SEC Approves Nasdaq’s Race and Gender Board Disclosure Rules

Last Friday the U. S. Securities and Exchange Commission voted “to approve Nasdaq’s proposed rule changes requiring issuers to disclose certain information about the diversity of the company’s board.” The first of its kind order by any U.S. government body, the SEC is being heralded by some for a “one giant leap for mankind” moment with environmental social governance (ESG) setting a new standard for corporate governance.

The impact of this “one small step for man” by the SEC is a Neil Armstrong moonshot and advancement of ESG.

The 82 page SEC Order provides,

“Under the Board Diversity Proposal, the Exchange proposes to require each Nasdaq listed company, subject to certain exceptions, to publicly disclose in an aggregated form, to the extent permitted by applicable law, information on the voluntary self-identified gender and racial characteristics and LGBTQ+ status (all terms defined below) of the company’s board of directors.”

“The Exchange also proposes to require each Nasdaq-listed company, subject to certain exceptions, to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+.”

Pursuant to the Rule, “Diverse” would be defined to mean an individual who self-identifies in one or more of the following categories: (i) Female, (ii) Underrepresented Minority, or (iii) LGBTQ+;

“Female” would be defined to mean an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth; “Underrepresented Minority” would be defined to mean 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+” would be defined to mean an individual who self identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.

Of note, Nasdaq amended its initial proposal to make it easier for small companies to comply, including by way of example, allowing companies that have five or fewer directors to meet the targets with just one board member from a designated diverse background, rather than two.

SEC Chairman Gary Gensler said in a statement releasing the Order, “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.” In many settings collecting and disclosing this gender and racial data had heretofore been verboten, especially by an authority, such that the magnitude of this earthquake order cannot be overstated.

Nasdaq said in a study conducted in 2020 that more than 75% of its listed companies would not have met these requirements.

The Spencer Stuart Board Index, in its 35th yearly report, described that even after this year when nearly 75% of new independent directors at S&P 500 companies were women or members of a minority, today around 80% of board seats are still held by white directors and about 70% by men.

Nasdaq responded to the SEC’s breakthrough action for the “G” in ESG in a press release, “We look forward to working with our companies to implement this new listing rule and set a new standard for corporate governance.” And we are available to assist Nasdaq listed companies comply with this new rule and to assist the business community generally in addressing the G in ESG.