January 31, 2023

Volume XIII, Number 31


January 31, 2023

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January 30, 2023

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SEC Continues to Drive ESG -- Approves Nasdaq’s Board Diversity Listing Standards

In the wake of the pandemic and social justice movement in 2020, the call for diversifying corporate boards has intensified. On Aug. 6, 2021, the Securities and Exchange Commission (SEC) approved the Nasdaq Stock Market’s (Nasdaq) proposal to amend its listing standards to promote greater board diversity and to require board diversity disclosures for Nasdaq-listed companies.

Fostering Diverse Perspectives

As indicated in Nasdaq’s proposal, empirical studies have demonstrated that demographic diversity among board directors is good for business. There are several reasons diverse boards outperform their non-inclusive competitors. For example, diverse boards better reflect the demographics of key stakeholders, such as customers, shareholders, and employees. But choosing board directors based solely on demographic traits may lead to diverse boards without diverse voices. In a board environment lacking in psychological safety and inclusivity, diverse voices may get ignored or remain silent. In that scenario, groupthink may dominate decision-making. Without empowered diverse voices, a board may have the physical appearance of diverse identities but lack varied learned and lived experiences that cultivate diversity of thoughts and opinions that foster rigorous and meaningful discussions about challenging issues. In today’s global marketplace, prudent companies do well to focus on increasing the representation of diverse directors while simultaneously creating an environment that maximizes unique perspectives.

Accordingly, Nasdaq-listed companies will be required to:

  • Publicly disclose board-level diversity statistics on an annual basis using a standardized matrix template under Nasdaq Rule 5606 (the Board Diversity Matrix Rule); and

  • Have, or disclose why they do not have, a minimum of two diverse board members under Nasdaq Rule 5605(f) (the Board Diversity or Disclosure Rule).

This “comply or disclose” or “name and shame” approach has been adopted by the SEC with respect to the adoption of various corporate governance rules by Nasdaq and the NYSE, with the expectation that a potentially awkward disclosure requirement will promote compliance. The Board Diversity Matrix Rule and the Board Diversity or Disclosure Rule are described in greater detail below. In addition, the SEC adopted a third rule requiring Nasdaq to offer certain listed companies access to a complimentary director recruiting service to help advance diversity on company boards (the Director Recruiting Rule).

Board Diversity Matrix Rule

Nasdaq Rule 5606 will require companies to disclose, in a standardized matrix set forth in the rule or in a substantially similar format, (i) the total number of company board members and (ii) how those board members self-identify regarding gender, predefined race, and ethnicity categories and LGBTQ+ status. Nasdaq sample matrices are published here. Foreign private issuers (FPIs) must disclose a similar matrix, but they can apply a broader definition of diversity and report the number of individuals who self-identify as underrepresented in their home country jurisdiction based on national, racial, ethnic, indigenous, cultural, religious, or linguistic identity. Companies will be required to publish the board diversity matrix in their annual meeting proxy statement, or alternatively, on the company’s website, provided that the company submits a link to the information through the Nasdaq Listing Center no later than 15 calendar days following the annual meeting. After the first year of publishing the statistics, companies will disclose the board diversity matrix for both the current and the immediately preceding year on an annual basis.

Compliance Date

All Nasdaq-listed companies must comply with the board diversity matrix disclosure rule by the later of (i) Aug. 8, 2022, or (ii) the date the company files its proxy statement for its 2022 annual meeting of shareholders (or if the company does not file a proxy statement, in its annual report on Form 10-K or 20-F).

Board Diversity or Disclosure Rule

Nasdaq Rule 5605(f) requires companies to have at least two diverse board members or to explain the company’s reasons for not meeting this diversity objective. For U.S. issuers, one diverse director must self-identify as female, and the other director must self-identify as either a racial or ethnic minority or a member of the LGBTQ+ community. Companies may comply with the rule by having two directors who self-identify in racial or ethnic categories beyond those described in the Nasdaq rule, and explaining that the company considers diversity more broadly than the categories defined in the rule. Smaller reporting companies and FPIs also will be required to have two diverse directors, at least one of whom identifies as female, but companies may satisfy the diversity requirement for the second director by appointing a second director who identifies as female. Unlike U.S. issuers, FPIs may satisfy the board diversity requirement under the broader definition of diversity applies to the matrix disclosures by appointing a director who self-identifies as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction. Companies with five or fewer board members can meet the board diversity objective by having only one instead of two diverse directors or can increase their board size to add a diverse director. Where a listed company fails to meet the applicable diversity objective, the company must detail the reasons why they do not have the applicable number of diverse directors. Failure to meet the diversity objective will not subject a company to delisting

Compliance Date

All companies are expected to have at least one diverse director by Aug. 7, 2023, larger companies listed on the Nasdaq Global Select Market or Nasdaq Global Market tiers have until Aug. 6, 2025, to have two diverse directors, while smaller companies listed on the Nasdaq Capital Market tier have until Aug. 6, 2026, to appoint a second diverse director.

Exempt Issuers

While the rules are broadly applicable, including as discussed above to FPIs, excluded are investments and other companies without boards, companies that are not operating, and companies that do not list equity securities, including limited partnerships, asset-backed companies, and special-purpose acquisition companies (SPACs). SPACs are exempt from the rules until the completion of their initial business combination.

Action Items

  • Recruiting and onboarding new directors takes time. Nasdaq-listed companies interested in adding diverse directors should begin that process now.

  • Director questionnaires elicit biographical information from directors. Consider whether your director questionnaire will need to be revised to elicit the information required under the new rules or standards adopted by significant shareholders.

© 2023 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume XI, Number 231

About this Author

David J. Lavan, Dinsmore, Corporate Litigation Attorney, SEC Registration

David is a partner in the Corporate Department who focuses his practice on all aspects of SEC registration, reporting and compliance. He routinely advises clients on public and private offerings of debt and equity, disclosure matters, corporate governance and accounting issues. As a former government bond broker, David provides clients with unique insights into the financial marketplace, counseling them on transactional and regulatory matters, as well as litigation. He represents both public and private companies, as well as independent board and committee members,...

Tammy Bennett, Partner of Counsel, Cincinnati
Partner of Counsel

Tammy is a member of the Employment, Labor & Benefits Department. She has more than 15 years of employment law experience providing counsel in HR compliance and best, and next, practices. She creates HR tool kits, policies and procedures, conducts training, evaluates performance, oversees workplace investigations and leads networking events such as roundtables. She provides services to her clients in the labor and employment fields of law. 


  • University of Cincinnati College of Law  (J.D., 2001)...
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