented 24.4% of board members;
who self-identifies as female and one who self-
(2) African Americans represented 10.9% of board
identifies as either an underrepresented minority
members; (3) Hispanics represented 4.4% of board
(one of the aforementioned groups) or as
members; and (4) Asian, Hawaiian, and Pacific Islanders
LGBTQ+.
represented 4.9% of board members. Many observers assert
Firms with boards of five or fewer directors will
companies would benefit from greater diversity on their
only be required to have at least one self-identified
boards. However, rules requiring certain disclosures from
diverse director. If such firms have such a small
companies about diversity are controversial. This In Focus
board before becoming subject to the board
examines one such rule implemented by the Nasdaq U.S.
diversity rule, they will be allowed to add a sixth
exchange.
diverse director in fulfillment of the requirement
for smaller boards. If, however, a company board
Nasdaq’s Diversity Directive
grows to more than six directors, it will be subject
Nasdaq is the second-largest stock exchange in the world,
to the two-diverse-directors mandate.
with approximately 3,700 firms listed on it. Among those
An additional Board Recruiting Service Rule will
are Costco, T-Mobile U.S., Qualcomm, Broadcom, Cisco
give Nasdaq-listed firms without a specified
Systems, PepsiCo, Adobe, Intel, Comcast, Netflix, PayPal,
number of diverse directors access to a service that
Nvidia, Facebook, Tesla, Alphabet, and Amazon.
provides a network of diverse director candidates
for one year.
In December 2020, Nasdaq stated that it intended “to
If a firm fails to provide for the specified number
provide stakeholders with a better understanding of the
of diverse directors or to explain why it has not, it
[listed] company’s current board composition and enhance
will have until its next annual meeting or 180 days
investor confidence that all listed companies are
from the event that caused the deficiency to cure
considering diversity in the context of selecting directors.”
the deficiency (such as the exit of a diverse
To that end, it proposed new company listing rules that the
director). A company that did not regain
Securities and Exchange Commission (SEC) approved in
compliance within the applicable cure period
August 2021 as new Nasdaq Rule 5605(f). Some observers
would be subject to delisting by the exchange.
think that the protocol will pressure firms to add more
The phase-in date for the board diversity data disclosure is
diverse directors due to their public nature.
August 8, 2022, or the date that a company files its proxy or
annual statement for the year. The earliest phase-in date for
Upon voting to approve the rules, SEC Chair Gary Gensler
the protocol in which Nasdaq-listed companies must have,
remarked: “These rules will allow investors to gain a better
or must explain why they do not have, (1) at least one
understanding of Nasdaq-listed companies’ approach to
diverse director is August 7, 2023, or the date the company
board diversity, while ensuring that those companies have
files its proxy or information statement for 2023; and (2) at
the flexibility to make decisions that best serve their
least two diverse directors is August 6, 2025, or the date the
shareholders…. These rules reflect calls from investors for
company files its proxy or information statement for 2025.
greater transparency about the people who lead public
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Nasdaq’s Board Diversity Directive
In its December 2020 proposal, Nasdaq reported that it
One Nasdaq review of an extensive body of
believed that much more than a majority of its listed
academic research concludes that diverse boards
companies had made noteworthy progress in improving
are positively associated with improved corporate
boardroom gender diversity and had at least one woman
governance and financial performance.
director. However, in a survey conducted the same year, the
For investors who favor diverse boards, the
exchange reportedly found that three-quarters of its listed
required disclosures could help inform their
firms would not satisfy the new board diversity rules. That
decisions on issues related to corporate
finding did not reflect the fact that firms will be permitted
governance, including election of directors. (SEC)
to avoid the diverse director requirements by explaining
For investors who do not think that there is a
why they were unable to fulfill it. When that occurs, the
benefit to diverse directors, the disclosure
exchange will not judge their merits.
requirement could help them decide to vote to
keep the existing board. (SEC)
Alternatively, Nasdaq’s chief rival, the New York Stock
According to some research (Fauver, Hung, Li,
Exchange, has created the Board Advisory Council
and Taboada, 2017), comply-or-explain corporate
composed of CEOs from some of its listed firms. Its goal is
governance measures similar to the Nasdaq listing
to use the executives’ personal networks to identify diverse
reform were generally found to have increased
board candidates and expose them to listed firms.
shareholder wealth more than outright corporate
governance mandates did.
