Nasdaq Proposes Board Diversity Rules for Listed Companies

In Short

The Situation: On December 1, 2020, The Nasdaq Stock Market LLC ("Nasdaq") filed a proposal with the Securities and Exchange Commission ("SEC") to adopt new listing rules addressing board composition diversity ("Diverse Representation Requirement") and related disclosures ("Diversity Disclosure Requirement").

The Result: If the new listing requirements are approved by the SEC, most Nasdaq listed companies will need to be prepared to fulfill the proposed board diversity requirements or publicly explain their failure to do so. In addition, these companies will be required to disclose board diversity statistics reported voluntarily by directors to provide stakeholders with additional information to evaluate board composition.

Looking Ahead: Nasdaq listed companies should be cognizant of the proposed rules as they contemplate board changes given that diversity is a stated priority of the Biden Administration and prompt SEC approval is possible. Although many companies are already focused on board diversity, if the new listing requirements are approved by the SEC, Nasdaq listed companies will need to ensure that their board diversity initiatives are consistent with these new requirements.

As proposed, Nasdaq's Diverse Representation Requirement (Rule 5605(f)) is a "comply or explain" rule, a common approach in corporate governance regulation, that would require almost all Nasdaq listed companies to either meet a board composition diversity requirement or disclose why they have not done so. Despite the "comply or explain" formulation, Nasdaq clearly intends to change behavior. The Diversity Disclosure Requirement proposal (Rule 5606) would require listed companies to annually disclose certain characteristics voluntarily reported by directors.

The timing to comply with the Diverse Representation Requirement, if approved, varies based on the Nasdaq's tiered listing system. Companies listed on The Nasdaq Global Select Market or The Nasdaq Global Market must have, or explain why they do not have, at least one diverse director no later than two years after SEC approval and at least two diverse directors no later than four years after SEC approval. Companies listed on The Nasdaq Capital Market must have, or explain why they do not have, at least one diverse director no later than two years after SEC approval and at least two diverse directors no later than five years after SEC approval. Compliance with the Diversity Disclosure Requirement will be required one year after SEC approval, irrespective of the Nasdaq tier on which a company is listed.

If approved by the SEC, failure to comply with either the Diverse Representation Requirement or the Diversity Disclosure Requirement (after a cure period) may result in de-listing.

Summary of Proposed Rules

Diverse Representation Requirement—Rule 5605(f) requires a Nasdaq listed company (with certain exceptions) to have, or explain why it does not have, at least two directors who are "Diverse," as defined by the rule, including at least one director who self-identifies as "Female" and one director who self-identifies as an "Underrepresented Minority" or "LGBTQ+."

  • "Diverse" means an individual who self-identifies in one or more of the following categories: Female, Underrepresented Minority, or LGBTQ+.
  • "Female" means an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth.
  • "LGBTQ+" means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.
  • "Underrepresented Minority" means an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities.

If the proposed rules are approved and a company elects to "explain" rather than "comply" with the Diverse Representation Requirement, the company must make the required disclosure either on its website or in its proxy or information statement for its annual meeting of shareholders. Nasdaq's proposal explicitly states that Nasdaq would not assess the substance of a company's explanation; the listing requirement is merely intended to ensure that the company has provided one.

Certain "Foreign Issuers" (broadly defined and not limited to Foreign Private Issuers) and "Smaller Reporting Companies" have more flexibility in satisfying the Diverse Representation Requirement.

  • Rule 5605(f) would require Foreign Issuers to have, or explain why they do not have, at least two diverse directors, including one director self-identifying as female. Foreign Issuers could satisfy the diversity requirements if the second diverse director is either another female director or an individual who self-identifies as LGBTQ+ or as an underrepresented minority based on the national, racial, ethnic, indigenous, cultural, religious, or linguistic identity in the Foreign Issuer's home country jurisdiction. Domestic issuers are permitted to apply this alternative formulation if they disclose the reason for doing so. In addition, if a Foreign Issuer is prohibited from disclosing self-identified attributes of board members due to applicable privacy laws, it can indicate that it is restricted by law. 
  • The Diverse Representation Requirement applies to Smaller Reporting Companies, although they may satisfy the requirement by having two self-identifying female directors. Larger issuers are permitted to apply this alternative rule if the rationale for doing so is publicly disclosed.

The Diversity Disclosure Requirement—Rule 5606 requires companies, to the extent permitted by law, to disclose on an annual basis information on each director's voluntarily reported, self-identified characteristics in line with Nasdaq's proposed "Board Diversity Matrix" or an alternative matrix intended to accommodate certain Foreign Issuers.

Exceptions to the Proposed Rules

Neither the Diverse Representation Requirement nor the Diversity Disclosure Requirement would apply to:

  • Acquisition companies listed under IM-5101-2;
  • Asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1));
  • 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 nonvoting preferred securities, debt securities, and Derivative Securities (as set forth in Rule 5615(a)(6)); and
  • Issuers of securities listed under the Rule 5700 Series.


One of the stated purposes of Nasdaq's diversity proposal is to enhance investor confidence, given the benefits to stakeholders of increased diversity on the board of directors, including a greater variety of perspectives, improved decision-making and oversight, and strengthened internal controls. Nasdaq's proposal follows recent state legislation, including in California, Colorado, Illinois, New York, and Maryland, that mandates or encourages diversity in board representation and/or disclosure of board members' self-identified demographic information. To facilitate compliance with the proposed rules, Nasdaq has also proposed partnering with Equilar to provide companies with access to a board recruiting resource (Listing Rule IM-5900-9) intended to connect companies with diverse, board-ready director candidates.

As Nasdaq acknowledges in its diversity proposal, many companies have already made significant progress in the area of diversity, with many companies having at least one woman on the board and working meaningfully to add directors with other diverse characteristics.

Two Key Takeaways

  1. The Nasdaq proposal to codify diversity requirements for boards of listed companies follows increased public focus on social justice and a growing commitment by public companies to ESG reporting and related diversity, equity, and inclusion initiatives.
  2. Nasdaq listed companies should bear the proposed rules in mind as they contemplate board refreshment plans, evaluate potential director nominees, and consider other board changes. 

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