Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related to Board Diversity

Federal RegisterDec 11, 2020

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90574; File No. SR-NASDAQ-2020-081]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related to Board Diversity

December 4, 2020.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),

and Rule 19b-4 thereunder,

notice is hereby given that on December 1, 2020, The Nasdaq Stock Market LLC (“Nasdaq” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

15 U.S.C. 78s(b)(1).

17 CFR 240.19b-4.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange proposes to adopt listing rules related to board diversity, as described in more detail below:

(i) To adopt Rule 5605(f) (Diverse Board Representation), which would require Nasdaq-listed companies, subject to certain exceptions, (A) to have at least one director who self-identifies as a female, and (B) to have at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (C) to explain why the company does not have at least two directors on its board who self-identify in the categories listed above;

(ii) to adopt Rule 5606 (Board Diversity Disclosure), which would require Nasdaq-listed companies, subject to certain exceptions, to provide statistical information in a proposed uniform format on the company's board of directors related to a director's self-identified gender, race, and self-identification as LGBTQ+; and

(iii) to update Rule 5615 and IM-5615-3 (Foreign Private Issuers) and Rule 5810(c) (Types of Deficiencies and Notifications) to incorporate references to proposed Rule 5605(f) and Rule 5606; and

(iv) to make certain other non-substantive conforming changes.

The text of the proposed rule change is available on the Exchange's website at

https://listingcenter.nasdaq.com/rulebook/nasdaq/rules,

at the principal office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

I. The Diversity Imperative for Corporate Boards

Over the past year, the social justice movement has brought heightened attention to the commitment of public companies to diversity and inclusion.

Controversies arising from corporate culture and human capital management challenges, as well as technology-driven changes to the business landscape, already underscored the need for enhanced board diversity—diversity in the boardroom is good corporate governance. The benefits to stakeholders of increased diversity are becoming more apparent and include an increased variety of fresh perspectives, improved decision making and oversight, and strengthened internal controls. Nasdaq believes that the heightened focus on corporate board diversity by companies,

investors,

corporate governance organizations,

and legislators

demonstrates that investor confidence is enhanced when boardrooms are comprised of more than one demographic group. Nasdaq has also observed recent calls from SEC commissioners

and investors

for

companies to provide more transparency regarding board diversity.

See

Deloitte and the Society for Corporate Governance,

Board Practices Quarterly: Diversity, equity, and inclusion

(Sept. 2020), available at:

https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/diversity-equity-and-inclusion.html

(finding, in a survey of over 200 companies, that “most companies and/or their boards have taken, or intend to take, actions in response to recent events surrounding racial inequality and inequity; 71% of public companies and 65% of private companies answered this question affirmatively”).

See

ISS Governance,

2020 Global Benchmark Policy Survey, Summary of Results

6 (Sept. 24, 2020), available at:

https://www.issgovernance.com/wp-content/uploads/publications/2020-iss-policy-survey-results-report-1.pdf

(finding that “a significant majority of investors (61 percent) indicated that boards should aim to reflect the company's customer base and the broader societies in which they operate by including directors drawn from racial and ethnic minority groups”).

See

International Corporate Governance Network,

ICGN Guidance on Diversity on Boards

5 (2016), available at:

https://www.icgn.org/sites/default/files/ICGN%20Guidance%20on%20Diversity%20on%20Boards%20-%20Final.pdf

(“The ICGN believes that diversity is a core attribute of a well-functioning board which supports greater long-term value for shareholders and companies.”).

See, e.g.,

John J. Cannon et al., Sherman & Sterling LLP,

Washington State Becomes Next to Mandate Gender Diversity on Boards

(May 28, 2020), available at:

https://www.shearman.com/perspectives/2020/05/washington-state-becomes-next-to-mandate-gender-diversity-on-boards;

Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020) (California legislation requiring companies headquartered in the state to have at least one director who self-identifies as a Female and one from an Underrepresented Community).

See

Commissioner Allison Herren Lee,

Regulation S-K and ESG Disclosures: An Unsustainable Silence

(Aug. 26, 2020), available at:

https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26#_ftnref15

(“There is ever-growing recognition of the importance of diversity from all types of investors . . . [a]nd large numbers of commenters on this [SEC] rule proposal emphasized the need for specific diversity disclosure requirements.”);

see also

Commissioner Caroline Crenshaw,

Statement on the “Modernization” of Regulation S-K Items 101, 103, and 105

(August 26, 2020), available at:

https://www.sec.gov/news/public-statement/crenshaw-statement-modernization-regulation-s-k

(“As Commissioner Lee noted in her statement, the final [SEC] rule is also silent on diversity, an issue that is extremely important to investors and to the national conversation. The failure to grapple with these issues is, quite simply, a failure to modernize.”); Mary Jo White,

Keynote Address, International Corporate Governance Network Annual Conference: Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability

(June 27, 2016), available at:

https://www.sec.gov/news/speech/chair-white-icgn-speech.html

(“Companies' disclosures on board diversity in reporting under our current requirements have generally been vague and have changed little since the rule was adopted . . . Our lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors.”).

See

Vanguard,

Investment Stewardship 2019 Annual Report

(2019), available at:

https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2019_investment_stewardship_annual_report.pdf

(“We want companies to disclose the diversity makeup of their boards on dimensions such as gender, age, race, ethnicity, and national origin, at least on an aggregate basis.”);

see also

State Street Global Advisors,

Diversity Strategy, Goals & Disclosure: Our Expectations for Public Companies

(Aug. 27, 2020)

https://www.ssga.com/us/en/individual/etfs/insights/diversity-strategy-goals-disclosure-our-expectations-for-public-companies

(announcing expectation that State Street's portfolio companies (including US companies “and, to the greatest extent possible, non-US companies”) provide board level “[d]iversity characteristics, including racial and ethnic makeup, of the board of directors”).

Nasdaq conducted an internal study of the current state of board diversity among Nasdaq-listed companies based on public disclosures, and found that while some companies already have made laudable progress in diversifying their boardrooms, the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multi-dimensional diversification of their boards.

It also found that current reporting of board diversity data was not provided in a consistent manner or on a sufficiently widespread basis. As such, investors are not able to readily compare board diversity statistics across companies.

Accordingly, Nasdaq is proposing to require each of its listed companies, subject to certain exceptions, to: (i) Provide statistical information regarding diversity among the members of the company's board of directors under proposed Rule 5606; and (ii) have, or explain why it does not have, at least two “Diverse” directors on its board under proposed rule 5605(f)(2).

“Diverse” means a director who self-identifies as: (i) Female, (ii) an Underrepresented Minority, or (iii) LGBTQ+. Each listed company must have, or explain why it does not have, at least one Female director and at least one director who is either an Underrepresented Minority or LGBTQ+. Foreign Issuers (including Foreign Private Issuers) and Smaller Reporting Companies, by contrast, have more flexibility and may satisfy the requirement by having two Female directors. “Female” means an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth. “Underrepresented Minority” means, consistent with the categories reported to the Equal Employment Opportunity Commission (“EEOC”) through the Employer Information Report EEO-1 Form (“EEO-1 Report”), an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities. “LGBTQ+” means an individual who self-identifies as any of the following: Lesbian, gay, bisexual, transgender or a member of the queer community.

Under proposed Rule 5606, Nasdaq proposes to provide each company with one calendar year from the date that the Commission approves this proposal (the “Approval Date”) to comply with the requirement for statistical information regarding diversity.

Under proposed Rule 5605(f)(2), no later than two calendar years after the Approval Date, each company must have, or explain why it does not have, one Diverse director. Further, each company must have, or explain why it does not have, two Diverse directors no later than: (i) Four calendar years after the Approval Date for companies listed on the Nasdaq Global Select or Global Market tiers; or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market tier.

Nasdaq undertook extensive research and analysis and has concluded that the proposal will fulfill the objectives of the Act in that it is designed to remove impediments to and perfect the mechanism of a free and open market and a national market system, to prevent fraudulent and manipulative acts and practices, and to protect investors and the public interest.

In addition to conducting its own internal analysis as described above, Nasdaq reviewed a substantial body of third-party research and interviewed leaders representing a broad spectrum of market participants and other stakeholders to:

• Determine whether empirical evidence demonstrates an association between board diversity, shareholder value, investor protection and board decision-making;

• understand investors' interest in, and impediments to obtaining, information regarding the state of board diversity at public companies;

• review the current state of board diversity and disclosure, both among Nasdaq-listed companies and more broadly within the U.S.;

• gain a better understanding of the causes of underrepresentation on boards;

• obtain the views of leaders representing public companies, investment banks, corporate governance organizations, investors, regulators and civil rights groups on the value of more diverse corporate boards, and on various approaches to encouraging more diversity on corporate boards; and

• evaluate the success of approaches taken by exchanges, regulators, and governments in both the U.S. and foreign jurisdictions to remedy underrepresentation on boards.

While gender diversity has improved among U.S. company boards in recent years, the pace of change has been gradual, and the U.S. still lags behind other jurisdictions that have imposed requirements related to board diversity. Moreover, progress toward bringing underrepresented racial and ethnic groups into the boardroom has been even slower.

Nasdaq is unable to provide definitive estimates regarding the number of listed companies that will be affected by the proposal due to the inconsistent disclosures and definitions of diversity across companies and the extremely limited disclosure of race and ethnicity information—an information gap the proposed rule addresses. Based on the limited information that is available, Nasdaq believes a supermajority of listed companies have made notable strides to improve gender diversity in the boardroom and have at least one woman on the board. Nasdaq also believes that listed companies are diligently working to add directors with other diverse attributes, although consistent with other studies of U.S. companies, Nasdaq believes the pace of progress, in this regard, is happening more gradually. While studies suggest that current candidate selection processes may result in diverse candidates being overlooked, Nasdaq also believes that the lack of reliable and consistent data creates a barrier to measuring and improving diversity in the boardroom.

Nasdaq reviewed dozens of empirical studies and found that an extensive body of academic research demonstrates that diverse boards are positively associated with improved corporate governance and financial performance.

For example, as discussed in detail below in

Section II, Academic Research: The Relationship between Diversity and Shareholder Value, Investor Protection and Decision Making,

studies have found that companies with gender-diverse boards or audit committees are associated with: More transparent public disclosures and less information asymmetry; better reporting discipline by management; a lower likelihood of manipulated earnings through earnings management; an increased likelihood of voluntarily disclosing forward-looking information; a lower likelihood of receiving audit qualifications due to errors, non-compliance or omission of information; and a lower likelihood of securities fraud. In addition, studies found that having at least one woman on the board is associated with a lower likelihood of material weaknesses in internal control over financial reporting and a lower likelihood of material financial restatements. Studies also identified positive relationships between board diversity and commonly used financial metrics, including higher returns on invested capital, returns on equity, earnings per share, earnings before interest and taxation margin, asset valuation multiples and credit ratings.

Nasdaq believes there are additional compelling reasons to support the diversification of company boards beyond a link to improved corporate governance and financial performance:

• Investors are calling in greater numbers for diversification of boardrooms. Vanguard, State Street Advisors, BlackRock, and the NYC Comptroller's Office include board diversity expectations in their engagement and proxy voting guidelines.

The heightened investor focus on corporate diversity and inclusion efforts demonstrates that investor confidence is undermined when a company's boardroom is homogenous and when transparency about such efforts is lacking. Investors frequently lack access to information about corporate board diversity that could be material to their decision making, and they might divest from companies that fail to take into consideration the demographics of their corporate stakeholders when they refresh their boards. Nasdaq explores these investor sentiments in

Section III, Current State of Board Diversity and Causes of Underrepresentation on Boards.

Vanguard announced in 2020 it would begin asking companies about the race and ethnicity of directors.

See

Vanguard,

Investment Stewardship 2020 Annual Report

(2020), available at:

https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2020_investment_stewardship_annual_report.pdf.

Starting in 2020, State Street Global Advisors will vote against the entire nominating committee of companies that do not have at least one woman on their boards and have not addressed questions on gender diversity within the last three years.

