Nasdaq’s Diversity Proposal is making headlines as it promotes board diversity and gender equity. The proposal aims to create an environment of equal representation where all voices are heard, and decisions made with the benefit of diverse perspectives and experiences.
Under the proposed rule, Nasdaq-listed companies must have at least two diverse directors on their boards by the end of 2023.
What is Rule 5605(f)?
Nasdaq’s rule 5605(f) is the proposed rule that outlines how companies must comply with the board diversity requirements. Companies must adhere to the proposed diversity requirements in this rule, including:
Companies listed on Nasdaq’s U.S. exchange must have two directors including:
- One director who self-identifies as female
- One direct who self-identifies as part of a minority group or LGBTQ + community
Those considered minorities under this new rule include:
- Black or African American
- Hispanic or Latino
- Native American or Alaska Native
- Native Hawaiian or Pacific Islander
- Two or more races or ethnicities
In addition, companies must also give an explanation as to why they cannot comply with one or both of these requirements in the form of a disclosure.
This disclosure should be provided prior to a company’s annual shareholder meeting or on its website. For website disclosures, the company should also provide information in its proxy or an information statement and then submit this URL link through the Nasdaq Listing Center within one business day of posting.
For smaller companies with five board members or less, only one diverse board member or disclosure is needed. Additional exceptions are given to foreign issuers.
Deadlines For Compliance
Under the proposed rule, companies now have clearer guidelines as to when this process will be expected to phase in.
A Nasdaq Global Select Market and Nasdaq Global Market listed company:
- By December 31, 2023: Must have at least one diverse director (phasing in compliance) or explain why not
- By December 31, 2025: Must have two diverse directors (fully compliant)
or give an explanation as to why they were unable to follow compliance and hire their diverse directors.
A Nasdaq Capital Market listed company:
- By December 31, 2023: Must have at least one diverse director
- By December 31, 2026: Must have two diverse directors
or explain the reasoning as to why not. It’s important to note that these dates have changed from previously proposed set dates in August thanks to a new amendment that has made the timeline more clear for participating Nasdaq companies.
Why Compliance Matters
According to NASDAQ, there’s an increasing need for diversity in the boardroom, not just from a moral perspective but from a business perspective as well. Having a diverse board allows multiple perspectives to be heard and considered when making important decisions, which leads to better outcomes. This new NASDAQ rule may help make sure that companies are compliant with other similar local regulations, while also meeting their own ethical and social responsibility standards.
The proposed rule changes from Nasdaq seeks to promote diversity among boards of directors throughout the U.S. The deadlines outlined above provide clear guidance as to when these requirements should be implemented by each company, allowing them to prioritize this important change without fear of repercussions or penalties.
Nasdaq believes this change in rules will help solidify an overarching standard of board diversity, opening the door to a more representative and equitable future for companies across the U.S.