As you probably know, on August 6, the SEC approved Nasdaq’s proposal for a new listing rule regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The new listing rule adopts a “comply or explain” mandate for board diversity for most listed companies and requires companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards in a matrix format. (See this PubCo post.) Shortly after SEC approval, Nasdaq posted a series of FAQs here. Nasdaq has been expanding the FAQs to provide some additional useful answers, as summarized below:
- A company cannot double count the same director in more than one diversity category. For example, if a company has one director who identifies as female and Asian, and no other director identifies in any of the other diverse categories, then that company would not satisfy both diversity objectives.
- If a company does not satisfy the applicable objective for a minimum number of diverse directors, it is required to explain why it does not. Nasdaq has said that it would not evaluate the substance or merits of a company’s explanation. According to correspondence from Nasdaq’s Chief Legal and Regulatory Officer, the company “can choose to disclose as much, or as little, insight into the company’s circumstances or diversity philosophy as the company determines, and shareholders may request additional information directly from the company if they need additional information to make an informed voting or investment decision.” He then offered examples of acceptable types of disclosure. (See this PubCo post.) In the FAQs, Nasdaq has provided samples of additional potential explanations:
- “A U.S. company may disclose that it chooses to define diversity more broadly than Nasdaq’s definition by considering national origin, veteran status or individuals with disabilities when identifying nominees for director because it believes such diversity brings a wide range of perspectives and experiences to the board.”
- “If under Israeli law regarding board diversity, an Israeli company is required only to have a minimum of one woman on the board and such Israeli company chooses to comply with Israeli home country law in lieu of meeting the diversity objectives of Rule 5605(f)(2)(B), it may choose to disclose that ‘the Company is incorporated in Israel and required by Israeli law to have a minimum of one woman on the board, and satisfies home country requirements in lieu of Nasdaq Rule 5605(f)(2)(B), which requires each Foreign Issuer to have at least two diverse directors.’”
- A company that is listed on the Nasdaq Global Select or Global Market may not have the benefit of the longer timeline available to companies on the Nasdaq Capital Market to satisfy the two diverse director objective; however, a company that does not satisfy the objective, depending on the facts, could provide an explanation like this: “While the Company is listed on Nasdaq Global Market, the Company believes that it is similarly situated to companies listed on Nasdaq Capital Market in terms of its annual revenues and public float, and therefore has chosen to meet the objectives of Rule 5605(f)(2)(C) in lieu of Rule 5605(f)(2)(A). The company has met these objectives by having at least two diverse directors on the board within the timeframe provided under Rule 5605(f)(7) applicable to Nasdaq Capital Market-listed companies.”
- Even if a Smaller Reporting Company (as defined in Rule 12b-2) does not apply the scaled disclosure requirements available to SRCs, it is still considered an SRC under Nasdaq’s Board Diversity Rule.
- Director self-identification is voluntary, and a director may choose not to self-identify with respect to diversity. The standardized disclosure matrix allows a company to indicate that the diversity information for some of its directors was not disclosed. In that event, the company would still be considered compliant with the requirement that listed companies publicly disclose a matrix of board-level diversity data. If a company is unable to meet the applicable diversity objectives as a result of a decision not to self-identify, the company may provide, as an alternative, public disclosure under Rule 5606(f)(3) explaining that the company has directors who do not wish to be identified or counted as diverse.
- The initial diversity matrix is due next year. The deadline is the later of August 8, 2022, or the date the company files its proxy statement for its annual meeting during 2022. If a company files its 2022 proxy statement before August 8, 2022 and does not include the matrix, it will have until August 8, 2022 to disclose its matrix either on its website or in an amended 10-K. If the company files its 2022 proxy statement on or after August 8, 2022, then it must include the matrix in its proxy statement or post it on its website within one business day of filing its proxy.
- Nasdaq provides illustrations of acceptable and unacceptable versions of the matrix here. For example, Nasdaq found one version of a matrix to be unacceptable because it was unclear from the presentation whether the company had at least one female director and one underrepresented individual or LGBTQ+ director; the matrix showed that the company had one female, but did not indicate whether the diversity categories applied solely to the male directors. Another presentation was unacceptable because the matrix incorporated categories not specifically included in the Board Diversity Matrix Template.
- Nasdaq also provides matrix presentations of different situations here. In one situation, a male director was Australian Aboriginal and did not identify as one of the race/ethnicity categories in the Nasdaq definition. Nasdaq showed a presentation where the company chose to provide this disclosure as supplemental information below the matrix. This director, however, would not count toward the diverse director objective. In another situation, a company had two female directors, one of whom identified as Black and Hispanic and the other as White. Nasdaq said that the matrix should reflect entries in each individual demographic category—Black, Hispanic and White—as well as an entry in the “Two or More Races or Ethnicities” category. This company would satisfy the objective of two diverse directors, Nasdaq said.
- Although the Nasdaq definition of “diverse” substantially aligns with the definition in the California board diversity laws (see this PubCo post and this PubCo post), there are some key differences. Nasdaq provides a table showing the differences between the California board diversity laws and the Nasdaq rule here.
- A company can supplement the information in the matrix by providing additional information below the matrix or in a separate table. In that event, it is not required to continue to provide the same supplemental disclosure in subsequent years.
- A company may satisfy the diverse director objective with two female directors if one of the females also identifies as either an underrepresented minority or LGBTQ+. In addition, foreign companies and smaller reporting companies that qualify for additional flexibility may also be able to satisfy the rule with two female directors.
- Companies cannot assume any diversity data to complete the matrix. Companies may want to include voluntary board diversity questions in their annual D&O questionnaires or, alternatively, collect the information in discussions with directors.