Supporters and Critics
Nasdaq’s reform has attracted both support and criticism.
Some Key Critical Arguments
Among those lending general support are the American
Significant critical arguments against the reform include the
Civil Liberties Union, the AFL-CIO, the Council of
following:
Institutional Investors, the Forum for Sustainable Growth,
the U.S. Chamber of Commerce, the Hispanic Chamber of
As a whole, the research on the impact of board
Commerce, the California State Teachers Retirement
diversity on their firms is generally inconclusive,
System, the Pennsylvania state treasurer, Goldman Sachs,
an indication that questions on the effect of
Microsoft, and Facebook.
mandatory changes still remain. (SEC)
The required disclosures do not meet the
In a letter to Nasdaq on January 7, 2021, Senator Sherrod
fundamental test of investor materiality in the
Brown, chair of the Senate Banking, Housing, and Urban
evaluation of a company’s performance as they are
Affairs Committee, and 15 other Senate Democrats
irrelevant to such considerations. (Republican
expressed support for the proposed reform. In joint
members of the Senate Banking, Housing, and
correspondence to the SEC, the Representatives Gregory
Urban Affairs Committee)
Meeks and Caroline Maloney also lent their support to the
It will pressure listed firms into subordinating
proposal. After the SEC approval, Senator Brown and
critical director attributes “such as knowledge,
Chairwoman Maxine Waters of the House Committee on
experience, and expertise” in the selection of board
Financial Services praised the decision.
members. (Senator Pat Toomey)
Research (Gormley, Gupta, Matsa, Mortal, and
There has been some targeted criticism that the rule is
Yang, 2021) found that market forces (as opposed
insufficiently inclusive with respect to the disabled and
to mandates) driven by the campaigns of
African Americans. It came from, respectively, various
Blackrock, State Street, and Vanguard for greater
disability rights advocates and the National Urban League.
board diversity resulted in adding two-and-a-half
Among those expressing more general criticism were the
times as many women directors in 2019 than
Competitive Enterprise Institute, Judicial Watch, the
existed three years earlier, many of whom
Heritage Foundation, former SEC Chairman Arthur Levitt
subsequently attained influential board positions.
Jr., and some academics.
The SEC’s approval process failed to meet the test
put forth in an earlier judicial opinion, which
On February 12, 2021, Senator Pat Toomey, the ranking
found that the agency had failed to fulfill its
member of the Senate Banking, Housing, and Urban Affairs
obligations under the Securities Exchange Act of
Committee, and the committee’s other Republican members
1934 (P.L. 73-291), which regulates exchanges, by
wrote a joint letter to then-acting SEC chair Allison Herren
not conducting “reasoned analysis” during the
Lee criticizing the proposed reform. After the SEC
approval process for another proposed rule. (SEC
approval, Senator Toomey said, “Corporate board rooms,
Commissioner Elad Roisman)
like all organizations, can benefit from a diversity of
perspectives, but NASDAQ’s one-size-fits-all quota misses
A Court Challenge
the mark.”
On August 9, 2021, a group of corporate directors, the
Alliance for Fair Board Recruitment, challenged the SEC’s
Some Key Supportive Arguments
approval of the Nasdaq rule before the Fifth Circuit Court
According to Nasdaq, a growing number of investors—
of Appeals. It argued that firms would be compelled to
including major asset managers Vanguard, State Street
discriminate on the basis of gender, race, and sexual
Advisors, and BlackRock—are increasingly calling for
orientation.
more diverse corporate boards. The following are among
the significant supportive arguments for the reform:
Gary Shorter, Specialist in Financial Economics
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Nasdaq’s Board Diversity Directive
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