Wednesday, December 9, 2020

NASDAQ Promotes Diversity Through New Listing Requirements

On December 1st, 2020, Nasdaq filed a proposal with the Securities and Exchange Commission to adopt additional listing rules requiring enhanced board diversity and disclosure of firm diversity efforts.  The new listing rules require Nasdaq-listed companies to have on their board of directors, at least two diverse directors, including one who self-identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+.  If the firm does not meet this listing requirement, it must explain why they do not have at least two diverse directors sitting on their board.  Additionally, the new listing rules require Nasdaq-listed companies to publicly disclose consistent, transparent diversity statistics regarding its board of directors.  Nasdaq defines underrepresented minorities to include Black or African America, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities.  Smaller reporting companies and foreign companies have additional flexibility in satisfying these new listing requirements by seating at least two female directors.  These new listing rules require approval from the SEC.

NASDAQ's stated goal for requiring diversity among its listed companies board makeups is to provide the investing public with a "better understanding of the company's current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or explaining their rationale for not meeting that objective." To support this new listing requirement, Nasdaq pointed to over 24 studies that found a link between diverse board and more robust financial performance with better corporate governance.  Under this proposal, Nasdaq-listed companies are required to publicly disclose board-level diversity statistics within one year of the SEC's approval of the rule.

CNN reports that Nasdaq CEO Adena Friedman stated, "Nasdaq's purpose is to champion inclusive growth and prosperity to power stronger economies." Non compliance by Nasdaq-listed companies could lead to delisting.  

Nasdaq's move is part of a growing momentum to see that corporate board diversity is taken seriously across the United States.  California has for two years been requiring gender diversity on corporate boards and has recently begun requiring racial and ethnic diversity on California boards as well.  Goldman Sachs has recently announced that it will require any company that it assists in taking public must include at least one diverse board member. 

The Corporate Justice Blog has long advocated for board diversity as a priority for expanding human capital and realizing greater financial benefits for the firms and its shareholders. We argue that a commitment to diversifying the board, both in gender and racial diversity as well as worldview diversity enhances the performance of the corporations that so commit.  See here, here, here and here.

hat tip:  Deepali Lal, 3L, Arkansas at Little Rock William H. Bowen School of Law 

photo: courtesy of Wikimedia Commons


  1. It is always great to read articles about big companies trying to diversify their board of directors! I believe there is such a benefit from getting differing views and perspectives to work together to create the most effective plan that can benefit everyone. It is definitely a challenge to make everyone happy, but it is definitely a step in the right direction to get a voice from all representations of cultures. NASDAQ is taking it even one step further by trying to diversify more in gender. Thanks for sharing!

    -Jaci Roberts

  2. This is an encouraging move by the NASDAQ, especially with the broad array of businesses that will fall within the scope of these requirements as the second largest stock exchange in the U.S. I am curious to see how large of a change in Board diversity and disclosure this"please explain yourself" requirement will have. This reminds me of a similar "please explain yourself" style rule that some states have implemented where attorneys are requires to list their pro bono hours to their state bar, even if they completed none. I suppose that this is a helpful tool to raise awareness of non-diverse corporations. I also think that this can function as a useful tool for job seekers to be able to identify (newly public) corporations that are truly striving for corporate diversity.

    -Will McGrath

  3. Diversity in boards is definitely needed. To me a diverse board is able to grow and adapt to the social environment all around us. With a diverse board can come diverse leadership from the top down and hopefully a waterfall effect of promoting diversity throughout the company. Now, this is not to have a hostile takeover of companies by the underrepresented, it is to show companies that diversity is in fact beneficial and that we should atone for our past atrocities when it came to women and minorities.

    I do find it interesting that the Nasdaq does not include LGBTQ+ individuals in their definition of minority and thus has to mention them separately. Last I checked, the Queer community is not a majority anywhere. Just thought that was interesting as I always thing of the Queer community as being within the list of minorities.

    I also find it interesting that foreign companies also have a different guideline. They only need to hire two women and have no minority requirement. I would be on board for having more minorities on boards for foreign countries too. There are underrepresented communities all across the globe, and Nasdaq can be a global leader in achieving diverse boards if they included foreign companies. Or maybe a country by country approach instead of just a blanket statement for every company that is foreign.

    - Damien Powell

  4. Diversity is a great thing, as it is inclusive of all perspectives and is ideal for modeling of any board; however, is this not an overreaching move? I dont know. How does this affect elections down the road? Will a candidate be unable to challenge an incumbent because an incumbent is protected by this rule? Will an individuals gross negligence be overlooked in comparison to other members because they hold a seat that satisfies a demographic requirement?

