Nasdaq has responded to the many comments on its board diversity proposal, including making some tweaks to the plan.
Nasdaq in December filed a proposal with the SEC to adopt new listing rules that would require companies to have – or explain why they do not have – at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an under-represented minority or LGBTQ+. Listed companies would also have to disclose diversity statistics regarding their board.
Nasdaq defines an under-represented minority as a person who self-identifies in one or more of the following groups: 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. This reflects the US Equal Employment Opportunity Commission’s categories.
The plan has received widespread support from both the investor community – such as the Council of Institutional Investors and New York City comptroller Scott Stringer – and the corporate world, including Microsoft, Facebook, the US Chamber of Commerce’s Center for Capital Markets Competitiveness and the National Investor Relations Institute.
There are also some critics, with the Republican members of the Senate Banking Committee having urged the SEC not to approve the proposal. A Nasdaq spokesperson last week responded to the senators’ letter, saying in a statement: ‘Our proposal is a market-led solution that should simplify and standardize disclosure requirements to avoid the type of regulatory overreach the critics fear.’
In a letter to the SEC last week, Nasdaq says that almost 85 percent of more than 200 substantive responses support the proposal. ‘After reviewing all comment letters, Nasdaq firmly believes the proposal ameliorates concerns regarding the consistency and comparability of current board disclosure data by enhancing transparency related to board diversity,’ it writes.
‘Additionally, Nasdaq continues to believe that the diversity objectives for its listed companies will promote board diversity and thus enhance corporate governance and strengthen the integrity of the market by building investor confidence and enhancing capital formation, efficiency and competition.’
It notes that the most frequently cited supportive comments include:
- Board diversity enhances corporate governance and board decision-making
- Commenters appreciated Nasdaq’s ‘pragmatic, disclosure-based approach to improving board diversity without undue burden, coercion or mandates’
- The proposal will help ‘meaningfully improve board diversity related to race, ethnicity, sexual orientation and gender identity’
- Standardizing board diversity disclosures that are material to investors will ‘reduce data collection costs and improve data quality, availability and comparability’
- Board diversity is linked to improved corporate performance, innovation and/or long-term sustainable returns.
Nasdaq also lays out proposed amendments to its initial plan in response to comments by Nasdaq-listed companies and other stakeholders. The amendments would, it says:
- Offer more flexibility to companies with small boards by revising the proposal to enable companies with boards of five or fewer directors to achieve the diversity objective by having one diverse director
- Give a one-year grace period for companies that no longer meet the diversity objectives as a result of a vacancy on the board of directors, such as if a diverse director becomes ill or resigns
- Look to issuers making board diversity information publicly available in advance of AGMs to align with the timing of other governance-related disclosures such as those in the proxy statement
- Give companies that list on Nasdaq after the phase-in period additional time to add diverse directors.
Nasdaq says in a statement on the letter: ‘We are encouraged by the feedback and support for our board diversity proposal and believe the amendments and clarifications we have submitted to the SEC will help to strengthen it further.’
The exchange operator also responds to some criticisms of the proposal. For example, it states that the plan will not impose a quota but rather is a disclosure framework: ‘Companies can elect to meet the diverse-director objective or disclose why they do not, and the explanation can include a description of a different approach.’
Among other things, it states that the proposal will not require companies to appoint unqualified directors to meet the diverse-director objective: ‘Nasdaq’s proposal does not discourage board candidate recruitment on the basis of merit, and there is a sufficient community of available and qualified diverse candidates.’