See

State Street Global Advisors,

Summary of Material Changes to State Street Global Advisors' 2020 Proxy Voting and Engagement Guidelines

(2020), available at:

https://www.ssga.com/library-content/pdfs/global/proxy-voting-and-engagement-guidelines.pdf.

Beginning in 2018, BlackRock stated in proxy voting guidelines they “would normally expect to see at least 2 women directors on every board.”

See

BlackRock Investment Stewardship,

Corporate governance and proxy voting guidelines for U.S. securities

(Jan. 2020), available at:

https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf.

The NYC Comptroller's Office in 2019 asked companies to adopt policies to ensure women and people of color are on the initial list for every open board seat.

See

Scott M. Stringer,

Remarks at the Bureau of Asset Management `Emerging Managers and MWBE Managers Conference

(Oct. 11, 2019), available at:

https://comptroller.nyc.gov/wp-content/uploads/2019/10/10.11.19-SMS-BAM-remarks_distro.pdf.

• Nasdaq believes, consistent with SEC disclosure requirements in other contexts,

that management's vision on key issues impacting the company should be communicated with investors in a clear and straightforward manner. Indeed, transparency is the bedrock of federal securities laws regarding disclosure, and this sentiment is reflected in the broad-based support for uniform disclosure requirements regarding board diversity that Nasdaq observed during the course of its outreach to the industry. In addition, organizational leaders representing every category of corporate stakeholders Nasdaq spoke with (including business, investor, governance, regulatory and civil rights communities) were overwhelmingly in favor of diversifying boardrooms. Nasdaq summarizes the findings of its stakeholder outreach in

Section IV, Stakeholder Perspectives.

See

Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, 68 FR 75,056 (Dec. 29, 2003) (“We believe that management's most important responsibilities include communicating with investors in a clear and straightforward manner. MD&A is a critical component of that communication. The Commission has long sought through its rules, enforcement actions and interpretive processes to elicit MD&A that not only meets technical disclosure requirements but generally is informative and transparent.”);

see also

Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Release No. 33-10890 (Nov. 19, 2020) (citing the 2003 MD&A Interpretative Release and stating that the purpose of the MD&A section is to enable investors to see a company “through the eyes of management”).

• Legislators at the federal and state level increasingly are taking action to encourage or mandate corporations to diversify their boards and improve diversity disclosures. Congress currently is considering legislation requiring each SEC-registered company to provide board diversity statistics and disclose whether it has a board diversity policy. To date, eleven states have passed or proposed legislation related to board diversity.

SEC regulations require companies to disclose whether diversity is considered when identifying director nominees and, if so, how. Nasdaq explores various state and federal initiatives in

Section V, U.S. Regulatory Framework and Section VI, Nasdaq Proposal.

See

Michael Hatcher and Weldon Latham,

States are Leading the Charge to Corporate Boards: Diversify!,

Harv. L. Sch. Forum on Corp. Governance (May 12, 2020), available at:

https://corpgov.law.harvard.edu/2020/05/12/states-are-leading-the-charge-to-corporate-boards-diversify/.

In considering the merits and shaping the substance of the proposed listing rule, Nasdaq also sought and received valuable input from corporate stakeholders. During those discussions, Nasdaq found consensus across every constituency in the inherent value of board diversity.

Business leaders also expressed concern that companies—and particularly smaller companies—would prefer an approach that allows flexibility to comply in a manner that fits their unique circumstances and stakeholders. Nasdaq recognizes that the operations, size, and current board composition of each Nasdaq-listed company are unique, and Nasdaq therefore endeavored to provide a regulatory impetus to enhance board diversity that balances the need for flexibility with each company's particular circumstances.

The Exchange also considered the experience of its parent company, Nasdaq, Inc., as a public company.

In 2002, Nasdaq, Inc. met the milestone of welcoming its first woman, Mary Jo White, who later served as SEC Chair, to its board of directors. In her own words, “I was the first and only woman to serve on the board when I started, but, happily, I was joined by another woman during my tenure . . . And then there were two. Not enough, but better than one.”

In 2019, Nasdaq, Inc. also welcomed its first Black director. As a Charter Pledge Partner of The Board Challenge, Nasdaq supports The Board Challenge's goal of “true and full representation on all boards of directors.”

While the Exchange recognizes that it is only one part of an ecosystem in which multiple stakeholders are advocating for board diversity, that part is meaningful: The United Nations Sustainable Stock Exchanges Initiative, of which Nasdaq, Inc., is an official supporter, recognized that “[s]tock exchanges are uniquely positioned to influence their market in a way few other actors can.”

See

United Nations Sustainable Stock Exchanges Initiative,

How Stock Exchanges Can Advance Gender Equality

2 (2017), available at:

https://sseinitiative.org/wp-content/uploads/2019/12/How-stock-exchanges-can-advance-gender-equality.pdf.

See

Mary Jo White, Completing the Journey: Women as Directors of Public Companies (Sept. 16, 2014), available at:

https://www.sec.gov/news/speech/2014-spch091614-mjw#.VBiLMhaaXDo.

See

The Board Challenge,

https://theboardchallenge.org/. See also

Nasdaq, Inc.,

Notice of 2020 Annual Meeting of Shareholders and Proxy Statement

52 (Mar. 31, 2020), available at:

https://ir.nasdaq.com/static-files/ce5519d4-3a0b-48ac-8441-5376ccbad4e5

(Nasdaq, Inc. believes that “[d]iverse backgrounds lead to diverse perspectives. We are committed to ensuring diverse backgrounds are represented on our board and throughout our organization to further the success of our business and best serve the diverse communities in which we operate.”).

As a self-regulatory organization, Nasdaq also is cognizant of its role in advancing diversity within the financial industry, as outlined in the Commission's diversity standards issued pursuant to Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Standards”).

Authored jointly by the Commission and five other financial regulators, the Standards seek to provide a framework for exchanges and financial services organizations “to create and strengthen

[their] diversity policies and practices.” Through these voluntary Standards, the Commission and other regulators “encourage each entity to use the[ ] Standards in a manner appropriate to its unique characteristics.”

To that end, the proposed rule leverages the Exchange's unique ability to influence corporate governance in furtherance of the goal of Section 342, which is to address the lack of diversity in the financial services industry.

Finally, while the Exchange recognizes the importance of maximizing shareholder value, its role as a listing venue is to establish and enforce substantive standards that promote investor protection. As a self-regulatory organization, the Exchange must demonstrate to the Commission that any proposed rule is consistent with Section 6(b) of the Act because, among other things, it is designed to protect investors, promote the public interest, prevent fraudulent and manipulative acts and practices, and remove impediments to the mechanism of a free and open market. The Exchange must also balance promoting capital formation, efficiency, and competition, among other things, alongside enhancing investor confidence.

See

Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015).

Id.

at 33,023.

156 Cong. Rec. H5233-61 (June 30, 2010).

With these objectives in mind, Nasdaq believes that a listing rule designed to enhance transparency related to board diversity will increase consistency and comparability of information across Nasdaq-listed companies, thereby increasing transparency and decreasing information collection costs.

Nasdaq further believes that a listing rule designed to encourage listed companies to increase diverse representation on their boards will result in improved corporate governance, thus strengthening the integrity of the market, enhancing capital formation, efficiency, and competition, and building investor confidence. To the extent a company chooses not to meet the diversity objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will provide investors with additional transparency through disclosure explaining the company's reasons for not doing so. For example, the company may choose to disclose that it does not meet the diversity objectives of Rule 5605(f)(2) because it is subject to an alternative standard under state or foreign laws and has chosen to meet that standard instead, or has a board philosophy regarding diversity that differs from the diversity objectives set forth in Rule 5605(f)(2). Nasdaq believes that such disclosure will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions, thereby promoting capital formation and efficiency.

Nasdaq observed that studies suggest that certain groups may be underrepresented on boards because the traditional director nomination process is limited by directors looking within their own social networks for candidates with previous C-suite experience.

Leaders from across the spectrum of stakeholders with whom Nasdaq spoke reinforced the notion that if companies recruit by skill set and expertise rather than title, they will find there is more than enough diverse talent to satisfy demand. In order to assist companies that strive to meet the diversity objectives of Rule 5605(f)(2), Nasdaq is proposing to provide listed companies that have not yet met its diversity objectives with free access to a network of board-ready diverse candidates and a tool to support board evaluation, benchmarking and refreshment. Nasdaq is contemporaneously submitting a rule filing to the Commission regarding the provision of such services. Nasdaq also plans to publish FAQs on its Listing Center to provide guidance to companies on the application of the proposed rules, and to establish a dedicated mailbox for companies and their counsel to email additional questions to Nasdaq regarding the application of the proposed rule. Nasdaq believes that these services will help to ease the compliance burden on companies whether they choose to meet the listing rule's diversity objectives or provide an explanation for not doing so.

See infra

Section III.

II. Academic Research: The Relationship Between Diversity and Shareholder Value, Investor Protection and Decision Making

A company's board of directors plays a critical role in formulating company strategy; appointing, advising and overseeing management; and protecting investors. Nasdaq has recognized the importance of varied perspectives on boards since 2003, when the Exchange adopted a listing rule intended to enhance investor confidence by requiring listed companies, subject to certain exceptions and cure periods, to have a majority independent board.

Accompanying the rule are interpretive materials recognizing that independent directors “play an important role in assuring investor confidence. Through the exercise of independent judgment, they act on behalf of investors to

maximize shareholder value

in the Companies they oversee and guard against conflicts of interest.”

See

Nasdaq Stock Market Rulebook, Rules 5605(b), 5615(a), and 5605(b)(1)(A).

Id.,

IM-5605-1 (emphasis added).

a. Diversity and Shareholder Value

There is a significant body of research suggesting a positive association between diversity and shareholder value.

In the words of SEC Commissioner Allison Herren Lee: “to the extent one seeks economic support for diversity and inclusion (instead of requiring economic support for the lack of diversity and exclusion), the evidence is in.”

Some companies recently have expressed the belief that a company must consider the impact of its activities on a broader group of stakeholders beyond shareholders.

See

Business Roundtable,

Statement on the Purpose of a Corporation

(Aug. 19, 2019), available at:

https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf.

Commentators articulated this view as early as 1932.

See

E. Merrick Dodd, Jr.,

For Whom Are Corporate Managers Trustees?,

45 Harv. L. Rev. 1145, 1153 (1932).

See

Commissioner Allison Herren Lee,

Diversity Matters, Disclosure Works, and the SEC Can Do More: Remarks at the Council of Institutional Investors Fall 2020 Conference

(September 22, 2020), available at:

https://www.sec.gov/news/speech/lee-cii-2020-conference-20200922.

The Carlyle Group (2020) found that its portfolio companies with two or more diverse directors had average earnings growth of 12.3% over the previous three years, compared to 0.5% among portfolio companies with no diverse directors, where diverse directors were defined as female, Black, Hispanic or Asian.

“After controlling for industry, fund, and vintage year, companies with diverse boards generate earnings growth that's five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth.”

See

Jason M. Thomas and Megan Starr, The Carlyle Group,

Global Insights: From Impact Investing to Investing for Impact

5 (Feb. 24, 2020), available at:

https://www.carlyle.com/sites/default/files2020-02/From%20Impact%20Investing%20to%20Investing%20for%20Impact_022420.pdf

(analyzing Carlyle U.S. portfolio company data, February 2020).

Id.

Several other studies also found a positive association between diverse boards and company performance. FCLTGlobal (2019) found that “the most diverse boards (top 20 percent) added 3.3 percentage points to [return on invested capital], as compared to their least diverse peers (bottom 20 percent).”

McKinsey (2015) found

that “companies in the top quartile for racial/ethnic diversity were 35 percent more likely to have financial returns above their national industry median.”

Carter, Simkins and Simpson (2003) found among Fortune 1000 companies “statistically significant positive relationships between the presence of women or minorities on the board and firm value.”

Bernile, Bhagwat and Yonker (2017) found that greater diversity on boards—including gender, ethnicity, educational background, age, financial expertise and board experience—is associated with increased operating performance, higher asset valuation multiples, lower stock return volatility, reduced financial leverage, increased dividend payouts to shareholders, higher investment in R&D and better innovation.

