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SEC approves Nasdaq’s board diversity rule changes
09/08/2021
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SEC

New rules requiring Nasdaq-listed companies to have at least two diverse board members, or explain why not, have been approved by the US Securities and Exchange Commission (SEC).

Rule 5605(f) will require Nasdaq-listed firms to have at least two diverse directors, including one woman director and one underrepresented minority – including African American, Hispanic, Asian, Native American, Native Hawaiian, or Pacific Islander – or as LGBTQ+.

A company that fails to satisfy both of these criteria must explain why it does not have two diverse directors on its board. Firms with five or fewer board members only need to have one diverse board member but, failing that, must also explain why not.

The new listing standards also require disclosure, in an aggregated form, of information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board.

In a joint statement, SEC commissioners Allison Herren Lee and Caroline A Crenshaw said the agency supported Nasdaq’s proposal because “it represents a step forward for investors on board diversity”.

“As we have noted in the past, investors are increasingly demanding diverse boards and diversity-related information about public companies,” they said.

“Nasdaq’s proposal should improve the quality of information available to investors for making investment and voting decisions by providing consistent and comparable diversity metrics.”

Nevertheless, the commissioners said there was more work to be done in improving both diversity and transparency at public companies and in capital markets more broadly.

“There is a continued, harmful disparity in the representation of a wide range of communities in our capital markets,” said Herren Lee and Crenshaw.

“Because enhanced diversity is critically important for investors, the markets, and our economy, we hope this is a starting point for initiatives related to diversity, not the finish line.”

In a statement, gender lens finance specialists Parallelle Finance said investors and consumers would benefit from the reforms, and companies will thrive by “experiencing viewpoints in positions of power that have long been ignored in America’s most influential companies”.

“It is long past due that women and minorities get fair representation in boardrooms across America,” said Marypat Smucker, the firm’s principal. “SEC approval is not a total solution, but a step in the right direction for equality in the boardroom.”

A 2020 study found there are only four black CEOs leading Fortune 500 firms, none of whom are women, and fewer than 10% of senior P&L leaders in the Fortune 500 are African American.

Responding to the SEC announcement, Nasdaq said: “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.

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

In July, UK regulators proposed new requirements for regular public reporting on the demographic and socio-economic diversity of financial service firms’ boards and broader workforce, as well as linking senior executive pay to diversity targets.