You probably remember that, late last year, Nasdaq filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. The proposal received a substantial number of comments, many of which were favorable and some of which were highly critical. For those of you who expected a speedy approval of this proposal by the SEC, you may need to reset your expectations.
The Nasdaq proposal set a “recommended objective” for Nasdaq-listed companies to have at least two diverse directors on their boards; if they did not meet that objective, they would need to explain their rationale for not doing so. The rule would also require listed companies to provide annually, in a board diversity matrix format, statistical information regarding the company’s board of directors related to the directors’ self-identified gender, race and self-identification as LGBTQ+. (See this PubCo post.) Nasdaq also proposed to provide Nasdaq-listed companies with one-year of complimentary access to a board recruiting solution to help identify board-ready diverse candidates. Earlier this month, in response to public comments, Nasdaq amended its proposal to, among other things, provide that companies with five or fewer directors may satisfy the recommended objective with one director from a diverse background rather than two and to provide a one-year grace period in the event a vacancy on the board brings a company under the recommended diversity objective. (See this PubCo post.)
Many of the comments on the proposal were very positive. For example, Senator Dianne Feinstein wrote in support of the proposal, citing the “substantial evidence that greater diversity among corporate board members contributes to a range of better outcomes.” In addition, she observed that “a large and growing body of investors are interested in diversity information both to improve the performance of their portfolios and to promote social goals in their investment decisions.” Two Democratic members of Congress, Carolyn Maloney and Gregory Meeks, also wrote in support of the proposal, contending that, “by requiring companies to analyze the makeup of their boards through public disclosure, we will create incentives and inspire change to ensure boards better reflect the American public at large. By disclosing this information to investors, this proposal will empower shareholders to support companies that embody their ideals.” They also noted that numerous studies have shown that increasing diversity improves financial performance. In addition, they pointed out that Nasdaq’s proposal would complement the trend in state and federal laws toward requiring greater diversity efforts. They added that they hoped to reintroduce in the new Congress legislation that the House of Representatives passed in 2019 requiring public companies to disclose the diversity of their boards with respect to race, gender and veteran status.
Even the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness wrote largely in support of the proposal, commending Nasdaq for “promoting a private sector-based solution to foster greater diversity among boards of directors. The Proposal encourages companies to think critically about how to incorporate diversity into their corporate leadership, which is a goal that the Chamber shares. The Chamber supports efforts to increase gender, racial, and ethnic diversity on corporate boards of directors. It is clear that board diversity is valuable.” (The letter also noted that the Chamber had previously supported the legislation described above.) In its commentary, the letter suggested the need for “ongoing careful assessment concerning how Nasdaq’s Proposal could affect Emerging Growth Companies (“EGCs”), as well as the potential effect that the proposed new listing standard could have on the future of initial public offerings.”
Republican Senators on the Senate Committee on Banking, Housing, and Urban Affairs, however, submitted a letter to Acting SEC Chair Allison Lee, asking the SEC to reject the Nasdaq board diversity proposal. While the Senators applauded board diversity as a concept, they believed that Nasdaq was, among other things, acting outside its proper scope as an SRO:
“it is not the role of NASDAQ, as a self-regulatory organization, to act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets and investors. NASDAQ’s narrow concept of mandated diversity, one that prioritizes race, gender, and sexual orientation, and pressured board diversity, misses the mark. It interferes with a board’s duty to follow its legal obligations to govern in the best interest of the corporation and its shareholders. It violates central principles of materiality that govern securities disclosures, and finally, it harms economic growth by imposing costs on public corporations and discouraging private corporations from going public.”
The Senators also argued that the Nasdaq proposal would interfere with a board’s fiduciary responsibility to govern in the best interests of shareholders, that there was no evidence that diversity caused improved corporate performance, that Nasdaq’s definition of diversity was too narrow and that the proposal was unnecessary because corporations were already seeking to diversify. See this PubCo post.)
Interestingly, Marc Morial, President and CEO of the National Urban League, was also highly critical of the proposal, but from quite a different perspective. He argued that “implementation of the proposed Rule, troublingly minimizes the opportunity for African American representation on public company boards. As noted below, this is a deep policy flaw in the proposed Rule, and it should be eliminated.” As Morial describe the proposal, it “requires at least two diverse board members. One is based on gender and must be female. The Submission spends a great deal of time detailing the benefits of diverse female board representation. And the Submission notes that, by one metric, over 95% of such women are Caucasian…. The proposed Rule requires the second director to be either a member of the LGBTQ community or a racial minority….” However, he argued,
“[a]ll diversity is important, but not necessarily equivalent. African Americans, descended from slaves, have been a disfavored group since being involuntarily brought to the shores of America in 1619. Until Brown v Bd. of Education in 1954, Black citizens had been legally excluded from equal participation in American institutions and corporate life. And to this day custom and other vestiges of slavery have perpetuated Black American inequality. Despite Brown and its progeny, and the Civil Rights Acts of 1964 and 1965, Black people have struggled to gain a foothold in corporate institutions despite our gains in education, medicine, industry, and law, among other professions. The Submission makes clear that, of all the underrepresented groups, Caucasian women have made the greatest advances on corporate boards. Yet, under the proposed Rule, one diverse person must by female. The second diverse member need not be an African American person, nor a person of color. The second diverse person may be a Caucasian member of the LGBTQ+ community. And so, the proposed Rule, by its terms, permits a formulation of American diversity that is all White. As such, the proposed Rule reinforces a racial exclusion that is at least as old as the nation. The Nasdaq and the SEC should not be in the business of perpetuating such an anti-American policy.”
He advocates that the proposal be modified “to require the addition of both an African American board member (or another racial/ethnic minority) and a member of the LGBTQ community, one of which might also be female.” He also contended that the proposal was too weak and should impose mandatory requirements and that the timeframes for compliance were too long.
Last week, the SEC posted an Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes, as Modified by Amendment No. 1, which indicates that the SEC has received a mix of comment letters on the proposal and that it is “instituting proceedings to allow for additional analysis of, and input from commenters with respect to, the consistency” of the proposals, as amended, with the requirements of the Act. The Order doesn’t identify any particular issues with the proposal, but, in addition to inviting additional comment, the Order will have the effect of postponing a decision on the proposal. The delay will also allow time for nominee Gary Gensler to join the SEC as Chair (and provide a likely tie-breaking vote). The WSJ speculates that the “final decision might not come until August.”