Diverse group of people meeting at a conference table.

On December 1, 2020, the Nasdaq Stock Market LLC filed a proposal with the U.S. Securities and Exchange Commission (SEC) to establish a new rule that would require diversity on corporate boards of directors and transparency regarding the composition of boards.

Summary of the Proposed Rule

In its proposal, Nasdaq emphasized that this year’s “social justice movement has brought heightened attention to the commitment of public companies to diversity and inclusion.” The proposal also cites several academic publications that studied the relationship between diverse boards and improved financial performance and corporate governance. As a result, the proposal seeks to encourage companies to have boards of directors that better reflect the country’s diverse population. The proposal would accomplish this goal by requiring a few things from companies.

Under the proposed rule, Nasdaq-listed companies, subject to certain exemptions, would be required to:

  • report on their annual proxy statements or websites statistical information regarding the gender, race, and LGBTQ+ makeup of their boards; and
  • have at least two diverse directors: one who self-identifies as female and one who self-identifies as “an [u]nderrepresented minority” or “a member of the LGBTQ+ community.”

Companies with corporate boards that do not satisfy the diversity requirements would be required to explain in their annual proxy statements or on their websites why they did not meet the requirements.

The term “underrepresented minority” will be construed in accordance with the U.S. Equal Employment Opportunity Commission’s (EEOC) definitions, which include: “Black or African American, Hispanic or Latinx, Asian, Native American or Alaskan Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities.” Gender, underrepresented minority status, and LGBTQ+ status would be self-identified.

According to the proposal, requiring an explanation from companies that do not satisfy the diversity requirements would provide investors with additional information so they can make more informed investment decisions. Nasdaq would phase the rule in over a period of several years. The proposed rule would require at least one diverse director no later than two years after the rule’s approval, and two diverse directors no later than four years after approval for companies listed on two of Nasdaq’s tiers, or five years for a third tier.


The proposal includes exceptions for foreign issuers and smaller reporting companies that allow these companies to satisfy the board diversity requirement by having two female directors.

A “foreign issuer” is “any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.”

A “smaller reporting company” is defined as “an issuer that is not an investment company, an asset-backed issuer …, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) [h]ad a public float of less than $250 million; or (2) [h]ad annual revenues of less than $100 million and either: (i) [n]o public float; or (ii) [a] public float of less than $700 million.” Nasdaq reasoned that “smaller companies, especially pre-revenue companies that depend on the capital markets to fund ground-breaking research and technological advancements, may not have the resources necessary to compensate an additional director or engage a search firm to search outside of directors’ networks.”

The Trend

Nasdaq’s proposed rule continues the trend by various states and non-U.S. regulatory agencies to promote board diversity, including efforts in California, Colorado, Illinois, Maryland, New York, and Washington, as well as by the Ontario Securities Commission. Similar legislation is currently pending in multiple other states.

What’s Next?

When an exchange seeks to modify its listing rules, the SEC must review and approve the proposal. During this review process, the SEC will receive public comment and then determine whether to approve the proposal. This review process could span several months.

The Takeaway

Nasdaq reportedly issued the proposed diversity rule because the SEC has not taken action regarding board diversity. If the proposal is approved, Nasdaq would be the first major exchange to implement such a rule regarding corporate board diversity and inclusion. Nasdaq’s proposed rule, together with increasing social awareness of diversity and the incoming Biden administration, will likely result in further regulatory or legislative changes championing corporate diversity.

Ogletree Deakins’ Diversity and Inclusion Practice Group and Financial Services Industry Group will monitor and report on developments with respect to this topic and will post updates on the firm’s Diversity and Inclusion blog.

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