November 9, 2021

Board Diversity Rules Toolkit

On August 6, 2021, Nasdaq received approval from the SEC to implement new listing rules, which were created to increase transparency of board diversity composition and encourage companies to select more diverse boards of directors.

With 37% of the Nasdaq-listed companies having no racially or ethnically diverse members, and the fact that only about 15% of Fortune 500 board members are women, now is the time to ensure compliance with the rules, which take effect in 2022. Companies that fail to comply risk being delisted.

This Diversity Rules Toolkit includes an editable diversity matrix template, Nasdaq’s definitions of racial and ethnic groups, and sample questions to determine board diversity. Keep reading for a list of FAQs about the new rules and how to ensure you meet the requirements. 

Diversity Matrix Toolkit: FAQs

What information do companies have to disclose?
The rule requires Nasdaq-listed companies to disclose the diversity statistics of their board of directors.

What are the specific board diversity requirements?
Nasdaq-listed companies are required to have two diverse directors:

  •   One who self-identifies as female
  •   One who self-identifies as a racial or ethnic minority, or as LGBTQ+.

Companies that don’t meet those requirements must disclose why not.

What’s the timeline?
Under the Board Diversity Disclosure Rule, Nasdaq-listed companies (other than “Exempt Entities”) must disclose the initial matrix in 2022.

  • If a company files its 2022 proxy BEFORE August 8, 2022 and DOES NOT include the Matrix, then the company has until August 8, 2022 to provide the Matrix.
  • If a company files its 2022 proxy ON or AFTER August 8, 2022, then it must either include the Matrix in its proxy or post the Matrix on its website within one business day of filing its proxy.
  • If a company does not intend to file a 2022 proxy, then the company has until August 8, 2022 to provide the Matrix on its website.
  • Only current-year data is required for the first year. For subsequent years, companies must disclose their diversity information for the current year and the previous year.

What’s the process?
Companies must disclose board-level diversity data annually.

  • Companies are required to disclose board diversity information in the company’s proxy statement or its information statement, or on its website. If a company does not file a proxy, they must use form 10-K or 20-F.
  • Click  here  for an editable template of Nasdaq’s Board Diversity Matrix template.
  • Click here for Nasdaq’s definitions of racial and ethnic groups.
  • Click here for Govenda’s sample questions to be answered by board members for providing their gender and racial/ethnic group, and whether they identify as LGBTQ+.
  • Companies that don’t meet the board diversity objective must detail the reasons why.

The reason can include a description of a different approach. Nasdaq will confirm that the company has provided an explanation but will not verify the merits of that explanation.

Are any companies exempt from Nasdaq’s Board Diversity Rule?
Yes. Non-operating companies are exempt from the rule. And, consistent with Nasdaq’s corporate governance rules, the following companies are exempt:

  • Acquisition companies listed under IM-5101-2.
  • Asset-backed issuers and other passive insurers. Note that while closed and funds are exempt from the rule, business development companies are not, as set forth in Rule IM-5615-4.
  • 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 only non-voting preferred securities, debt securities, and Derivative Securities, as set forth in Rule 5615(a)(6).
  • Issuers of securities listed under the Rule 5700 Series, including exchange traded products.

What happens if a company can’t fulfil the diversity requirements by the deadline?
If a company can’t comply with Nasdaq’s diversity requirements, they must provide an explanation, following the disclosure instructions set forth in Rule 5605(f)(3).

Can a company be delisted if they fail to comply with the board diversity metrics as required by the Board Diversity Rule?
If a company fails to meet the diversity objectives and also doesn’t provide an explanation, they have until their next annual shareholders’ meeting or 180 days from the deficiency event to rectify the deficiency, whichever is later.

Can a director choose not to disclose their gender, race, and/or LGBTQ+ status?
Yes. Self-identifying disclosures regarding gender, race, and/or LGBTQ+ status are voluntary. The Board Diversity Matrix template reflects aggregated information and companies are permitted to indicate certain information was not disclosed.

Can one director satisfy both diversity objectives?
No. Individual directors cannot be double counted in more than one diverse category.

For a comprehensive list of Nasdaq’s FAQs, click  here.

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