The authors observed that “[t]his is in line with the results in Carter, Simkins, and Simpson (2003), which show a positive association between local demographic diversity and firm value.”

See

FCLTGlobal,

The Long-term Habits of a Highly Effective Corporate Board

11 (March 2019), available at:

https://www.fcltglobal.org/wp-content/uploads/long-term-habits-of-highly-effective-

corporate-boards.pdf

(analyzing 2017 MSCI ACWI constituents from 2010 to 2017 using Bloomberg data).

See

Vivian Hunt et al., McKinsey & Company,

Diversity Matters

(February 2, 2015), available at:

https://www.mckinsey.com/~/media/mckinsey/business%20functions/organization/our%20insights/why%20diversity%20matters/diversity%20matters.pdf

(analyzing 366 public companies in the United Kingdom, Canada, the United States, and Latin America in industries for the years 2010 to 2013, using the ethnic and racial categories African ancestry, European ancestry, Near Eastern, East Asian, South Asian, Latino, Native American, and other).

See

David A. Carter et al.,

Corporate Governance, Board Diversity, and Firm Value.

38(1) Fin. Rev. 33 (analyzing 638 Fortune 1000 firms in 1997, measuring firm value by Tobin's Q, with board diversity defined as the percentage of women, African Americans, Asians and Hispanics on the board of directors).

See

Gennaro Bernile et al.,

Board Diversity, Firm Risk, and Corporate Policies

(March 6, 2017), available at:

https://ssrn.com/abstract=2733394

(analyzing 21,572 firm-year observations across non-financial, non-utility firms for the years 1996 to 2014, based on the ExecuComp, RiskMetrics, Compustat and CRSP databases).

Id.

at 32.

Several studies have found a positive association between gender diversity and financial performance. Credit Suisse (2014) found companies with at least one woman on the board had an average sector-adjusted return on equity (“ROE”) of 12.2%, compared to 10.1% for companies with no female directors, and average sector-adjusted ROEs of 14.1% and 11.2%, respectively, for the previous nine years.

MSCI (2016) found that U.S. companies with at least three women on the board in 2011 experienced median gains in ROE of 10% and earnings per share (“EPS”) of 37% over a five year period, whereas companies that had no female directors in 2011 showed median changes of −1% in ROE and −8% in EPS over the same five-year period.

Catalyst (2011) found that the ROE of Fortune 500 companies with at least three women on the board (in at least four of five years) was 46% higher than companies with no women on the board, and return on sales and return on invested capital was 84% and 60% higher, respectively.

See

Credit Suisse,

The CS Gender 3000: Women in Senior Management

16 (Sept. 2014), available at:

https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/the-cs-gender-3000-women-in-senior-management.pdf

(analyzing 3,000 companies across 40 countries from the period from 2005 to 2013).

See

Meggin Thwing Eastman et al., MSCI,

The tipping point: Women on boards and financial performance

3 (December 2016), available at:

https://www.msci.com/documents/10199/fd1f8228-cc07-4789-acee-3f9ed97ee8bb

(analyzing of U.S. companies that were constituents of the MSCI World Index for the entire period from July 1, 2011 to June 30, 2016).

See

Harvey M. Wagner, Catalyst,

The Bottom Line: Corporate Performance and Women's Representation on Boards (2004-2008)

(March 1, 2011), available at:

https://www.catalyst.org/research/the-bottom-line-corporate-performance-and-womens-representation-on-boards-2004-2008/

(analyzing gender diversity data from Catalyst's annual Fortune 500 Census of Women Board Directors report series for the years 2005 to 2009, and corresponding financial data from S&P's Compustat database for the years 2004 to 2008).

Credit Suisse (2016) found an association between LGBTQ+ diversity and stock performance, finding that a basket of 270 companies “supporting and embracing LGBT employees” outperformed the MSCI ACWI index by an average of 3.0% per year over the past 6 years.

Further, “[a]gainst a custom basket of companies in North America, Europe and Australia, the LGBT 270 has outperformed by 140 bps annually.”

Nasdaq acknowledges that this study focused on LGBTQ+ employees as opposed to directors, and that there is a lack of published research on the issue of LGBTQ+ representation on boards. However, Out Leadership (2019) suggests that the relationship between board gender diversity and corporate performance may extend to LGBTQ+ diversity:

See

Credit Suisse ESG Research,

LGBT: The value of diversity

1 (April 15, 2016), available at:

https://research-doc.credit-suisse.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=807075590&extdocid=807075590_1_eng_pdf&serialid=evu4wXNcHexx7kusNLaZQphUkT9naxi1PvptZQvPjr1k%3d.

Id.

While the precise reason for the positive correlation between gender diversity and better corporate performance is unknown, many of the reasons that gender diversity is considered beneficial are also applicable to LGBT+ diversity. LGBT+ diversity in the boardroom may create a dynamic that enables better decisionmaking, and it brings to the boardroom the perspective of a community that is a critical component of the company's consumer population and organizational talent.

See

Quorum,

Out Leadership's LGBT+ Board Diversity and Disclosure Guidelines

3 (2019), available at:

https://outleadership.com/content/uploads/2019/01/OL-LGBT-Board-Diversity-Guidelines.pdf.

McKinsey (2020) found “a positive, statistically significant correlation between company financial outperformance and [board] diversity, on the dimensions of both gender and ethnicity,” with companies in the top quartile for board gender diversity “28 percent more likely than their peers to outperform financially,” and a statistically significant correlation between board gender diversity and outperformance on earnings before interest and taxation margin.

Moody's (2019) found that greater board gender diversity is associated with higher credit ratings, with women accounting for an average of 28% of board seats at Aaa-rated companies but less than 5% of board seats at Ca-rated companies.

See

McKinsey & Company,

Diversity wins: How inclusion matters

13 (May 2020), available at:

https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Diversity%20and%20Inclusion/Diversity%20wins%20How%20inclusion%20matters/Diversity-wins-How-inclusion-matters-vF.pdf

(analyzing 1,039 companies across 15 countries for the period from December 2018 to November 2019).

See

Moody's Investors Service,

Gender diversity is correlated with higher ratings, but mandates pose short-term risk

2 (Sept. 11, 2019), available at:

https://www.moodys.com/research/Moodys-Corporate-board-gender-diversity-associated-with-higher-credit-ratingsPBC_1193768

(analyzing 1,109 publicly traded North American companies rated by Moody's).

While the overwhelming majority of studies on the association between economic performance and board diversity, including gender diversity, present a compelling case that board diversity is positively associated with financial performance, the results of some other studies on gender diversity are mixed. For example, Pletzer et al. (2015) found that board gender diversity alone has a “small and non-significant” relationship with a company's financial performance.

Post and Byron (2014) found a “near zero” relationship with a company's market performance, but a positive relationship with a company's

accounting returns.

Carter, D'Souza, Simkins and Simpson (2010) found that “[w]hen Tobin's Q is used as the measure of financial performance, we find no relationship to gender diversity or ethnic minority diversity, neither positive nor negative.”

A study conducted by Campbell and Minguez-Vera (2007) “suggests, at a minimum, that increased gender diversity can be achieved without destroying shareholder value.”

Adams and Ferreira (2009) found that “gender diversity has beneficial effects in companies with weak shareholder rights, where additional board monitoring could enhance firm value, but detrimental effects in companies with strong shareholder rights.”

Carter et al. (2010)

and the U.S. Government Accountability Office (“GAO”) (2015)

concluded that the mixed nature of various academic studies may be due to differences in methodologies, data samples and time periods.

See

Jan Luca Pletzer et al.,

Does Gender Matter? Female Representation on Corporate Boards and Firm Financial Performance—A Meta-Analysis

1, PLOS One (June 18, 2015);

see also

Alice H. Eagly (2016),

When Passionate Advocates Meet Research on Diversity, Does the Honest Broker Stand a Chance?,

72 J. Social Issues 199 (2016), available at

https://doi.org/10.1111/josi.12163

(concluding that the “research findings are mixed, and repeated meta‐analyses have yielded average correlational findings that are null or extremely small” with respect to board gender diversity and company performance).

See

Corinne Post and Kris Byron,

Women on Boards and Firm Financial Performance: A Meta-Analysis

1 (2014). In 2016, the same authors, based on a review of the results for 87 studies, “found that board gender diversity is weakly but significantly positively correlated with [corporate social responsibility],” although they noted that “a significant correlational relationship does not prove causality.”

See

Corinne Post and Kris Byron,

Women on Boards of Directors and Corporate Social Performance: A Meta‐Analysis,

24(4) Corp. Governance: An Int'l Rev. 428 (July 2016), available at

http://dx.doi.org/10.1111/corg.12165.

See

David A. Carter et al.,

The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance,

18(5) Corp. Governance 396, 410 (2010) (analysis of 541 S&P 500 companies for the years 1998-2002).

See

Kevin Campbell and Antonio Minguez-Vera,

Gender Diversity in the Boardroom and Firm Financial Performance,

83(3) J. Bus. Ethics 13 (Feb. 2008) (analyzing 68 non-financial companies listed on the continuous market in Madrid during the period from January 1995 to December 2000, measuring firm value by an approximation of Tobin's Q defined as the sum of the market value of stock and the book value of debt divided by the book value of total assets).

See

Renee B. Adams and Daniel Ferreira,

Women in the boardroom and their impact on governance and performance,

94 J. Fin. Econ. 291 (2009) (analyzing 1,939 S&P 500, S&P MidCaps, and S&P SmallCap companies for the period 1996 to 2003, measuring company performance by a proxy for Tobin's Q (the ratio of market value to book value) and return on assets).

See

Carter et al.,

supra

note 40, at 400 (observing that the different “statistical methods, data, and time periods investigated vary greatly so that the results are not easily comparable.”).

See

United States Government Accountability Office, Report to the Ranking Member, Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services, House of Representatives,

Corporate Boards: Strategies to Address Representation of Women Include Federal Disclosure Requirements

5 (Dec. 2015) (the “GAO Report”), available at:

https://www.gao.gov/assets/680/674008.pdf

(“Some research has found that gender diverse boards may have a positive impact on a company's financial performance, but other research has not. These mixed results depend, in part, on differences in how financial performance was defined and what methodologies were used”).

While there are studies drawing different conclusions, Nasdaq believes that there is a compelling body of credible research on the association between economic performance and board diversity. At a minimum, Nasdaq believes that the academic studies support the conclusion that board diversity does not have adverse effects on company financial performance. This is not the first time Nasdaq has considered whether, on balance, various studies finding mixed results related to board composition and company performance are a sufficient rationale to propose a listing rule. For example, in 2003, notwithstanding the varying findings of studies at the time regarding the relationship between company performance and board independence,

Nasdaq adopted listing rules requiring a majority independent board that were “intended to enhance investor confidence in the companies that list on Nasdaq.”

In its Approval Order, the SEC stated that “[t]he Commission has long encouraged exchanges to adopt and strengthen their corporate governance listing standards in order to, among other things, enhance investor confidence in the securities markets.”

See, e.g.,

Benjamin E. Hermalin and Michael S. Weisbach,

The Effects of Board Composition and Direct Incentives on Firm Performance,

20 Fin. Mgmt. 101, 111 (1991) (finding that “there appears to be no relation between board composition and performance”); Sanjai Bhagat and Bernard Black,

The Uncertain Relationship Between Board Composition and Firm Performance,

54(3) Bus. Law. 921, 950 (1999) (“At the very least, there is no convincing evidence that increasing board independence, relative to the norms that currently prevail among large American firms, will improve firm performance. And there is some evidence suggesting the opposite—that firms with supermajority-independent boards perform worse than other firms, and that firms with more inside than independent directors perform about as well as firms with majority- (but not supermajority-) independent boards.”).

See

Order Approving Proposed Rule Changes, 68 FR 64,154, 64,161 (Nov. 12, 2003) (approving SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141).

Id.

at 64,176.

