On August 6, 2021, the SEC approved Nasdaq’s board diversity listing standards proposal. Nasdaq Rule 5605(f) requires Nasdaq listed companies, subject to certain exceptions, to: (i) to have at least one director who self-identifies as a female, and (ii) have at least one director who self-identifies as Black or African American, Hispanic or Latino, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (iii) explain why the company does not have at least two directors on its board who self-identify in the categories listed above. The rule changes also made headlines in most major publications. One of the most common themes in the press was the lack of inclusion of people with disabilities in the definition of an “underrepresented minority” for purposes of complying with the new rules.
The original rules had tiered compliance deadlines which Nasdaq (and practitioners) found confusing and unnecessarily complicated. On December 14, 2022, the SEC amended the deadline dates to not only allow additional time for compliance but also to simplify the timeframe for disclosures made outside of the proxy statement.
New Compliance Deadlines
I’ve included a complete summary of the rules below and as such am only including the amended deadlines in this section.
Matrix Disclosure
The original rule required the Board Diversity Matrix to be included in an annual report or proxy statement, or on the company’s website beginning in 2022. If a company filed its 2022 proxy before August 8, 2022, and did not include the Matrix, it would have needed to either amend or post the Matrix by August 8, 2022. If a company filed its 2022 proxy after August 8, 2022, it would either include the Matrix or the Matrix must be posted on its website within one day of filing the proxy.
The new amendment clarifies that December 31st is the annual deadline for this disclosure.
Requirement for Adding Diverse Directors and Explanations as to “Why Not”
The original rule required each company to provide statistical disclosure with one year from its adoption. A company that goes public via a business combination with a SPAC, an IPO, a direct listing, a transfer from another exchange or an uplisting from the OTC Markets has one year to comply with the disclosure requirements.
As adopted, a Nasdaq Global Select Market and Nasdaq Global Market listed company, other than a smaller reporting company, SPAC or other exempt company, must have at least one diverse director by August 7, 2023, and two diverse directors by August 6, 2025, or explain the reasoning as to why not. A Nasdaq Capital Market listed company must have at least one diverse director by August 7, 2023, and two diverse directors by August 6, 2026, or explain the reasoning as to why not. Companies with boards of 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.
Under the new amendment, a company trading on the Nasdaq Global Select Market, The Nasdaq Global Market, and The Nasdaq Capital Market will have until December 31, 2023 (moved from August 7, 2023) to have at least one diverse director or explain the reasoning as to why not. The requirement for a company trading on the Nasdaq Global Select Market or the Nasdaq Global Market to have at least two diverse directors or explain the reasoning as to why not has been moved from August 6, 2025, to December 31, 2025. The requirement for a company trading on the Nasdaq Capital Market to have at least two diverse directors or explain the reasoning as to why not has been moved from August 6, 2026, to December 31, 2026.
In addition to the date changes above, the rule change will also permit companies to submit the URL link to disclosure that’s made outside of the proxy statement via email, to drivingdiversity@nasdaq.com, in addition to being able to submit it through the Nasdaq Listing Center.
Refresher on Nasdaq Final Board Diversity Rule
Matrix Disclosure
Nasdaq added Rule 5606(a) to the corporate governance requirements for listing and continued listing which requires Nasdaq listed companies to publicly disclose, in an aggregated form, to the extent permitted by law (for example, some foreign countries may prohibit such disclosure), information on the voluntary self-identified gender and racial characteristics and LGBTQ+ status of the company’s board of directors. Each company will need to provide an annual Board Diversity Matrix disclosure including: (i) the total number of directors; (ii) the number of directors based on gender identity (female, male or non-binary); (iii) the number of directors that did not disclose gender; (iv) the number of directors based on race and ethnicity; (v) the number of directors who self-identify as LGBTQ+; and (vi) the number of directors who did not disclose a demographic background.
Foreign issuers may elect to use an Alternative Board Diversity Matrix format. Foreign issuers using the Alternative Matrix are required to disclose: (i) the total number of directors; (ii) its country of principal executive offices; (iii) whether it qualifies as a Foreign Private Issuer; (iv) whether disclosure is prohibited under its home country law; (v) the number of directors based on gender identity and the number of directors who did not disclose gender; (vi) the number of directors who self-identify as underrepresented individuals in its home country; (vii) the number of directors who self-identify as LGBTQ+; and (viii) the number of directors who did not disclose a demographic background.
Although not required, the rule encourages disclosure of other diverse attributes such as nationality, disability or veteran status. Failure to provide the disclosure will result in a listing deficiency with the ability to submit a plan within 45 days that would provide for cure within 180 days. Ultimate non-compliance could result in delisting. I’ve included both the Board Diversity Matrix and Alternative Board Diversity Matrix at the end of this blog.
Requirement for Adding Diverse Directors and Explanations as to “Why Not”
Nasdaq has also added Rule 5605(f), pursuant to which, subject to certain exceptions, each listed company will be required to: (i) have at least one director who self-identifies as a female, and (ii) have at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (iii) explain why the company does not have at least two directors on its board who self-identify in the categories listed above.
Foreign issuers are required to have at least two diverse directors including at least one female. Both foreign issuers and smaller reporting companies may satisfy the two diverse director requirements by having two female directors.
