Nasdaq Board Diversity Proposal Secures SEC Backing

The new rules will require listed companies to meet race and gender targets on a comply or explain basis.

The US Securities and Exchange Commission (SEC) has approved Nasdaq’s December 2020 proposal to enhance issuer disclosures on board diversity.

The approval will allow Nasdaq to include race and gender disclosures in its listing rules, and require listed companies to meet certain minimum targets for gender and racial diversity of their boards.

Listed companies will have to have at least one female director in addition to another board member who self-identifies as a member of a racial minority or the LGBTQ community. Companies that do not meet these targets will be required to explain in a public disclosure why they have failed to do so.

The rules also require firms to release diversity statistics about their boards, after Nasdaq found in a 2020 study that more than 75% of its listed companies wouldn’t have met the new requirements.

The SEC’s approval will encourage the creation of more diverse boards through a market-led solution, Nasdaq said in a statement, adding that it will offer certain companies access to a complimentary board recruiting service.

“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,” Nasdaq said.

“We look forward to working with our companies to implement this new listing rule and set a new standard for corporate governance.”

Nasdaq says the new rules reflect calls from investors for greater transparency about the people who lead public companies and for consistent and comparable data that allows for better investment decision-making.

SEC Commissioner Hester Peirce opposed the new rules, saying they attempt to expand opportunity in a way that improperly leverages authority that Congress has entrusted to the regulator under the Exchange Act.

“The Exchange makes no effort to explain why studies examining the effects of gender and, to a lesser extent, racial diversity support its decision to include in its rule other types of diversity for which there is no evidence linking board membership to corporate performance,” she said.

According to Pierce, the board diversity proposal does not protect investors, harms market integrity, is contrary to the public interest, and addresses issues outside the scope and purposes of the Exchange Act.

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