Nasdaq proposes comply-or-explain board diversity requirement for listed companies

At least two board members would have to be “diverse,” including at least one female and one underrepresented minority or LGBTQ+ member.

Under a new proposal, companies listed on the Nasdaq Stock Exchange (“Nasdaq”) may soon be required to have, or explain why they do not have, at least two board of directors members who are diverse (i.e., female, an underrepresented minority or LGBTQ+), including (i) at least one female director; and (ii) at least one underrepresented minority or LGBTQ+ director. Companies would also have to provide annual disclosures on board diversity.  

Non-U.S. issuers and smaller reporting companies would be allowed to satisfy the new requirements by having two female directors. Certain issuers, such as issuers of non-voting preferred securities, debt securities and derivative securities, would be exempt from the proposed requirements.  

The U.S. Securities and Exchange Commission (the “SEC”) is reviewing the proposed rules, and it is not clear whether or when they will be approved. Under the proposal, listed companies would have at least two years from the SEC’s approval date to comply with the rules.  

What do the proposed rules require?  

Nasdaq’s proposal would add new section (f) to Rule 5605 (the comply-or-explain board diversity requirement) and new Rule 5606 (annual disclosures regarding board diversity) to its listing rules.  

Proposed Rule 5605(f) would require each listed company 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+.

If a company chooses to explain rather than comply, it must disclose the reasons why it does not have two diverse directors in its proxy statement or information statement for its annual meeting of shareholders (the “proxy statement”) or on the company’s website.  

Proposed new Rule 5606 would also separately require listed companies to disclose annually information on each director’s voluntary self-identified characteristics in a Board Diversity Matrix, either in the company’s proxy statement or on its website. After the first year of disclosure, companies must disclose the current and prior year diversity statistics using the Board Diversity Matrix.

Would the proposed requirements apply to non-U.S. issuers?

As a general rule, Nasdaq allows listed foreign private issuers (i.e., most non-governmental issuers incorporated outside the United States) to follow their home country corporate governance rules instead of the Nasdaq requirements, with certain exceptions. The proposal would amend the general rule to require foreign private issuers to comply with the board diversity and annual disclosure requirements, but with more flexibility.  

Foreign issuers (which include both foreign private issuers and foreign governmental issuers) would be subject to Rule 5605(f)’s comply-or-explain requirement, but can satisfy the rule by having at least two female board members. Smaller reporting companies would be granted the same flexibility. Also, for foreign issuers, the definition of diverse does not use the term “underrepresented minority,” and instead uses “underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the [c]ompany’s home country jurisdiction.”  

Foreign issuers also would not be required to provide a breakdown of the “unrepresented individual” group by race or ethnicity in the Board Diversity Matrix.  

Are any issuers exempt from the proposed requirements?  

As proposed, the following companies would be exempt from both the board diversity and annual disclosure requirements:  

  • issuers of non-voting preferred securities, debt securities and derivative securities;  
  • issuers of securities listed under the Rule 5700 Series (i.e., securities other than common or preferred stock and warrants);  
  • acquisition companies;  
  • asset-backed issuers and other passive issuers;  
  • cooperatives;  
  • limited partnerships; and  
  • management investment companies.  
When would the proposed rules become effective?  

The SEC has yet to approve the proposed amendments, and there is no set date by which the SEC will complete its review. It is also possible that Nasdaq could amend the proposal before SEC approval, or that the SEC could decide not to approve the changes.  

If the SEC does approve the changes, Nasdaq will phase in compliance with respect to the Rule 5605(f) board diversity requirements, as follows:  

  • Two calendar years after the approval date – Companies must have, or explain why they do not have, one diverse director;  
  • Four calendar years after the approval date – Companies listed on the Nasdaq Global Select or Global Market tiers must have, or explain why they do not have, two diverse directors;  
  • Five calendar years after the approval date – Companies listed on the Nasdaq Capital Market tier must have, or explain why they do not have, two diverse directors;  

Newly listed companies will have a year after listing to comply with the diversity requirements. If they list prior to the expiration of the transition periods described above, they may also rely on the transition periods.  

The Rule 5606 annual disclosure requirements would become effective one year after the SEC’s approval of the rule. As with the board diversity requirements, newly listed companies do not need to provide the Board Diversity Matrix until one year after listing.  

What are the consequences if a company does not comply?

Nasdaq will move to delist a company that does not comply with the board diversity or the annual disclosure requirements within the time periods discussed above, if the company is unable to comply during a cure period that would end the latter of its next annual shareholders meeting, or 180 days from the event that caused the deficiency. The company may appeal the delisting determination through the hearing process set out in the Nasdaq rules.  

How do the proposed rules differ from what the SEC and U.S. states require regarding board diversity?

Nasdaq’s proposed requirements are a significant step beyond what the SEC currently requires, but less than what the state of California requires.  

In 2009, the SEC adopted rules requiring public companies to disclose in their proxy statements whether, and if so how, its nominating committee considers diversity in identifying nominees for director. Notably, the SEC declined to define the term “diversity” in the rules, stating in the adopting release that diversity could be viewed expansively to include differences of viewpoint, professional experience, education and skill.  

More recently, the SEC also issued guidance regarding Item 401(e)(1) of Regulation S-K, which requires a company to “briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director.” The guidance states that if a board considered a director’s self-identified diversity characteristics (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) during the nomination process, and the individual consents to disclose those diverse characteristics, the SEC “would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered.”

By contrast, the Nasdaq proposal explicitly defines “diverse,” focusing specifically on gender, LGBTQ+ and underrepresented minorities, rather than on broad concepts such as “viewpoint” or “skill,” and requires companies to have a specific number of diverse board members (or provide an explanation of why they do not). Nasdaq would also require specific numerical disclosures regarding board member diversity that are comparable year by year and across companies.  

The proposed rules are not as demanding, however, as the requirements that have been adopted in California, which require public companies headquartered in the state to include a certain number of women directors and directors from an "underrepresented community" on their boards by a certain time. California does not provide the option for companies to “explain” their lack of compliance. It also sets a minimum number of women and underrepresented community board members based on the size of the board of directors, while Nasdaq’s proposal does not consider the size of the board. Similar legislation has been proposed in New Jersey, Michigan and Hawaii.  


It is not clear when or if the SEC will approve Nasdaq’s proposal. The current SEC has not been receptive to mandating ESG (environmental, social and governance) disclosures. However, SEC Chair Jay Clayton will be stepping down at the end of 2020, and the new chair (yet to be named by the incoming administration) may be open to taking a more active approach to board diversity.

We will continue to monitor developments in this area and welcome any queries you may have.