A rule requiring companies listed on the Nasdaq to publicly disclose diversity statistics regarding their board of directors is in effect. On the heels of a Nasdaq-proposed rule (Rule 5606) being approved by the U.S. Securities and Exchange Commission in August 2021, companies listed on the exchange have to make such disclosures either in an SEC filing or on their own websites – by way of a Board Diversity Matrix – by August 8 or the date the company files its 2022 proxy, whichever is later. First introduced in early 2021, the rule aims to “provide stakeholders with a better understanding of [a] company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors.”
To summarize Nasdaq-listed companies’ current obligations under the diversity-focused rule, Goodwin Procter LLP’s Sean Donahue and John Newell state that “if a Nasdaq-listed operating company has already filed its 2022 proxy or information statement for its annual meeting and a Form 10-K or Form 20-F during 2022, but did not include the Nasdaq Board Diversity Matrix in one of those filings, it is required to disclose its Board Diversity Matrix on the company’s website on or before August 8, 2022.”
In the Board Diversity Matrix, companies must disclose the total number of directors on the board, as well as the number of directors based on gender identity (female, male, or non-binary) and the number of directors who did not disclose gender; the number of directors based on race and ethnicity (African American or Black, Alaskan Native or Native American, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two or More Races or Ethnicities), disaggregated by gender identity (or did not disclose gender); the number of directors who self-identify as LGBTQ+; and the number of directors who did not disclose their race and ethnicity and whether they identify as LGBTQ+.
For companies that have yet to file their proxy or information statement, Form 10-K, or Form 20-F for 2022, those companies “do not have to post the Board Diversity Matrix on their website by August 8, 2022 so long as they include it in their proxy statement, Form 10-K, or Form 20-F filed no later than December 31, 2022 or post it on their website on such date,” per Donahue and John Newell, who note that this timeline only applies to companies that were listed on the Nasdaq before August 6, 2021. Companies listed on or after that date are required to make diversity discloses by way of the Nasdaq Board Diversity Matrix one year from the date of listing.
A second stage of reporting, which begins on August 7, 2023, calls on listed companies to have (and report) or explain why they do not have at least one diverse director, and ultimately, will need to have or explain why they do not have at least two diverse directors. “Certain relief is provided for Smaller Reporting Companies and Foreign Issuers, as well as companies with five or fewer directors,” according to Bryan Cave’s Victoria Westerhaus and R. Randall Wang.
Reflecting on the approval of the Nasdaq proposal back in August 2021, SEC Chairman Gary Gensler said in a statement, “These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.” Not all of the SEC’s commissioners were on board, with Commissioner Hester Peirce voting against the proposal, and Commissioner Elad Roisman issuing a partial dissent, in which he anticipated future legal issues being born from the new rule given the SEC’s role as the “adjudicating body for exchange delisting decisions.”
One of Roisman’s “serious concerns” on this front stems from the fact that “the SEC – without any doubt, a state actor – may need to take future action in which the agency must consider disclosure of the racial, ethnic, gender, or LGTBQ+ status of individual directors.”
More broadly, the 3-2 split on the SEC “reflects a broad and deepening divide concerning recent SEC moves in the ESG space, including disclosures related to climate risk,” Mintz stated in a client note at the time. “The significant dissent among the SEC commissioners suggests that there will be substantial opposition to any new disclosure requirements focusing on ESG, and that efforts may be made by the regulated industries to delay any rule-making in the expectation of a different political balance on the SEC within a few years.”
Additional rule-making is, nonetheless, expected in light of increasing demand for board diversity and related disclosures, paired with a larger push for attention to ESG issues more generally and uniform reporting by publicly-traded entities on this front.
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