Read the Securities and Exchange Commission Approval of the Diversity Rule

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Treliant Takeaway:

Treliant knows diversity, equity, and inclusion (DEI). If your financial services institution needs assistance with assessing your DEI program and its impact, we can help.

Rule Highlights:

On August 6, 2021, the Securities and Exchange Commission (SEC) approved a NASDAQ rule (Board Diversity Rule) requiring listed companies to meet minimum board diversity standards. NASDAQ’s Board Diversity Rule requires companies that are listed on NASDAQ’s U.S. exchange to:

  • Publicly disclose board-level diversity statistics on an annual basis using a standard template;
  • Have at least two diverse directors, including at least one woman and at least one member of an underrepresented community; and
  • If the company does not meet the board diversity requirement, the disclosure must specify which requirement the board membership does not meet and explain why the company has failed to meet the diversity requirement.

Companies with smaller boards (five or fewer directors) may comply with the Board Diversity Rule by having one diverse director. Foreign issuers and smaller companies may comply with the Board Diversity Rule by having two female directors. For U.S. companies, “underrepresented community” includes African-American, Hispanic, Asian, Native American, Alaskan Native, Native Hawaiian, Pacific Islander, multiracial, or LGBTQ+. For foreign companies, board members that are underrepresented national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the foreign issuer’s home office will be considered diverse for the purposes of compliance with the Board Diversity Rule. There are exemptions from the Board Diversity Rule for special purpose acquisition companies, asset-backed or passive issuers, cooperatives, limited partnerships, and certain other issuers.

To assist companies without diverse boards in transitioning to compliance with the new rule, NASDAQ included a phase-in period. Companies not currently in compliance will have two years to add at least one diverse director, and four or five years to be fully compliant, depending on exchange tier. Issuers that become non-compliant because of a board vacancy will have a grace period to return to compliance. Newly-listed firms will also have a phase-in period to become fully compliant. In addition, NASDAQ will offer certain listed companies access to a complimentary board recruiting service to help increase board diversity.

According to the Alliance for Board Diversity, the largest (Fortune 100 and Fortune 500) public companies have substantially increased diversity over the past several years. Of the Fortune 500, 200 companies have greater than 40 percent diversity among board members. However, minority men have made little progress in gaining board seats within either the Fortune 100 or the Fortune 500. more than a third of Fortune 500 board seats held by diverse directors are filled with persons that are on multiple Fortune 500 boards. More than 40 percent of African-American directors and approximately 25 percent of Asian and Pacific Islander directors serve on multiple Fortune 500 boards. This indicates that, although board diversity has increased at the largest public firms, issuers seeking more diverse members will frequently select candidates from the pool of existing diverse board members. This means there are additional opportunities to broaden board membership even at boards that are currently relatively diverse.