Along the same lines, even without clear consensus among studies related to board diversity and company performance, the heightened focus on corporate board diversity by investors demonstrates that investor confidence is undermined when data on board diversity is not readily available and when companies do not explain the reasons for the apparent absence of diversity on their boards. Therefore, Nasdaq believes that the proposal will enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two Diverse directors on their boards or by explaining their rationale for not meeting that objective. Further, Nasdaq believes that the proposal is consistent with the Act because it will not negatively impact capital formation, competition or efficiency among its public companies, and will promote investor protection and the public interest.

see also

Dhir,

supra

note 78, at 39 (“[T]here is an apparent preference for either CEOs (whether current or retired) or senior management who have experience at the helm of a particular business stream or unit. . . . The fact that far fewer women than men have been CEOs has a potentially devastating effect on access to the boardroom, which in turn can have an effect on the number of women who rise to the level of CEO and to the executive suite.”).

Hillman et al. (2002) found that while white male directors of public companies were more likely to have current or former experience as a CEO, senior manager or director, African-American and white women directors were more likely to have specialized expertise in law, finance, banking, public relations or marketing, or community influence from positions in politics, academia or clergy.

105

Dhir (2015) suggests that “[c]onsidering persons from other, non-management pools, such as academia, legal and accounting practice, the not-for-profit sector and politics, may help create a broader pool of diverse candidates.”

106

Directors surveyed by the U.S. GAO also “suggested, for example, that boards recruit high performing women in other senior executive level positions, or look for qualified female candidates in academia or the nonprofit and government sectors. . . . [I]f boards were to expand their director searches beyond CEOs more women might be included in the candidate pool.”

107

105

See

Amy J. Hillman et al.,

Women and Racial Minorities in the Boardroom: How Do Directors Differ?,

28(6) J. Mgmt. 747, 749, 754 (2002).

106

See

Dhir,

supra

note 78, at 42.

107

See

GAO Report

supra

note 44, at 18.

Investors have begun calling for greater transparency surrounding ethnic diversity on company boards, and in the past several months as the U.S. has seen an uprising in the racial justice movement, there has been an increase in the number of African Americans appointed to Russell 3000 corporate boards.

108

In a five-month span, 130 directors appointed were African American, in comparison to the 38 African American directors who were appointed in the preceding five months.

109

Although tracking the acceleration in board diversity is feasible for some Russell 3000 companies, many of the companies do not disclose the racial makeup of the board, making it impossible to more broadly assess the impact of recent events on board diversity.

108

See

Leslie P. Norton,

The Number of Black Board Members Surged After George Floyd's Death, Barron's,

Oct. 27, 2020, available at:

https://www.barrons.com/articles/after-george-floyds-death-the-number-of-black-board-members-surges-51603809011

109

Id.

IV. Stakeholder Perspectives

To gain a better understanding of the current state of board diversity, benefits of diversity, causes of underrepresentation on boards and potential remedies to address underrepresentation, Nasdaq spoke with leaders representing a broad spectrum of market participants and other stakeholders. Nasdaq sought their perspectives to inform its analysis of whether the proposed rule changes would promote the public interest and protection of investors without unduly burdening competition or conflicting with existing securities laws. The group included representatives from the investor, regulatory, investment banking, venture capital and legal communities. Nasdaq also spoke with leaders of civil rights and corporate governance organizations, and organizations representing the interests of private and public companies, including Nasdaq-listed companies. Specifically, Nasdaq obtained their views on:

• The current state of board diversity in the U.S.;

• the inherent value of board diversity;

• increasing pressure from legislators and investors to improve diverse representation on boards and board diversity disclosure;

• whether a listing rule related to board diversity is in the public interest;

• how to define a “diverse” director; and

• the benefits and challenges of various approaches to improving board diversity disclosures and increasing diverse representation on boards, including mandates and disclosure-based models.

The discussions revealed strong support for disclosure requirements that would standardize the reporting of board diversity statistics. The majority of organizations also were in agreement that companies would benefit from a regulatory impetus to drive meaningful and systemic change in board diversity, and that a disclosure-based approach would be more palatable to the U.S. business community than a mandate. While many organizations recognized that mandates can accelerate the rate of change, they expressed that a disclosure-based approach is less controversial and would spur companies to take action and achieve the same results. Business leaders also

expressed concern that smaller companies would require flexibility and support to comply with any time-sensitive requirements to add diverse directors. Some stakeholders highlighted additional challenges that smaller companies, and companies in certain industries, may face finding diverse board members. Leaders from across the spectrum of stakeholders that Nasdaq surveyed reinforced the notion that if companies recruit by skill set and expertise rather than title, then they will find there is more than enough diverse talent to satisfy demand. Leaders from the legal community emphasized that any proposed rule that imposed additional burdens beyond, or is inconsistent with, existing securities laws—by, for example, requiring companies to adopt a diversity policy or include disclosure solely in their proxy statements—would present an additional burden and potentially more legal liability for listed companies.

V. U.S. Regulatory Framework

As detailed above, diversity has been the topic of a growing number of studies over the past decade and, in recent years, some investors have been increasingly advocating for greater diversity among directors of public companies.

110

Over the past year, the social justice movement has underscored the importance of having diverse perspectives and representation at all levels of decision-making, including on public company boards. In recent years, diversity has become increasingly important to the public, including institutional investors, pension funds and other stakeholders who believe that board diversity enhances board performance and is an important factor in the voting decisions of some investors.

111

Legislators increasingly are taking action to encourage corporations to diversify their boards and improve diversity disclosures.

112

110

In 2009, when the Commission proposed enhancements to proxy disclosures, including addressing board diversity disclosures, the Commission received over 130 comment letters related to its proposal, including from corporations, pension funds, professional associations, trade unions, accounting firms, law firms, consultants, academics, individual investors and other interested parties.

See

Proxy Disclosure Enhancements, 74 FR at 68,335;

see also

David A. Katz and Laura McIntosh,

Raising the Stakes for Board Diversity,

Law.com (July 22, 2020), available at:

https://www.law.com/newyorklawjournal/2020/07/22/raising-the-stakes-for-board-diversity/?slreturn=20201017021522

; Office of the Illinois State Treasurer,

The Investment Case For Board Diversity: A Review of the Academic and Practitioner Research on the Value of Gender and Racial/Ethnic Board Diversity for Investors

7 (Oct. 2020), available at:

https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/il%20treasurer%20white%20paper%20-%20the%20investment%20case%20for%20board%20diversity%20(oct%202020).pdf

111

See

Comments on Proposed Rule: Proxy Disclosure and Solicitation Enhancements, available at:

https://www.sec.gov/comments/s7-13-09/s71309.shtml. See also

CGLytics,

Diversity on the Board? Metrics Used by Fortune 100 Companies

(June 29, 2020), available at:

https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/

; Office of the Illinois State Treasurer,

supra

note 110.

112

For example, California requires companies headquartered in the state to have at least one director who self-identifies as a Female and one director from an Underrepresented Community.

See

Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020). Washington requires companies headquartered in the state to have at least 25% women on the board by 2022 or provide certain disclosures.

See

Wash. Subst. S.B. 6037 (June 11, 2020). At least eleven states have proposed diversity-related requirements.

See

Hatcher and Latham,

supra

note 11.

a. SEC Diversity Disclosure Requirements—Background

In 2009, the Commission sought comment on whether to amend Item 407(c)(2)(vi) of Regulation S-K to require disclosure of whether a nominating committee considers diversity when selecting a director for a position on the board.

113

The Commission received more than 130 comment letters on its proposal. According to a University of Dayton Law Review analysis of those comment letters, most were submitted by groups with a specific interest in diversity, or by institutional investors, including mutual funds, pension funds, and socially responsible investment funds.

114

Further, the analysis showed that 56 commenters addressed the issue of diversity disclosures, and only 5 of those 56 commenters did not favor such disclosure.

115

Twenty-seven of the 56 mentioned gender diversity, 18 mentioned racial diversity, and 13 mentioned ethnic diversity. However, neither the proposed rule nor the final rule defined diversity.

116

113

See

Proxy Disclosure and Solicitation Enhancements, 74 FR 35,076, 35,084 (July 17, 2009) (proposed rule).

114

See

Thomas Lee Hazen and Lissa Lamkin Broome,

Board Diversity and Proxy Disclosure,

37:1 Univ. Dayton L. Review 41, 51, n. 82 (citing the comment letters).

115

In the five comments that opposed diversity disclosure, three stated that diversity was an important value.

See

Comments on Proposed Rule,

supra

note 111;

see also

Hazen and Broome,

supra

note 114, at 54 n.88 (citing the 56 comment letters).

116

See

Hazen and Broome,

supra

note 114, at 53 n. 84-86.

Ten years after its adoption of board diversity disclosure rules, the Commission revisited the rules by establishing new Compliance and Disclosure Interpretations (“C&DI”). However, the Commission did not provide a definition of diversity, and therefore issuers currently are not required to disclose the race, ethnicity or gender of their directors or nominees.

Currently, Item 401(e)(1) of Regulation S-K 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.”

117

The C&DI clarifies 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 Commission “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.”

118

117

See

17 CFR 229.401(e)(1).

118

See

Securities and Exchange Commission, Regulation S-K Compliance & Disclosure Interpretations (Sept. 21, 2020), available at:

https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm

Rather than providing a specific definition of diversity, the C&DI provides a non-exhaustive list of examples of diverse characteristics that a company could consider for purposes of Item 401(e)(1), including “race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background.”

119

Additionally, the Commission stated that any description of a company's diversity policy would be expected to include “a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.”

120

119

Id.

120

Id.

Item 407(c)(2)(vi) of Regulation S-K requires proxy disclosure regarding whether diversity is considered when identifying director nominees and, if so, how. In addition, if the board or nominations committee has adopted a diversity policy, the company must describe how the policy is implemented and its effectiveness is assessed.

121

When adopting Item 407(c)(2)(vi), the Commission explained:

121

See

17 CFR 229.407(c)(2)(vi).

We recognize that companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to

include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin. We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate. As a result we have not defined diversity in the amendments.

122

See

Proxy Disclosure Enhancements, 74 FR at 68,344.

Moreover, Item 407(c)(2)(vi) does not require companies to adopt a formal policy and does not require them to explain why they have not. It also does not require public disclosure of board-level diversity statistics.

b. Complaints Surrounding Current Diversity Disclosure Requirements

Given the broad latitude afforded to companies by the Commission's rules related to board diversity and proxy disclosure, current reporting of board-level diversity statistics has been significantly unreliable and unusable to investors. This has been due to myriad data collection challenges, including the scarcity of reported information, the lack of uniformity in the information that is disclosed and inconsistencies in the definitions of diversity characteristics across companies.

123

The heightened national discourse around diversity and mounting grievances from investors surrounding transparency on board diversity prompted Nasdaq to examine the state of board diversity among its listed companies. While conducting that research, Nasdaq identified a number of key challenges, such as: (1) Inconsistent disclosure and definitions of diversity across companies; (2) limited data on diverse characteristics outside of gender; (3) inconsistent or no disclosure of a director's race, ethnicity, or other diversity attributes (

e.g.,

nationality); (4) difficult-to-extract data because statistics are often embedded in graphics; and (5) aggregation of information, making it difficult to separate gender from other categories of diversity. Investors and data analysts have raised similar criticisms.

123

See

Petition for Rulemaking (July 6, 2017), available at:

https://www.sec.gov/rules/petitions/2017/petn4-711.pdf

As the Illinois Treasurer observed, the paucity of data on race and ethnicity creates barriers to investment analysis, due diligence and academic study.

124

For example, the scarcity of such data is an impediment to academics who want to study the performance impact of racially diverse boards.

125

Nasdaq is concerned that investors also face the many data collection challenges Nasdaq encountered, rendering current diversity disclosures unreliable, unusable, and insufficient to inform investment and voting decisions. Commissioner Allison Herren Lee expressed similar concerns, stating that the current SEC disclosure requirements have “led to spotty information that is not standardized, not consistent period to period, not comparable across companies, and not necessarily reliable. . . . And the current state of disclosure reveals the shortcomings of a principles-based materiality regime in this area.”