    I think the NASDAQ failed with this rule because it is a requirement which molests a macro issue onto a micro process. The appropriate route, in my opinion, would be to incentivize board diversity and not mandate. While I support diversification of boards, I disagree with the exclusion of a class because their makeup does not conform with a diverse standard.

    Kenneth Connor

  5. While I appreciate that NASDAQ is making an effort to increase diversity in corporate boards, I wish that this were not necessary. It would be great if corporations didn't have to be forced into making their corporate boards diverse. I think that corporations will appoint people just to meet the diversity quota required by NASDAQ. I don't think that this new corporate board diversity is going to make me think differently of these corporations. It may lessen the efforts of boards that were already diverse because you won't be able to tell who has a diverse board just to meet requirements and who genuinely believes that diversity is good for the business.

    I don't think that the everyday investor is going to take into account whether a board is diverse before buying stocks in that business. The typical investor would just look at who is going to make them the most money. I don't think that the typical investor is aware of the link between the diversity of the board and the financial performance of the company.

    - Alexis Pinkston

  6. My concern here is that this will end up not changing anything. The rule gives an out for a company to just explain why you didn't comply with the rule. Excuses can always be made and I doubt that NASDAQ will delist a company solely because of noncompliance with this rule. I am concerned that this will be like the NFL diversity rule for coaching. Its there and has some formalities that are supposed to be observed but no real consequence when its not respected.

    James Gift

  7. This is an encouraging move by Nasdaq. More diversity in corporate boards will bring more worldviews into considerations of issues that have a large impact on the world economy and humanity in general. The corporations represented on the Nasdaq play a role in many peoples' day to day lives, and their operations affect the resources on this planet, and therefore, everyone on it. While many new board members will likely still be American, and have a western viewpoint, tapping into the mindsets of as many different people, from as many different backgrounds as possible allows for a greater dissemination of ideas, creative thinking, and facets of problem-solving . To take any action other than what brings the greatest amount of information and perspective to the table is disrespectful to all of humanity and seems to me irresponsible, myopic, and a duty of care violation. -Chris Brunson

  8. Although in making this decision, the Nasdaq pointed to "over 24 studies that found a link between diverse board and more robust financial performance with better corporate governance", a truly incredible and encouraging finding, if this rule is approved, I believe there will be one overarching negative externality. If corporations begin to elect to the board two diverse directors solely to either satisfy Nasdaq's listing requirement or avoid having to issue a public statement, boards will, on paper, seem to appear more progressively diverse. However, my fear is that the board members who were not elected under a diversity initiative will feel superior to and ignore the thoughts and ideas of the diverse members. The 24 studies showing that diversity is correlated with more "robust financial performance" are likely premised on those diverse individuals actually having their voices heard in the decision making process. If passed, I hope my fear will be shown unfounded, and this rule will not stifle, but elevate, those vital voices.

    - Taylor Mackenzie Mounger

  9. I believe that the proposed rule is a step in the right direction. However, I agree with the comments above. Enforcement of the rule may be entirely too lax and corporations may simply just not comply with the new rule. Additionally, this brings the issue of forced diversity. The corporate world is largely ran by white males who share ideas with other white males. It is important that within our society that we think outside our own personal bubbles. But that begs the question, does diversity really matter when it isn't organic? Members of a board will be elected to the board based on a narrow set of restrictions, forcing the board to simply pick someone to pick someone. Again, I agree with the above comments that the voices of people forced to be on the board to meet a certain requirement may have their voices and ideas not heard because they are deemed inferior to other board members. However, I do think diversity is greatly needed in the corporate world. It is disheartening that we have to use restrictive measures to implement diversity onto corporate boards. But maybe this proposed rule leads to a future of corporate boards that are inclusive and represent all walks of life without being forced to do so.

    -Amanda Williamson

  10. While I believe corporations should be seeking diversity on their own, I think it is so neat that NASDAQ is doing its part to promote diversity in board leadership. The standards proposed by NASDAQ here are low and will not harm corporations, but will rather get corporations who generally do not engage in considering diverse applicants thinking about why diversity is important. I will be interested to see if the SEC does adopt this rule and if any follow up rules regarding the concerns of my peers above will be adopted.

    Frances Amick

  11. I am pleased that California has been requiring this diversity on the Boards. However, always other states will probably slowly lag behind with the more progressive, more diverse, and more urban states being next to join. Many will, however, probably somehow feel this is a type of affirmative action and that the minority members appointed or elected to boards are not as qualified as the mostly white males boards have been traditionally made up of. However, I feel that the need for diversity, and not just racial and ethnic diversity; but. gender diversity as well is needed on boards. We must include people that represent all members of society that support these corporations, and that is ALL of Us!

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