SDI Productions / iStock
The Nasdaq Inc. stock exchange received the green light from the Securities and Exchange Commission (SEC) on Friday to move forward with its mission to create more corporate board diversity.
Nasdaq filed a proposal with the SEC in December that would require all companies listed on the exchange to publicly disclose consistent, transparent diversity statistics about their board of directors. With the SEC’s approval, Nasdaq-listed companies must have, or explain why they don’t have, at least two diverse directors on their board. This includes having one board member who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Foreign companies and smaller reporting companies would receive additional flexibility.
Nasdaq found in a review conducted before submitting its plan late last year that more than three-quarters of its listed companies wouldn’t have met its proposed requirements.
“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,” SEC Chairman Gary Gensler said in a statement.
Republican Commissioner Hester Peirce voted against the proposal, while the SEC’s other Republican commissioner, Elad Roisman, offered a partial dissent. In a statement, Roisman praised the goal of greater boardroom diversity, but said the SEC’s approval order fails to make the case for why the agency should agree to the rule. He also warned that the rule could drag the SEC into thorny legal disputes over discrimination.
“A serious concern is that the SEC — without any doubt, a state actor — may need to take future action in which the agency must consider disclosure of the racial, ethnic, gender, or LGTBQ+ status of individual directors,” Roisman wrote. “After all, the Commission is the adjudicating body for exchange delisting decisions.”
Critics of Nasdaq’s plan have posited that it could be challenged in court. Some conservative groups have argued that the exchange’s diversity rule, if implemented, would violate the U.S. Constitution and civil-rights laws.
“The proposed rule is racist and sexist in that it mandates that firms establish quotas and discriminate based on sex, skin color, ethnicity or sexual orientation,” David Burton, a senior fellow at the Heritage Foundation, told the SEC.
Lawyers for Nasdaq say the rule wouldn’t violate any laws. Nasdaq has rejected characterizations of its proposed rule as a mandatory quota system, since companies would have the option of filing a written explanation for why they weren’t meeting the diversity targets.
The exchange operator also amended its initial proposal to make it easier for small companies to comply. One of the changes, for instance, allows companies that have five or fewer directors to meet the targets with just one board member from a designated diverse background, rather than two.
Nasdaq argued that its proposed rule change would benefit investors. The exchange operator cited studies that found companies with more diverse boards tended to have stronger corporate governance and financial performance.
“We are pleased that the SEC has approved Nasdaq’s proposal to enhance board diversity disclosures and encourage the creation of more diverse boards through a market-led solution,” Nasdaq said Friday.
Nasdaq is the first major exchange to pursue such a requirement, but not the first authority to pursue board diversity requirements. In September 2020, California passed a law that will legally require public companies headquartered in the state to diversify their boards in terms of race, ethnicity and sexual and gender identity. That law requires companies to have at least one board member from an underrepresented community by the end of 2021 and at least two or three by the end of 2022.
California’s new law expands on its 2018 law, which required public companies headquartered in the state to have at least one female on their board of directors by the end of 2019.
According to The Wall Street Journal, there were 93 California-based companies in the Russell 3000 that had all-male boards when the bill was signed into law. Within a year, only 17 had no women on their boards.
During the same period, according to the WSJ, 244 California companies in the Russell 3000 have added at least one female director, and 41 companies added two. Even more surprising: More than 90% of companies in the S&P 500 now include two or more women on their boards, compared to 86% in the prior year. And last year a milestone was reached, as the last all-male board among the S&P 500 was eliminated.
An analysis released in June found that big U.S. companies significantly boosted the share of new directors who are Black or Latino this year, and have added more women to their boards in recent years. Nearly 75% of new independent directors at companies in the S&P 500 are women or belong to a racial or ethnic minority, up from about 60% last year and 31% a decade ago, according to the analysis by board and executive recruiting firm Spencer Stuart.
Nasdaq named Adena Friedman as its CEO in 2016, which made her the first woman to lead a major U.S. exchange.
The Nasdaq contains all companies that trade on the exchange; more than 3,300 in total. It is dominated by technology companies, but there are many financial, biotech and industrial companies as well. It is the second largest exchange by market capitalization, behind the New York Stock Exchange.
Nasdaq has said its goal is to give stakeholders a better understanding of a company's current board composition and to bolster investor confidence that all listed companies are considering diversity when they look for new board members.