126

124

See

Press Release,

Illinois State Treasurer Frerichs Calls on Russell 3000 Companies to Disclose Diversity Data

(Oct. 28, 2020), available at

https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/october2020_russell3000.pdf

125

See

Office of Illinois State Treasurer,

supra

note 110, at 3-4.

126

See

Lee,

supra

note 22.

Some stakeholders believe there is a correlation between companies that disclose the gender, racial and ethnic composition of their board and the number of diverse directors on those companies' boards.

127

Currently, the lack of reliable and consistent data makes it difficult to measure diversity in the boardroom, and a common set of standards for diversity definitions and disclosure format is greatly needed. At present, U.S. companies must navigate a complex patchwork of federal and state regulations and disclosure requirements. The limited disclosure currently provided voluntarily, which is primarily focused on gender (due in part to that data being the most readily available), fails to provide the full scope of a board's diverse characteristics.

128

It is difficult to improve what one cannot accurately measure. This lack of transparency is impacting investors who are increasingly basing public advocacy, proxy voting and direct shareholder-company engagement decisions on board diversity considerations.

129

127

See

Proxy Disclosure Enhancements, 74 FR at 68,355 (“Although the[se] amendments are not intended to steer behavior, diversity policy disclosure may also induce beneficial changes in board composition. A board may determine, in connection with preparing its disclosure, that it is beneficial to disclose and follow a policy of seeking diversity.”);

see also

Office of Illinois State Treasurer,

supra

note 110, at 3.

128

See, e.g.,

CGLytics,

supra

note 111, at

https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/;

Petition for Amendment of Proxy Rule,

supra

note 80; Office of Illinois State Treasurer,

supra

note 110.

129

See

Office of the Illinois State Treasurer,

Russell 3000 Board Diversity Disclosure Initiative, https://www.illinoistreasurer.gov/Financial_Institutions/Equity,_Diversity__Inclusion/Russell_3000_Board_Diversity_Disclosure_Initiative

(last accessed Nov. 25, 2020).

c. Support for Updating Diversity Disclosure Requirements

Nasdaq's surveys of investors and reviews of their disclosed policies and actions show that board diversity is a priority when assessing companies, and investors report, in some cases, relying on intuition when there is a lack of empirical, evidenced-based data. Furthermore, the continued growth of ESG investing raises the importance of quality data, given the data-driven nature of investment products such as diversity-specific indices and broader ESG funds.

Investors have a unique platform from which to engage and influence a company's position on important topics like diversity. Similarly, Nasdaq, like other self-regulatory organizations, is uniquely positioned to establish practices that will assist in carrying out Nasdaq's mandate to protect investors and remove impediments from the market. Various stakeholders, including Nasdaq, believe that clear and concise annual disclosure of board diversity information that disaggregates the data by race, ethnicity, gender identity and sexual orientation will provide the public, including key stakeholders, with a better sense of a company's approach to improving corporate diversity and the support needed to effectuate any changes. Required disclosures also would eliminate the number of shareholder proposals asking for these key metrics and the need for companies to respond to multiple investor requests for information.

130

Moreover, companies manage issues more closely and demonstrate greater progress when data is available.

131

130

See

Petition for Rulemaking,

supra

note 123, at 2.

131

See, e.g.,

Gwen Le Berre, Parametric,

Investors Need Data to Make Diversity a Reality

(Aug. 24, 2020),

https://www.parametricportfolio.com/blog/investors-need-data-to-make-diversity-a-reality

In 2015, nine large public pension funds who collectively supervised $1.12 trillion in assets at the time petitioned the Commission to require registrants to disclose information related to, among other things, the gender, racial, and ethnic diversity of the registrant's board nominees.

132

In 2017, Human Capital Management Coalition, which described itself as a group of institutional investors with $2.8 trillion in assets at the time, made a similar petition to the Commission.

133

More recently, in October 2020, the Illinois Treasurer spearheaded an initiative along with twenty other investor organizations, asking for all companies in the Russell

3000 Index to disclose the composition of their board, including each board member's gender, race and ethnicity.

134

132

See

Petition for Amendment of Proxy Rule,

supra

note 80.

133

See

Petition for Rulemaking,

supra

note 123.

134

See

Press Release,

supra

note 124.

The largest proxy advisory firms have aligned their voting policies to encourage increased board diversity disclosure. Institutional Shareholder Services (“ISS”), recently adopted a new voting policy under which it will identify boards of companies in the Russell 3000 or S&P 1500 that “lack racial and ethnic diversity (or lack disclosure of such)” in 2021 and, beginning in 2022, will recommend voting against the chair of the nominating committee of such companies. The stated goal of the policy is “helping investors identify companies with which they may wish to engage and to foster dialogue between investors and companies on this topic.”

135

In 2017, proxy advisory firm Glass Lewis announced a policy regarding board gender diversity that took effect in 2019. Glass Lewis generally recommends voting against the nominating committee chair of a board that has no female members, and when making such a recommendation, the firm closely examines the company's disclosure of its board diversity considerations and other relevant contextual factors.

136

On November 24, 2020, Glass Lewis announced the publication of its 2021 Proxy Voting Policy Guidelines, which expand its board gender diversity policy to vote against nominating chairs if there are fewer than two female directors, beginning in 2022.

137

Most notably, beginning with the 2021 proxy season, the company will include an assessment report of company proxy disclosures relating to board diversity, skills and the director nomination process for companies in the S&P 500 index. According to Glass Lewis, it “will reflect how a company's proxy statement presents: (i) The board's current percentage of racial/ethnic diversity; (ii) whether the board's definition of diversity explicitly includes gender and/or race/ethnicity; (iii) whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (aka `Rooney Rule'); and (iv) board skills disclosure.”

138

135

See

ISS Governance,

ISS Announces 2021 Benchmark Policy Updates

(November 12, 2020), available at:

https://www.issgovernance.com/iss-announces-2021-benchmark-policy-updates/

136

See

Glass Lewis,

2019 Policy Guideline Updates

(Oct. 24, 2018), available at:

https://www.glasslewis.com/2019-policy-guideline-updates-united-states-canada-shareholder-initiatives-israel/

137

See

Glass Lewis,

2021 Proxy Paper Guidelines: An Overview of the Glass Lewis Approach to Proxy Advice—United States

(2020), available at:

https://www.glasslewis.com/wp-content/uploads/2020/11/US-Voting-Guidelines-GL.pdf?hsCtaTracking=7c712e31-24fb-4a3a-b396-9e8568fa0685%7C86255695-f1f4-47cb-8dc0-e919a9a5cf5b

138

Id.

Congress and members of the Commission also have weighed in on the importance of improving board transparency. In 2017, Representative Carolyn Maloney introduced the “Gender Diversity in Corporate Leadership Act of 2017,” which proposed requiring public companies to provide proxy disclosure regarding the gender diversity of the board of directors and nominees.

139

In November 2019, the U.S. House of Representatives, with bipartisan support, passed the “Corporate Governance Through Diversity Act of 2019,” which requires certain registrants annually to disclose the racial, ethnic, and gender composition of their boards and executive officers, as well as the veteran status of any of those directors and officers, in their proxy statements.

140

The bill also requires the disclosure of any policy, plan or strategy to promote racial, ethnic, and gender diversity among these groups. Legislators have proposed a companion bill in the U.S. Senate.

141

139

Gender Diversity in Corporate Leadership Act of 2017, H.R. 1611, 115th Cong. (2017).

140

Improving Corporate Governance Through Diversity Act of 2019, H.R. 5084, 116th Cong. (2019).

141

Improving Corporate Governance Through Diversity Act of 2019, S. 360, 116th Cong. (2019).

The Council of Institutional Investors (“CII”), U.S. Chamber of Commerce,

142

National Urban League, Office of New York State Comptroller and the National Association for the Advancement of Colored People praised the House of Representatives' for passing the 2019 legislation. According to the U.S. Chamber of Commerce's members and associations, it has become increasingly important to see improvements in board diversity.

143

Additionally, CII's General Counsel stated that the proxy statement disclosure requirement in the legislation “could contribute to enhancing U.S. public company board consideration of diversity.”

144

142

See

Letter from Various U.S. Chamber of Commerce Associations and Members to Chairman Mike Crapo and Ranking Member Sherrod Brown, U.S. House Committee on Banking, Housing, and Urban Affairs (July 27, 2020), available at:

https://www.uschamber.com/sites/default/files/200727_coalition_h.r._5084_senatesmallbusiness.pdf

143

Id.

144

See

Joe Mont,

SEC, Congress seek better diversity disclosures,

Compliance Week (Feb. 20, 2019),

https://www.complianceweek.com/sec-congress-seek-better-diversity-disclosures/24802.article

More recently, SEC Commissioners have called for greater transparency surrounding ethnic diversity on company boards. In a September 2020 speech titled “Diversity Matters, Disclosure Works, and the SEC Can Do More” given at the CII Fall Conference, Commissioner Lee advocated advancing corporate diversity and for various approaches by which the Commission could promote diversity, including among other things, strengthening the C&DI's guidance related to disclosure of board candidate diversity characteristics.

145

Commissioner Lee stated:

145

See

Lee,

supra

note 22.

[The SEC has] largely declined to require diversity-related disclosure. In 2009, we adopted a requirement for companies to disclose if and how diversity is considered as a factor in the process for considering candidates for board positions, including any policies related to the consideration of diversity. In 2018, we issued guidance encouraging the disclosure of self-identified characteristics of board candidates. While I appreciate these measures, given that women of color hold just 4.6% of Fortune 500 board seats and less than one percent of Fortune 500 CEOs are Black, it's time to consider how to get investors the diversity information they need to allocate their capital wisely.

146

Id.

Commissioner Crenshaw also expressed disappointment with the Commission's silence on diversity.

See

Crenshaw,

supra

note 7.

VI. Nasdaq Proposal

a. Overview of Disclosure Requirements

Disclosure of information material to an investor's voting and investment decision is the bedrock of federal securities laws. The Exchange's listing rules require companies to comply with federal securities laws, including the registration requirements under the Securities Act of 1933. Once listed, companies are obligated to solicit proxies and file all annual and periodic reports with the Commission under the Act at the prescribed times.

147

In discharging its obligation to protect investors, Nasdaq monitors listed companies for compliance with those disclosure obligations, and the failure to do so results in a notice of deficiency or delisting.

147

See

Nasdaq Stock Market Rulebook, Rules 5250(c) and (d).

Nasdaq believes it is well within the Exchange's delegated regulatory authority to propose listing rules designed to enhance transparency so long as they do not conflict with existing federal securities laws. For example, Nasdaq requires listed companies to publicly disclose compensation or other payments by third parties to a company's directors or

nominees, notwithstanding that such disclosure is not required by federal securities laws. In approving that proposed rule, the Commission noted:

To the extent there are certain factual scenarios that would require disclosure not otherwise required under Commission rules, we believe that it is within the purview of a national securities exchange to impose heightened governance requirements, consistent with the Act, that are designed to improve transparency and accountability into corporate decision making and promote investor confidence in the integrity of the securities markets.

148

See

Order Granting Accelerated Approval of a Proposed Rule Change, 81 FR 44,400, 44,403 (July 7, 2016).

Nasdaq is concerned that while investors have increasingly emphasized that they consider board diversity information to be material, the current lack of transparency and consistency makes it difficult for Nasdaq and investors to determine the state of diversity among listed companies as well as each board's philosophy regarding diversity. Investors also have voiced dissatisfaction about having to independently collect board-level data about race, ethnicity and gender identity because such investigations can be time consuming, expensive, and fraught with inaccuracies.

149

Moreover, in some instances, based on Nasdaq's own investigation, such information is either unavailable, or, if available, not comparable across companies. To the extent investors must obtain this information on their own through an imperfect process, Nasdaq is concerned that it increases information asymmetries between larger stakeholders, who are able to collect this data directly from companies, and smaller investors, who must rely on incomplete public disclosures. For all investors who take on the burden of independently obtaining the current information, there is a cost and time burden related to the data collection.

149

See

Petition for Amendment of Proxy Rule,

supra

note 80, at 2.

