On August 6, 2021, the SEC approved Nasdaq’s Board Diversity Rule. The rule is the culmination of efforts initiated by Nasdaq in December 2020 to require Nasdaq-listed companies to publicly disclose information about the diversity makeup of boards of directors.
Broadly, the Board Diversity Rule requires Nasdaq-listed companies to:
- Publicly disclose board-level diversity statistics using a standardized template; and
- Have, or explain why they do not have, at least two diverse directors.
Annual Disclosure of Board-level Diversity Data Starting in 2022
Companies listed on Nasdaq’s U.S. exchange have until the later of (x) August 8, 2022 or (y) the date the company files its proxy or information statement for the company’s annual shareholder meeting during 2022, to disclose board-level diversity data using the Board Diversity Matrix found here, or a format that is substantially similar. Companies may provide this disclosure in the company’s proxy statement or its information statement (or if the company does not file a proxy, its Annual Report on Form 10-K or 20-F), or on the company’s website.1
In the listing rule FAQs, Nasdaq also provides examples of acceptable (i.e., same or substantially similar) and unacceptable (i.e., substantially different) disclosures.
“Comply or Explain” Approach to Diversity Objectives
Nasdaq’s rule is not a mandate and does not set a binding target for companies; rather the objectives are in the form of a “comply or explain” disclosure framework. Accordingly, Nasdaq-listed companies that 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+, must provide an explanation for not doing so in its proxy statement, information statement for its annual shareholder meeting or on the company’s website. Nasdaq will verify that the company has provided an explanation, but will not assess the merits of the explanation.
Special Rules for Smaller Reporting Companies, Foreign Issuers and Companies with Five or Fewer Directors
Smaller reporting companies have additional flexibility and can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented minority or LGBTQ+.
Foreign issuers can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+.
Companies with five or fewer directors can meet the diversity objective by having at least one diverse director.
SPACS are Exempt Until Business Combination
SPACs are exempt from the board diversity rule until their business combination. Following the business combination, such companies must meet, or explain why they do not meet, the applicable diversity objectives by the later of (x) two years from the date of listing or (y) the date the company files its proxy statement or its information statement for the company’s second annual meeting of shareholders subsequent to the company’s listing.
Transition Periods for Compliance
Transition periods2 for Nasdaq-listed companies to meet the diversity objectives, or explain why they do not, are based on the listing tier and are set forth below.
- Nasdaq Global Select Market or Nasdaq Global Market companies are required to “comply or explain” whether they have at least one diverse director by August 7, 2023, and at least two diverse directors by August 6, 2025.
- Nasdaq Capital Market companies are required to “comply or explain” whether they have at least one diverse director by August 7, 2023, and at least two diverse directors by August 6, 2026.
- Companies with boards that have five or fewer directors, regardless of listing tier, are required to “comply or explain” whether they have at least one diverse director by August 7, 2023.
1 If the company elects to provide such disclosure on its website, then the company must publish this disclosure with its proxy statement or its information statement (or if the company does not file a proxy, its Annual Report on Form 10-K or 20-F). It must also submit a URL link to the disclosure through the Nasdaq Listing Center within one business day after such posting.
2Additional phase-in periods are available for newly listed companies on Nasdaq, including IPOs and direct listings.
Louis C. Taormina
Lou Taormina works directly with corporate board of directors and senior management providing executive compensation consulting services, particularly as it relates to the design and ongoing administration of compensation programs. During his more than 20-year career at FW Cook, Lou has worked with a broad collection of clients in a variety of industries, as well as start-up organizations. His legal background is of added value on matters relating to employment agreements, severance and change in control arrangements, SEC reporting and disclosure requirements, and equity incentive plan design and disclosure. Lou has authored numerous research reports and articles on compensation-related topics and is a frequent speaker at compensation forums throughout the country.
Becca Jordan works with both large publicly traded clients and smaller privately held companies across a wide range of industries. She provides consulting services in various areas of compensation matters, specializing in director compensation benchmarking, executive compensation trends, and peer group analysis.