Nasdaq stresses that it is not establishing quotas or mandating diversity as companies that do not meet the objectives need only explain why they do not. The Exchange has provided examples of what might be contained in an explanation. It could be that a company’s reasoning for not having board members that specifically fit the diverse attributes in the Rule, is that it has otherwise a diverse board composition based on other considerations. However, as noted in my introduction, disability advocacy groups are very disappointed that those with disabilities are not included in the definition of diverse attributes under the Rule.
Under the Rule, Nasdaq will not assess the substance of an explanation but will just verify that the company has provided one. In fact, the final rule release reiterated many times that Nasdaq will not evaluate the substance of the explanation and that a company has full flexibility and discretion in drafting such explanation, including how much detail to provide.
Nasdaq has also added to its list of services for listed companies, a complimentary board recruiting solution to help advance diversity on company boards. The service provides companies that have not yet achieved a certain level of diversity with one-year complimentary access for two users to a board recruiting solution, which will provide access to a network of board-ready diverse candidates. The service is intended to allow companies to identify and evaluate diverse board candidates, and act as a tool to support board benchmarking. To access the service, a listed company must make a request on or before December 1, 2022.
The following types of companies are exempt from the requirements: (i) SPACs; (ii) asset-backed issuers; (iii) cooperatives; (iv) limited partnerships; (v) management investment companies; (vi) issuers of non-voting preferred securities, debt securities or derivative securities; and (vii) ETFs and similar funds.
Purpose of the Rule
Simply put, Nasdaq is of the view that diversity in the boardroom equates to good corporate governance. They believe that increased diversity brings fresh perspectives, improved decision making and oversight and strengthened internal controls. Further, Nasdaq asserts that the increased focus on diversity by companies, investors, legislators and corporate governance organizations provides evidence that investor confidence is enhanced by greater board diversity. In conducting an internal study on diversity amongst listed companies, Nasdaq found they fell short and that a regulatory impetus would help.
Nasdaq indicates it conducted extensive research including reviewing a substantial body of third-party research and conducting interviews. Among the questions it sought to answer were (i) whether there is empirical evidence to support the proposition that board diversity increases shareholder value, investor protections and board decision-making; (ii) investors interest in board diversity information; (iii) the current state of board diversity and disclosure; (iv) causes of underrepresentation; (v) various approaches to encourage board diversity; and (vi) the success of approaches taken by other groups, both domestic and foreign.
Clearly, Nasdaq is confident that the answers to these questions support not only the value of board diversity and related disclosure, but the value of regulations requiring same. In addition to the results of its studies, Nasdaq cites the increasing call for diversity by large institutional investors such as Vanguard and BlackRock in their corporate engagement and proxy guidelines. Nasdaq also believes that the SEC disclosure regime supports disclosure requirements in this context.
Both the 127-page Nasdaq proposed rule release and 82-page approval of the rules contain an in-depth discussion of Nasdaq’s research, findings, and conclusions. Nasdaq also presents counter-information. There is a lack of studies or information of the association between LGBTQ+ diversity and board representation, stock or other financial performance. Many studies support a correlation between women on the board and increased earnings and other financial metric performance, but some also show a lack of correlation between the two. Studies which include other factors, such as strong shareholder rights, show a decreasing impact of diversity to performance.
Interestingly, I believe it is the non-financial aspects, including investor protections (through increased internal controls, public disclosure, and management oversight) and confidence, that compelled Nasdaq adopt the rule. As it states in its release, “[A]t a minimum, Nasdaq believes that the academic studies support the conclusion that board diversity does not have adverse effects on company financial performance.” Moreover, as most directors are chosen from the current directors and C-suite executive’s social and business network, without a compelling reason to search elsewhere, such as regulatory compliance, a natural impediment to increased diversity will remain.
Matrix Forms
| Board Diversity Matrix (As of [DATE]) | ||||
| Total Number of Directors | # | |||
|
Female |
Male |
Non-Binary |
Did Not Disclose Gender | |
| Part I: Gender Identity | ||||
| Directors | # | # | # | # |
| Part II: Demographic Background | ||||
| African American or Black | # | # | # | # |
| Alaskan Native or Native American | # | # | # | # |
| Asian | # | # | # | # |
| Hispanic or Latinx | # | # | # | # |
| Native Hawaiian or Pacific Islander | # | # | # | # |
| White | # | # | # | # |
| Two or More Races or Ethnicities | # | # | # | # |
| LGBTQ+ | # | |||
| Did Not Disclose Demographic Background | # | |||
| Board Diversity Matrix (As of [DATE])
To be completed by Foreign Issuers (with principal executive offices outside of the U.S.) and Foreign Private Issuers |
||||
| Country of Principal Executive Offices: | [Insert Country Name] | |||
| Foreign Private Issuer | Yes/No | |||
| Disclosure Prohibited Under Home Country Law | Yes/No | |||
| Total Number of Directors | # | |||
|
Female |
Male |
Non-Binary |
Did Not Disclose Gender | |
| Part I: Gender Identity | ||||
| Directors | # | # | # | # |
| Part II: Demographic Background | ||||
| Underrepresented Individual in Home Country Jurisdiction |
# |
|||
| LGBTQ+ | # | |||
| Did Not Disclose Demographic Background | # | |||
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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