Nasdaq believes that additional disclosure regarding a board's composition and philosophy related to board diversity will improve transparency and accountability into corporate decision making. Nasdaq proposes to improve transparency regarding board diversity by requiring all listed companies to publicly disclose unbundled, consistent data utilizing a uniform, transparent framework on their website or in their proxy statement under Rule 5606. Similarly, Nasdaq proposes to promote accountability in corporate decision-making by requiring companies who do not have at least two Diverse directors on their board to provide investors with a public explanation of the board's reasons for not doing so under Rule 5605(f)(3). Nasdaq designed the proposal to avoid a conflict with existing disclosure requirements under Regulation S-K and to mitigate additional burdens for companies by providing them with flexibility to provide such disclosure on their website or in their proxy statement, and not requiring them to adopt a formal diversity policy.

Nasdaq proposes to foster consistency in board diversity data disclosure by defining “Diverse” under Rule 5605(f)(1) as “an individual who self-identifies in one or more of the following categories: Female, Underrepresented Minority or LGBTQ+,” and by adopting the following definitions under Rule 5605(f)(1):

• “Female” means an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth.

• “LGBTQ+” means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community.

• “Underrepresented Minority” means an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities.

The terms in the proposed definition of “Underrepresented Minority” reflect the EEOC's categories and are construed in accordance with the EEOC's definitions.

150

The terms in the proposed definition of LGBTQ+ are similar to the identities defined in California's A.B. 979, described below, but have been expanded to include the queer community based on Nasdaq's consultation with stakeholders, including human rights organizations.

151

150

While the EEO-1 report refers to “Hispanic or Latino” rather than Latinx, Nasdaq proposes to use the term Latinx to apply broadly to all gendered and gender-neutral forms that may be used by individuals of Latin American heritage, including individuals who self-identify as Latino/a/e.

151

Further, Nasdaq agrees with the United Kingdom Financial Reporting Council that the acronym LGBTQ+ “does not attempt to exclude other groups, nor does it imply that the experiences of people under its umbrella are the same.”

See

Hay et al.,

supra

note 98, at 14.

In constructing its proposed definition of “Diverse,” Nasdaq considered various state and federal legislation, stakeholder sentiments and academic studies. For example, California requires public companies headquartered in the state to have at least one individual who self-identifies as a female on the board by 2019 under S.B. 826

152

and at least one director who is a member of an “underrepresented community” by 2021 under A.B. 979.

153

S.B. 826 defines “Female” as “an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth,” consistent with legislation proposed by New Jersey, Michigan and Hawaii related to board gender diversity.

154

A.B. 979 considers directors from underrepresented communities to be individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or as gay, lesbian, bisexual or transgender. Since S.B. 826 was passed, 669 women have joined public company boards in the state and the number of public companies with all male boards has declined from 30% in 2018 to 3% in 2020.

155

152

See

Cal. S.B. 826,

supra

note 112.

153

See

Cal. A.B. 979,

supra

note 112.

154

See

Cal. S.B. 826,

supra

note 112.

See also

N.J. Senate No. 3469, § 3(b)(2) (2019); Mich. S.B. 115, § 505a(2)(b) (2019); Haw. H.B. 2720, § 414-1(b)(2) (2020).

155

See

California Partners Project,

Claim Your Seat: A Progress Report on Women's Representation on California Corporate Boards

4 (2020), available at:

https://www.calpartnersproject.org/claimyourseat

The state of Washington requires public companies whose boards are not comprised of at least 25% directors who self-identify as women by January 1, 2022 to provide public disclosures related to the board's consideration of “diverse groups” during the director nomination process. The state considers “diverse groups” to include “women, racial minorities, and historically underrepresented groups.”

156

See

Wash. Subst. S.B. 6037,

supra

note 112. At least 11 states have proposed diversity-related requirements.

See

Hatcher and Latham,

supra

note 11.

As discussed above, Congress has proposed legislation relating to disclosure of racial, ethnic, gender and veteran status among the company's directors. Section 342 of the Dodd-Frank Act defines “minority” as “Black American, Native American, Hispanic American, and Asian American,”

157

and the Diversity Assessment Report for Entities Regulated by the SEC requires the Exchange to report workforce composition data to the SEC based on

the EEOC's categories.

158

Most companies are required by law to provide similar workforce data to the EEOC through the EEO-1 Report, which requires employers to report statistical data related to race, ethnicity and gender to the EEOC.

159

157

See

12 U.S.C. 5452(g)(3) and Public Law 101-73 § 1204(c)(3).

158

See

Securities and Exchange Commission, Diversity Assessment Report for Entities Regulated by the SEC, available at:

https://www.sec.gov/files/OMWI-DAR-FORM.pdf.

159

All companies with 100 or more employees are required to complete the EEO-1 Report.

See

U.S. Equal Employment Opportunity Commission, EEO-1: Who Must File,

https://www.eeoc.gov/employers/eeo-1-survey/eeo-1-who-must-file

(last accessed Nov. 27, 2020).

Nasdaq has designed the proposed rule to require all companies to provide consistent, comparable data under Rule 5606 by utilizing the existing EEO-1 reporting categories that companies are already familiar with, and by requiring companies to have, or publicly explain why they do not have, at least two directors who are diverse in terms of race, ethnicity, sexual orientation or gender identity under Rule 5605(f)(2). While the EEO-1 report does not currently include sexual orientation or gender identity, Nasdaq believes it is reasonable and in the public interest to include a reporting category for LGBTQ+ status in recognition of the U.S. Supreme Court's recent decision in

Bostock

Clayton County

that sexual orientation and gender identity are “inextricably” intertwined with sex.

160

See Bostock

Clayton Cty.,

140 S. Ct. 1731, 1742 (2020) (“But unlike any of these other traits or actions, homosexuality and transgender status are inextricably bound up with sex. Not because homosexuality or transgender status are related to sex in some vague sense or because discrimination on these bases has some disparate impact on one sex or another, but because to discriminate on these grounds requires an employer to intentionally treat individual employees differently because of their sex.”).

The proposal does not preclude companies from considering additional diverse attributes, such as nationality, disability, or veteran status in selecting board members; however, the company would still have to provide the required disclosure under Rule 5605(f)(3) if the company does not also have at least two directors who are otherwise considered Diverse under Rule 5605(f)(1). Nor would the proposal prevent companies from disclosing information related to other diverse attributes of board members beyond those highlighted in the rule if they felt such disclosure would benefit investors. Nasdaq believes such disclosure would provide investors with additional information about the company's philosophy regarding broader diversity characteristics.

Overall, Nasdaq believes the proposal will enhance investor confidence that all listed companies are considering diversity of race, ethnicity, sexual orientation and gender identity in the context of selecting directors. Investors will be confident that board discussions at listed companies with at least two Diverse directors include the perspectives of more than one demographic group. They will also be confident that boardrooms without at least two Diverse directors are having a thoughtful discussion about their reasons for not doing so and publicly explaining those reasons. On balance, the proposal will advance the public interest and enhance investor confidence in the integrity of the securities markets by ensuring investors that Nasdaq is monitoring all listed companies to verify that they have at least two Diverse directors or explain why they do not, and by requiring all listed companies to provide consistent, comparable diversity disclosures.

b. Board Statistical Disclosure

Given the increased interest in, and advocacy for, improvements in board transparency related to diversity disclosure information, the Exchange is proposing to adopt new Rule 5606(a), which would require each company to publicly disclose, to the extent permitted by applicable law, information on each director's voluntary self-identified gender and racial characteristics and LGBTQ+ status.

All Nasdaq-listed companies that are subject to proposed Rule 5605(f), whether they choose to meet the diversity objectives of proposed Rule 5605(f)(2) or to explain why they do not, would be required to make the proposed Rule 5606 disclosure. This proposed rule also will assist the Exchange in assessing whether companies meet the diversity objectives of proposed Rule 5605(f). Under Rule 5606(e), Nasdaq proposes to make proposed Rule 5606 operative for listed companies one year after the SEC Approval Date of this proposal.

Pursuant to proposed Rule 5606(a), each company would be instructed to annually provide its board-level diversity data in a format substantially similar to the Board Diversity Matrix in proposed Rule 5606(a) and attached [sic] as

Exhibit 3.

The company would be required to provide the total number of directors on its board. If a director voluntarily self-identifies, each company, other than a Foreign Issuer (as defined under Rule 5605(f)(1)), would include the following in a table titled “Board Diversity Matrix,” in accordance with the instructions accompanying the proposed disclosure format: (1) the number of directors based on gender identity (male, female or non-binary

161

); (2) the number of directors based on race and ethnicity (African American or Black, Alaskan Native or American Indian, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two or More Races or Ethnicities); and (3) the number of directors who self-identify as LGBTQ+.

161

Although non-binary is included as a category in the proposed Board Diversity Matrix, a company would not satisfy the diversity requirement proposed by Rule 5605(f)(2) if a director self-identifies solely as non-binary.

Any director who chooses not to disclose a gender would be included under “Gender Undisclosed” and any director who chooses not to identify as any race or not to identify as LGBTQ+ would be included in the “Undisclosed” category at the bottom of the table. The defined terms for the race and ethnicity categories in the instructions to the Board Diversity Matrix disclosure format are substantially similar to the terms and definitions used in the EEO-1 Report.

162

LGTBQ+ is defined similarly to proposed Rule 5605(f)(1) as a person who identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community.

162

See supra

note 159. Additionally, the EEOC does not categorize LGBTQ+ or any other sexual orientation identifier on its EEO-1 Report. The definitions of the EEO-1 race and ethnicity categories may be found in the appendix to the EEO-1 Report instructional booklet, available at

https://www.eeoc.gov/employers/eeo-1-survey/eeo-1-instruction-booklet.

Below is an example of a Board Diversity Matrix that companies may use, which is also attached [sic] as

Exhibit 3:

Board Diversity Matrix

[As of [DATE]]

Board Size:

Total Number of Directors

Gender:

Male

Female

Non-Binary

Gender undisclosed

Number of directors based on gender identity

Number of directors who identify in any of the categories below:

African American or Black

Alaskan Native or American Indian

Asian

Hispanic or Latinx

Native Hawaiian or Pacific Islander

White

Two or More Races or Ethnicities

LGBTQ+

Undisclosed

Nasdaq recognizes that some Foreign Issuers, including Foreign Private Issuers as defined by the Act,

163

may have their principal executive offices located outside of the United States and in jurisdictions that may impose laws limiting or prohibiting self-identification questionnaires, particularly as they relate to race, ethnicity or LGBTQ+ status. In such countries, a Foreign Issuer may be precluded by law from requesting diversity data from its directors. Moreover, Nasdaq's definition of Underrepresented Minority proposed in Rule 5606(f)(1) may be inapplicable to a Foreign Issuer, making this Board Matrix data less relevant for such companies and not useful for investors.

163

See

17 CFR 240.3b-4.

As a result of these limitations, Nasdaq is proposing the option of a separate Board Diversity Matrix for Foreign Issuers. Similar to other companies, a Foreign Issuer would be required to provide the total number of directors on its board. If a director voluntarily self-identifies, the company would include the following in a table titled “Board Diversity Matrix”: (1) The number of directors based on gender identity (male, female or non-binary

164

); (2) the number of directors who are considered underrepresented in the company's home country jurisdiction;

165

and (3) the number of directors who self-identify as LGBTQ+. An “Underrepresented Individual in Home Country Jurisdiction” is defined in the instructions to the Board Diversity Matrix as a person who self-identifies as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in a Foreign Issuer's home country jurisdiction. Rule 5605(f)(2)(B)(i) also proposes the same definition for Diverse directors of Foreign Issuers.

164

Although non-binary is included as a category in the proposed Board Diversity Matrix, a company would not satisfy any aspect of the diversity requirement proposed by Rule 5605(f)(2) if a director self-identifies solely as non-binary.

165

To clarify, although a Foreign Issuer may disclose directors that meet the requirement of Underrepresented Minority pursuant to new Rule 5605(f)(1), such disclosure may not meet the diversity objectives of new Rule 5605(f)(2)(B)(ii).

