What Your Board Needs to Know About Nasdaq’s Rule Change on Diversity Disclosure

On Friday, Nasdaq won Securities and Exchange Commission approval to implement rule changes for listed companies,¹ requiring increased disclosure around board diversity. The likely result of this will be a growing competition for directors who are women, racial and ethnic minorities, or identify as LGBTQ+.

While it is possible that the rule implementation will be delayed pending legal challenges, there is clearly a growing emphasis around increasing diversity and disclosure in the boardroom – and a long way for boards to go to meet minimum standards: according to a Nasdaq analysis conducted in 2020, over 75 percent of boards would not have met the proposed new standards had they been implemented at that time. According to ISS data on 2,284 boards, over a third of Nasdaq listed companies lack a racially diverse director and more than 10 percent lack female directors.

The rule requires most listed boards to:

• Disclose board-level diversity data annually, following Nasdaq’s Board Diversity Matrix, or a substantially similar format. The disclosure will be made via the company’s proxy statement, information statement, 10-K or 20-F, or on the company’s website.
• Have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Companies which do not meet this standard may provide an explanation for why not, as well as a description of a different approach to diversity that they are implementing.

There is a transition period for companies to meet the standard:

• Nasdaq Global Select Market and Nasdaq Global Market companies will have to have, or explain why they do not have, one diverse director (per the above standard) no later than two years after the SEC approval date. They will have to do the same thing for two diverse directors no later than four years after the approval date.
• Nasdaq Capital Market companies will have to have, or explain why they do not have, one diverse director (per the above standard) no later than two years after the SEC approval date. They will have to do the same thing for two diverse directors no later than five years after the approval date.
• Companies with boards of five or fewer directors will have to have, or explain why they do not have, one diverse director (per the above standard) no later than two years after the SEC approval date.

We recently published an article in Directors and Boards discussing a modern approach to recruiting diverse board candidates.2 In that article we stated:

To increase the diversity of their boards, companies must change how they recruit diverse talent. Too many boards think they can complete a search for a diverse director in under three months, failing to recognize how in-demand diverse executives are and how complex a well-designed process can be to do well. Boards should instead develop a three- to five-year succession plan, so they have a long-term view of the strategy-driven skills and experiences new directors need.

Boards then need to identify pools of diverse talent, which will likely be different from where and how the board has recruited in the past. Part of this should include building relationships with diverse executives before they become attractive director candidates, creating a pipeline to board service, and a network of up-and-coming diverse leaders.

Ensure that diverse candidates are getting an opportunity to interview and that diverse stakeholders are included in the interview process. The NYC comptroller advocates for a version of the NFL’s Rooney Rule, encouraging boards to consider at least a minimum number of qualified people of color for every open board seat.

There is growing pressure on companies to continue making progress on DEI — and that pressure is not likely to lessen anytime soon.

Russell Reynolds Associates is proud of our 50 year history of supporting diversity, equity, and inclusion on corporate boards. In 2020, over 30 percent of the board directors we placed were racial and ethnic minorities, and nearly 50 percent were women. Our firm co-founded and has co-led the Black Corporate Directors Conference for over 20 years, founded the Hispanic Directors Network, was an original supporter of the 30% Club, and is a long-term sponsor of HIMFORHER and the Latino Corporate Director Association.

Additional Authors

PJ Neal is a Thought Leadership Architect and Lead. He is based in Boston.

<sub>1. “Nasdaq’s Board Diversity Rule: What Nasdaq-Listed Companies Should Know”, Nasdaq, October 1, 2021.
2. Rusty O’Kelley, “A Modern Approach to Recruiting Diverse Board Candidates”, Directors & Boards, July 2021.</sub>