Nasdaq’s proposal to increase diversity on the boards of companies listed on its exchange was approved by the Securities and Exchange Commission.
All Nasdaq-listed companies must have at least two diverse directors, one of whom must be a woman and one of whom must be a member of a “underrepresented” minority group, such as Black people, Latinos, or LGBTQ+ people. Companies that do not have at least two diverse directors will be required to justify their lack of diversity in writing.
Smaller companies and foreign companies listed on the stock exchange might be able to get away with having two female directors.
Companies will also be required to publicly disclose boardroom diversity statistics within one year, and to have at least one diverse director within two years, and two within four to five years, depending on their size and stock market exchange tier.
“These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders,” SEC chairman Gary Gensler said in a statement.
According to him, the new Nasdaq disclosure requirements will provide “consistent and comparable data when making investment decisions.”
Nasdaq first laid out its boardroom diversity rules in December as part of its mission to “promote inclusive growth and prosperity to drive stronger economies.”
The news comes at a time when corporate boards are increasingly looking for directors who are diverse. According to a study released by the Alliance for Board Diversity in collaboration with Deloitte, white women and minorities made up 38.3 percent of Fortune 500 board seats in 2020, up from 34 percent in 2018.
Governor Gavin Newsom of California signed a diversity law in September that requires companies to have at least one board member from an underrepresented community by the end of 2021, and at least two or three by the end of 2022, depending on the size of the board. Failure to comply with the diversity rule by publicly traded companies in California could result in fines ranging from $100,000 to $300,000 per violation.
Senator Pat Toomey, a Republican on the US Senate Banking Committee, spoke out against the Nasdaq’s diversity rule in February, urging the Securities and Exchange Commission to block the Nasdaq’s proposal.
“These prescriptive requirements may ultimately harm economic growth and investors by pressuring companies to select directors from a narrower pool of candidates and discouraging others from going public,” Toomey said in a statement following the news. “I’m disappointed Chairman Gensler is turning a financial regulator into a laboratory for progressive social engineering.”