Nasdaq is also proposing new Rule 5606(b), which would require each company to provide the disclosure required under Rule 5606(a) in either the company's proxy statement or information statement for its annual meeting for shareholders, or on the company's website. If the company elects to disclose the information on its website, the company must also submit such disclosure along with a URL link to the information through the Nasdaq Listing Center within 15 calendar days of the company's annual shareholder meeting. The proposed time period to submit the information to the Nasdaq Listing Center is aligned with the time period provided in proposed Rule 5605(f)(3) for a company to submit its explanation for why it does not have at least two Diverse directors. Disclosure of the statistical data is not in lieu of any SEC requirements for a company to disclose any required information pursuant to Regulation S-K or any other federal, state or foreign laws or regulations. As described in the instructions to the Board Diversity Matrix and Rule 5606(a), each year following the first year that a company publishes its annual Board Diversity Matrix, the company would be required to publish its data for the current and immediately prior years.

Additionally, Nasdaq is proposing Rule 5606(c), which exempts the following types of companies from proposed Rule 5606(a): acquisition companies listed under IM-5101-2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series. The exemption of these companies is consistent with the approach taken by Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate governance standards for board composition.

Nasdaq is also proposing Rule 5606(d) to allow for a company newly listing on Nasdaq, including a company listing in connection with a business combination under IM-5101-2, to satisfy the requirement of Rule 5606 within one year of listing on Nasdaq. The disclosure required by proposed Rule 5606(d) would be required to be included in the company's annual proxy statement or information statement for its annual meeting of shareholders or on the company's website. If the company provides such disclosure on its website, the company must also submit the disclosure and a URL link to the disclosure through the Nasdaq Listing Center no later than 15 calendar days after the company's annual shareholder meeting.

When a company does not timely provide the required disclosure, Nasdaq will notify the company that it is not in compliance with a listing requirement

and allow the company to provide a plan to regain compliance. Consistent with deficiencies from most other rules that allow a company to submit a plan to regain compliance,

166

Nasdaq proposes to allow companies deficient under proposed Rule 5606 45 calendar days to submit a plan in accordance with Rule 5810(c)(2) to regain compliance and, based on that plan, Nasdaq can provide the company with up to 180 days to regain compliance. If the company does not do so, it would be issued a Staff Delisting Determination, which the company could appeal to a Hearings Panel pursuant to Rule 5815. Although proposed Rule 5606 is not identical to the current Commission requirements, it is similar to, and does not deviate from, the Commission's CD&I related to Items 401(e)(1) and 407(c)(2)(vi) of Regulation S-K. Moreover, the proposed rule strengthens the Commission's requirements by providing clarity to the definition of diversity and streamlining investors' desire for clear, complete and consistent disclosures. Nasdaq believes that the format of the Board Diversity Matrix and the information that it will provide offers greater transparency into a company's board composition and will enable the data to be easily aggregated across issuers.

167

Nasdaq also believes that requiring annual disclosure of the data will ensure that the information remains current and easy for investors, data analysts and other parties to track.

166

Pursuant to Nasdaq Rule 5810(c)(2)(A)(iii), a company is provided 45 days to submit a plan to regain compliance with Rules 5620(a) (Meetings of Shareholders), 5620(c) (Quorum), 5630 (Review of Related Party Transactions), 5635 (Shareholder Approval), 5250(c)(3) (Auditor Registration), 5255(a) (Direct Registration Program), 5610 (Code of Conduct), 5615(a)(4)(D) (Partner Meetings of Limited Partnerships), 5615(a)(4)(E) (Quorum of Limited Partnerships), 5615(a)(4)(G) (Related Party Transactions of Limited Partnerships), and 5640 (Voting Rights). Pursuant to Nasdaq Rule 5810(c)(2)(A)(iv), a company is also provided 45 days to submit a plan to regain compliance with Rule 5250(b)(3)(Disclosure of Third Party Director and Nominee Compensation). A company is generally provided 60 days to submit a plan to regain compliance with the requirement to timely file periodic reports contained in Rule 5250(c)(1).

167

Various stakeholders have requested easier aggregation.

See

Petition for Amendment of Proxy Rule,

supra

note 80, at 1.

c. Diverse Board Representation or Explanation

Nasdaq is proposing to adopt new Rule 5605(f)(2) to 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 who self-identifies as Female and one who self-identifies as an Underrepresented Minority or LGBTQ+.

168

A company does not need to provide additional public disclosures if the company discloses under Rule 5606 that it has at least two Diverse directors satisfying this requirement. The terms in the proposed definition of “Underrepresented Minority” reflect the EEOC's categories and are construed in accordance with the EEOC's definitions. Nasdaq has provided additional flexibility for Smaller Reporting Companies and Foreign Issuers (including Foreign Private Issuers).

168

Nasdaq plans to publish an FAQ on the Listing Center clarifying that “two members of its board of directors who are Diverse” would exclude emeritus directors, retired directors and members of an advisory board.

Under proposed Rule 5605(f)(3), if a company satisfies the requirements of Rule 5605(f)(2) by explaining why it does not have two Diverse directors, the company must: (i) Specify the requirements of Rule 5605(f)(2) that are applicable (

e.g.,

the applicable subparagraph, the applicable diversity objectives, and the timeframe applicable to the company's market tier); and (ii) explain the reasons why it does not have two Diverse directors. Such disclosure must be provided: (i) In the company's proxy statement or information statement for its annual meeting of shareholders; or (ii) on the company's website. If the company provides such disclosure on its website, the company must also notify Nasdaq of the location where the information is available by submitting the URL link through the Nasdaq Listing Center no later than 15 calendar days after the company's annual shareholder meeting.

Nasdaq would not assess the substance of the company's explanation, but would verify that the company has provided one. If the company has not provided any explanation, or has provided an explanation that does not satisfy subparagraphs (i) and (ii) of Rule 5605(f)(3), the explanation will not satisfy the requirements of Rule 5605(f)(3). For example, it would not satisfy Rule 5605(f)(3) merely to state that “the Company does not comply with Nasdaq's diversity rule.” As described above, the company must specify the requirements of Rule 5605(f)(2) that are applicable and explain the reasons why it does not have two Diverse directors. For example, a company could disclose the following to satisfy subparagraph (i) of Rule 5605(f)(3): “As a Smaller Reporting Company listed on the Nasdaq Capital Market tier, the Company is subject to Nasdaq Rule 5605(f)(2)(C), which requires the company to have, or explain why it does not have, at least two Diverse directors, including at least one director who self-identifies as Female. Under Rule 5605(f)(7), the Company is required to have at least one Diverse director by March 10, 2023, and a second Diverse director by March 10, 2026. The Company has chosen to satisfy Rule 5605(f)(2)(C) by explaining its reasons for not meeting the diversity objectives of Rule 5605(f)(2)(C), which the Company has set forth below.”

i. Effective Dates and Phase-in Period

Proposed Rule 5605(f)(7) provides a transition period before companies must fully satisfy the requirement to have two Diverse directors or explain why they do not upon the initial implementation of the rule. Under this transition rule, each company must have, or explain why it does not have, one Diverse director no later than two calendar years after SEC approval of the proposed rule (the “Approval Date”), and two Diverse directors no later than (i) four calendar years after the Approval Date for companies listed on the Nasdaq Global Select (“NGS”) or Global Market (“NGM”) tiers, or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market (“NCM”) tier. For example, if the Approval Date is March 10, 2021, all companies would be required to have, or explain why they do not have, one Diverse director by March 10, 2023 and two Diverse directors by March 10, 2025 (for NGS/NGM companies) or March 10, 2026 (for NCM companies).

Under proposed Rule 5605(f)(5)(A), a newly listed company that was not previously subject to a substantially similar requirement of another national securities exchange will be allowed one year from the date of listing to satisfy the requirement described above. This “phase-in” period applies to companies listing in connection with an initial public offering, a direct listing, a transfer from another exchange or the over-the-counter market, or through a business combination with an acquisition company listed under IM-5101-2, such that the company is no longer subject to IM-5101-2 after the combination. This phase-in period will apply after the end of the transition period provided in Rule 5605(f)(7). As a result, companies listing after the expiration of the phase-in periods provided by Rule 5605(f)(7) would be provided with one year from the date of listing to satisfy the applicable requirement of Rule 5605(f)(2) to have, or explain why they do not have, at least two Diverse directors. Companies listing after the Approval Date, but prior to the expiration of the phase-in periods provided by Rule 5605(f)(7), would be

provided with the latter of the periods set forth in Rule5605(f)(7) or one year from the date of listing.

Nasdaq believes this proposed period is consistent with the phase-in periods granted to companies for Nasdaq's other board composition requirements. For example, Rule 5615(b)(1) provides a company listing in connection with its initial public offering one year to fully comply with the compensation and nomination committee requirements of Rules 5605(d) and (e), and with the majority independent board requirement of Rule 5605(b). Similarly, SEC Rule 10A-3(b)(1)(iv)(A) allows a company up to one year from the date its registration statement is effective to fully comply with the applicable audit committee composition requirements. Nasdaq Rule 5615(b)(3) provides a one-year timeframe for compliance with the board composition requirements for companies transferring from other listed markets that do not have a substantially similar requirement.

ii. Foreign Issuers

Nasdaq recognizes that the EEOC categories of race and ethnicity may not extend to all countries globally because each country has its own unique demographic composition. However, Nasdaq observed that on average, women tend to be underrepresented in boardrooms across the globe, holding an estimated 16.9% of board seats in 2018.

169

As an official supporter of the United Nations Sustainable Stock Exchanges Initiative, Nasdaq recognizes that ensuring women have equal opportunities for leadership in economic decision making is one of the United Nations Sustainable Development Goals to be accomplished by 2030.

170

However, studies estimate that at current rates, it could take 18

171

to 34 years

172

for U.S. companies to achieve gender parity on their boards.

169

See

Deloitte,

Women in the Boardroom, supra

note 86.

170

See

United Nations Sustainable Stock Exchanges Initiative,

Gender Equality, https://www.un.org/sustainabledevelopment/gender-equality/

(last accessed Nov. 24, 2020).

171

See

McKinsey & Company,

supra

note 36, at 17.

172

See

GAO Report,

supra

note 44, at 9 (estimating “it could take about 10 years from 2014 for women to comprise 30 percent of board directors and more than 40 years for the representation of women on boards to match that of men”).

Accordingly, under proposed Rule 5605(f)(2)(B), each Foreign Issuer must have, or explain why it does not have, at least two Diverse directors on its board, including at least one Female. Nasdaq proposes to provide Foreign Issuers with additional flexibility in that Foreign Issuers may satisfy the diversity requirement by having two Female directors. In addition, Foreign Issuers may also satisfy the diversity requirement by having one Female director, and an individual who self identifies as (i) LGBTQ+ or (ii) an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company's home country jurisdiction. Alternatively, a company could satisfy Rule 5605(f)(2)(B) by publicly explaining the company's reasons for not meeting the diversity objectives of the rule.

Nasdaq proposes to define a Foreign Issuer under Rule 5605(f)(1) as (a) a Foreign Private Issuer (as defined in Rule 5005(a)(19)) or (b) a company that: (i) Is considered a “foreign issuer” under Rule 3b-4(b) under the Act;

173

and (ii) has its principal executive offices located outside of the United States. This definition will include all Foreign Private Issuers (as defined in Rule 5005(a)(19)),

174

and any foreign issuers that are not foreign private issuers so long as they are also headquartered outside of the United States. This is designed to recognize that companies that are not Foreign Private Issuers but are headquartered outside of the United States are foreign companies notwithstanding the fact that they file domestic SEC reports. It is also designed to exclude companies that are domiciled in a foreign jurisdiction without having a physical presence in that country. Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be a Foreign Issuer one year from the date that the company no longer qualifies as a Foreign Issuer to satisfy the requirements of Rule 5605(f).

173

See

17 CFR 240.3b-4(b) (“The term foreign issuer means any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.”).

174

Under Nasdaq Rule 5005(a)(19), the term Foreign Private Issuer has “the same meaning as under Rule 3b-4 under the Act.”

