Nasdaq’s proposed rules on board diversity illustrates the growing importance of DEI efforts in corporate America. Of course that old saw is true—“no good deed goes unpunished.” While supporters applaud the expected positive impact to diversity of Nasdaq’s move, detractors question its appropriateness and efficacy.
Imposing Diversity Requirements for Nasdaq Listings
In December, 2020, Nasdaq – the second-largest U.S. stock exchange – submitted a filing to the U.S. Securities and Exchange Commission (SEC) requesting approval for Nasdaq-proposed rules that would impose diversity requirements on companies listed on the exchange.
As explained in a recent SEC filing, the proposed rule “would require each Nasdaq listed company (other than a Foreign Issuer, Smaller Reporting Company, or Company with a Smaller Board, as discussed below) to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one Diverse director who self-identifies as Female and at least one Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+. Pursuant to proposed Rule 5605(f)(1), “Diverse” would be defined to mean an individual who self-identifies in one or more of the following categories: (i) Female, (ii) Underrepresented Minority, or (iii) LGBTQ+.”
Supporters Point to Potential Benefits
As the language of the rule states, the proposed requirement would not be so strict as to require a company to have diverse members. Companies could simply draft a statement explaining why that is not the case. However, doing so could be interpreted by detractors as a form of public shaming of companies with non-diverse boards.
Supporters of the rule argue that increasing diversity is not only the right thing to do, but is demonstrably beneficial to the success of companies. Indeed, Nasdaq’s own 271-page proposal in support of the rule cited extensive academic and empirical research supporting the argument that diverse companies outperform non-diverse companies.
While Detractors Cite Potential Burdens
Opponents of the proposed rules have generally publicly supported the goal of increased corporate diversity. But they question the validity of Nasdaq’s and other data attempting to create a link between diversity and performance.
They argue that, while the data does show a correlation between diversity and performance, it does not demonstrate or prove causation. Furthermore, opponents of the measure, including Republican senators on the Senate Banking Committee have argued that the proposed rules could violate securities disclosure principals, create costs of compliance for impacted companies and generally interfere with boards’ duties to their shareholders.
A Step in the Right Direction
We think that Nasdaq’s move is a step in the right direction—just one more way that the foundation can be built, and reinforced, to drive broader diversity where it counts.
The proposed Nasdaq rules are, as of now, just that: a proposal. An SEC ruling has been delayed multiple times since the rules were proposed late last year. Still, the Wall Street Journal expects we could see a final decision sometime in August of this year. Regardless of the final outcome, the fact that a major U.S. stock exchange has formally proposed such diversity rules to the SEC in the first place is a signal of the growing importance of diversity at the highest levels of corporate America, at least in the eyes of some major players. We applaud their efforts to prompt companies to be inclusive!