The growing demand for increased diversity on corporate boards passed another hurdle.  The SEC approved to Nasdaq’s proposed rule changes to mandate increased board diversity requirements.  Three SEC Commissioners, including Chairman Gensler, approved the measure, and one Republican commissioner opposed the measure.  The other Republican commissioner supported the proposal only in part.

Under the new Nasdaq rules, listed companies would have to meet minimum targets for gender and ethnic diversity or explain in writing why they are unable to reach these targets.  Most companies will have to include at least one female director, as well as a director who self-identifies as a racial minority or as lesbian, gay, bisexual, transgender or queer.  Companies would have to disclose diversity statistics about their boards.

The new rules will become effective for 2022 reporting requirements.  For newly-listed Nasdaq companies, there will be a phased-in approach for compliance with the new rules. In the first year, Nasdaq companies will have to report on its board diversity for the one year.  After that, companies will be required to report on two years — the current and immediate past year.  In general, the disclosure report will have to be filed within 15 days after the company’s annual shareholder meeting.

Compliance with the new mandate will require boards to improve their diversity efforts.  Naasdaq found that as of late last year more than 75 percent of its listed companies would have fallen short of the basic mandate under the new rule.

Opponents of the new rule argued that the SEC may be dragged into  adjudicating Nasdaq de-listing decisions based on failure to comply with the diversity rules.  Goldman Sachs and Microsoft supported the new diversity rules.

Nasdaq persuaded the SEC that the new rules would not impose a quota system because companies that do not meet the diversity requirement can provide a written explanation of their inability to achieve the mandated targets.  Nasdaq’s rules also allow companies with five or fewer directors to meet the targets with just one board member from a designated diverse background, as opposed to the mandate for two separate directors who meet the diversity requirement.

Nasdaq argued that the diversity rules would ultimately benefit investors, citing studies that found that corporate boards with more diverse members performed better than boards with low diversity in their membership. 

Board diversity has been at the center of corporate governance reforms.  United States companies have a poor record on gender and ethnic diversity at the board level in comparison to European Union and other countries.  United States asset managers have pushed portfolio companies to increase diversity on their respective boards.  Goldman Sachs has stated that it will not underwrite initial public offerings of companies in the United States and  Europe unless they had at least two diverse directors.

Board diversity continues to plague United States companies that are dominated by white male board members.  Many large companies have increased the number of women and ethnic minorities to their boards.  Of the top 500 S&P board members, approximately 70 percent are filled by white males, 10 percent by white females, and 20 percent by African-Americans, Latinos and Asians.

To help companies meet the new requirements, Nasdaq is offering certain listed companies access to a complimentary board recruiting service to increase diversity on company boards.