Nasdaq also proposes to revise Rule 5615 and IM-5615-3, which currently permit a Foreign Private Issuer to follow home country practices in lieu of the requirements set forth in the Rule 5600 Series, subject to several exclusions. Nasdaq proposes to revise Rule 5615 and IM-5615-3 to add Rules 5605(f) and 5606 to the list of excluded corporate governance rules. As a result, Foreign Private Issuers must satisfy the requirements of Rule 5605(f) and 5606 and may not follow home country practices in lieu of such requirements. However, Foreign Private Issuers that elect to follow an alternative diversity objective in accordance with home country practices, or are located in jurisdictions that restrict the collection of personal data, may satisfy the requirements of Rule 5605(f) by explaining their reasons for doing so instead of meeting the diversity objectives of the rule.

iii. Smaller Reporting Companies

Nasdaq also recognizes that smaller companies, especially pre-revenue companies that depend on the capital markets to fund ground-breaking research and technological advancements, may not have the resources necessary to compensate an additional director or engage a search firm to search outside of directors' networks. In recognition of the resource constraints faced by smaller companies, Nasdaq proposes to provide each Smaller Reporting Company with additional flexibility. Specifically, these companies could satisfy the two Diverse directors objective under Rule 5605(f)(2)(C) by having two Female directors.

Like other companies, Smaller Reporting Companies could also satisfy the two Diverse directors by having one Female director and one director who self-identifies as either (i) an Underrepresented Minority, or (ii) a member of the LGBTQ+ community. Alternatively, a company could satisfy Rule 5605(f)(2)(C) by publicly explaining the company's reasons for not meeting the diversity objectives of the rule. Under Rule 5605(f)(1), Nasdaq proposes to define a Smaller Reporting Company as set forth in Rule 12b-2 under the Act.

175

Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be a Smaller Reporting Company one year from the date that the company no longer qualifies as a Smaller Reporting Company to satisfy the requirements of Rule 5605(f).

175

Under 12b-2 of the Act, a Smaller Reporting Company “means an issuer that is not an investment company, an asset-backed issuer (as defined in § 229.1101 of this chapter), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) Had a public float of less than $250 million; or (2) Had annual revenues of less than $100 million and either: (i) No public float; or (ii) A public float of less than $700 million.”

See

17 CFR 240.12b-2.

iv. Cure Period

Nasdaq proposes to adopt Rule 5605(f)(6) and a new Rule 5810(c)(3)(F) to specify what happens if a company does not have at least two Diverse directors as set forth under Rule 5605(f)(2) and fails to provide the disclosure required by Rule

5605(f)(3).

176

Under those provisions, the Listing Qualifications Department will promptly notify the company that it has until the latter of its next annual shareholders meeting, or 180 days from the event that caused the deficiency, to cure the deficiency. The company can cure the deficiency either by nominating additional directors so that it satisfies the Diversity requirement of Rule 5605(f)(2) or by providing the disclosure required by Rule 5605(f)(3). If a company does not regain compliance within the applicable cure period, the Listings Qualifications Department would issue a Staff Delisting Determination Letter. A company that receives a Staff Delisting Determination can appeal the determination to the Hearings Panel through the process set forth in Rule 5815. Nasdaq also proposes revising Rule 5810(c)(2)(A)(iv) to make a non-substantive change clarifying that Rule 5250(b)(3) is related to “Disclosure of Third Party Director and Nominee Compensation.”

176

Nasdaq proposes that existing Rules 5810(c)(3)(F) and (G) be renumbered as Rules 5810(c)(3)(G) and (H) respectively.

v. Exempt Companies

Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the following types of companies from the requirements of Rule 5605(f) (“Exempt Companies”): acquisition companies listed under IM-5101-2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series. Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be an Exempt Company one year from the date that the company no longer qualifies as an Exempt Company to satisfy the requirements of Rule 5605(f).

Nasdaq believes it is appropriate to exempt these types of companies from the proposed rule because such companies do not have boards, do not list equity securities, or are not operating companies. These companies are already exempt from certain of Nasdaq's corporate governance standards related to board composition, as described in Rule 5615.

d. Alternatives Considered

Nasdaq considered whether requiring listed companies to have, or explain why they do not have, two Diverse directors would better promote the public interest than an alternative threshold or approach. Nasdaq's reasoned decision-making process included considering: (i) Mandate and disclosure-based approaches; (ii) higher and lower diversity objectives; (iii) longer and shorter timeframes; and (iv) broader and narrower definitions of “Diverse.”

i. Mandate vs. Disclosure Based Approach

Globally, gender mandates range from requiring at least one woman on the board,

177

requiring two or more women based on board size,

178

or requiring 30 to 50% women on the board.

179

Some mandates vary by board size—for example, Norway imposes different standards for boards of two to three directors, four to five directors, six to eight directors, nine directors and ten or more directors.

180

California imposes a higher standard for gender diversity that boards with five directors or six or more directors must satisfy by the end of 2021 under S.B. 826, and a higher standard for underrepresented communities that boards with five to eight directors and nine or more directors must satisfy by the end of 2022 under A.B. 979. Nasdaq did not observe a common denominator among the mandates applicable to varying board sizes. However, Nasdaq considered criticism that a model based on various board sizes could subject companies to a higher threshold by virtue of adding directors.

181

Based on Nasdaq data, the average board size of its listed companies is eight directors.

177

For example, the Securities and Exchange Board of India requires public companies to have at least one woman on the board.

See

Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, Regulation 17(1)(a) (2015), available at:

https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-january-10-2020-_37269.html.

Similarly, the Israeli Companies Law requires public companies to have at least one woman on the board.

See

Paul Hastings,

Breaking the Glass Ceiling: Women in the Boardroom

139 (2018), available at:

https://www.paulhastings.com/genderparity/.

In the United States, California's S.B. 826 requires public companies headquartered in California to have at least one woman on the board.

See

Cal. S.B. 826,

supra

note 112, at § 301.3(b)(3).

178

For example, California's S.B. 826 requires public companies headquartered in California to have at least two women on the board if their board is comprised of five directors, and at least three women on the board if their board is comprised of six or more directors.

See

Cal. S.B. 826,

supra

note 112, at § 301.3(b)(1) and (2). Similar legislation has been proposed in New Jersey, Michigan and Hawaii.

See

N.J. Senate No. 3469, § 3(b)(2) (2019); Mich. S.B. 115, § 505a(2)(b) (2019); Haw. H.B. 2720, § 414-1(b)(2) (2020).

179

For example, Norway imposes a gender quota ranging from 33%-50% depending on board size.

See

Paul Hastings,

supra

note 177, at 103. Portugal requires listed companies to have at least 33.3% women on boards by 2020.

See

Deloitte,

Women in the Boardroom, supra

note 86, at 143. Germany requires public companies with co-determined boards (at least 50% employee representation) to have at least 30% women, and all other listed companies to establish a company-defined target.

See

Ulrike Binder and Guido Zeppenfeld, Mayer Brown,

Germany Introduces Rules on Female Quota for Supervisory Boards and Leadership Positions

(March 13, 2015), available at

https://www.mayerbrown.com/en/perspectives-events/publications/2015/03/germany-introduces-rules-on-female-quota-for-super.

Belgium requires listed companies to have at least 33% women on the board.

See

Deloitte,

Women in the Boardroom, supra

note 86, at 85. Austria requires listed companies with more than 1,000 employees to have at least 30% women on the board.

See id.

at 81. Iceland requires public companies with more than 50 employees to have at least 40% women on the board.

See

Act respecting Public Limited Companies No. 2/199, Article 63, available at:

https://www.government.is/publications/legislation/lex/2018/02/06/TRANSLATION-OF-RECENT-AMENDMENTS-OF-ICELANDIC-PUBLIC-AND-PRIVATE-LIMITED-COMPANIES-LEGISLATION-2008-2010-including-Acts-13-2010-sex-ratios-and-68-2010-minority-protection-remuneration/.

France and Italy both require public companies to have at least 40% women on their boards.

See

Paul Hastings,

supra

note 177, at 91; White & Case,

Italy increases gender quotas in corporate boards of listed companies

(Jan. 29, 2020), available at:

https://www.whitecase.com/publications/alert/italy-increases-gender-quotas-corporate-boards-listed-companies

180

See

Paul Hastings,

supra

note 177, at 103.

181

See

David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz,

Gender Diversity and Board Quotas,

New York Law Journal (July 25, 2018), available at:

https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.26150.18.pdf

(“California legislators dispute that the bill requires men to be displaced by women, noting that boards can simply increase their size. This may be easier said than done, however: Because the required quota increases with board size, a company with a four-man board that did not wish to force out a current director would need to add three women to accommodate the requirements of the law by 2021.”).

Soft targets ranging from 25% to 40% women on boards have been suggested by various corporate governance codes and corporate governance organizations. For example, Rule 4.1 of the Swedish Corporate Governance Code (the “Code”) provides that listed companies are to “strive for gender balance on the board.”

182

Each company's nominations committee is to publish a statement on its website at the time it issues notice of its shareholders meeting “with regard to the requirement in rule 4.1, that the proposed composition of the board is appropriate according to the criteria set out in the Code and that the company is to strive for gender balance.”

183

Companies are not

required to comply with the Code, “but are allowed the freedom to choose alternative solutions which they feel are better suited to their particular circumstances, as long as they openly report every deviation, describe the alternative solution they have chosen and explain their reasons for doing so.”

184

Signifying progress, in 2019, 7% of nominations committees did not issue a statement on board gender balance, compared to 58% in 2013.

185

182

See

Swedish Corporate Governance Board,

The Swedish Corporate Governance Code

§ 4.1 17 (eff. Jan. 1, 2020), available at:

http://www.bolagsstyrning.se/UserFiles/Koden/The_Swedish_Corporate_Governance_Code_1_January_2020.pdf.

183

See

Swedish Corporate Governance Board,

Annual Report 2020

22 (August 2020), available at:

http://www.bolagsstyrning.se/userfiles/archive/3930/kodkoll_arsrapport-2020_eng.pdf.

184

See

Swedish Corporate Governance Board,

Gender balance on boards of listed companies: The Swedish Corporate Governance Board assesses the situation ahead of this year's AGMs

(February 3, 2015), available at:

http://www.bolagsstyrning.se/userfiles/archive/3856/pressrelease_gender_2014-02-03.pdf.

185

See

Swedish Corporate Governance Board,

Annual Report 2020, supra

note 183, at 22.

In 2015, the Swedish Corporate Governance Board, which is responsible for administering the Code, established a goal to achieve representation of women on boards of small/mid cap (and Swedish companies listed on NGM Equity) and large cap companies of 30% and 35%, respectively, by 2017. Further, the Board aimed to achieve 40% representation of women on boards of all listed Swedish companies by 2020.

186

Based on data as of June 30, 2020, among listed companies, women accounted for 32.7% of board seats on small/mid cap companies and NGM Equity, 38.6% of large cap companies and 34.7% of all listed companies.

187

186

See

Swedish Corporate Governance Board,

Gender balance, supra

note 184.

187

See

Swedish Corporate Governance Board,

Statistics regarding gender balance

(July 15, 2020), available at:

http://www.bolagsstyrning.se/userfiles/archive/3922/200715_gender_balance_on_boards.pdf; see

also Sammanfattning,

available at

http://www.bolagsstyrning.se/userfiles/archive/3922/statistik_konsfordelning_2020.pdf.

In the United Kingdom, the Financial Conduct Authority requires companies with a premium listing on the London Stock Exchange to publicly disclose whether or not they comply with the Financial Reporting Council's U.K. Corporate Governance Code (the “U.K. Code”), and if not, to explain their reasons for non-compliance.

188

Provision 23 of the U.K. Code requires each company to publicly describe “the work of the nomination committee, including . . . the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives,”

189

and Principle J states that board appointments and succession planning should, among other things, “promote diversity of gender, social and ethnic backgrounds.”

190

In addition, the Companies Act requires companies to disclose gender diversity statistics among the board, management and employees.

191

In 2018, the Financial Reporting Council reported that 83% of FTSE 100 and 74% of FTSE 250 companies had established a board diversity policy specifying gender, with approximately

1/3

specifying ethnicity.

192

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