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Nasdaq Proposes Board-Diversity Rule for Listed Companies
Nasdaq Proposes Board-Diversity Rule for Listed Companies
Publication Date 12/01/2020
Source: Dow Jones News Service
By Alexander Osipovich, Akane Otani and Matt Grossman 

Nasdaq Inc. aims to require listed companies to include women and people of diverse racial identities or sexual orientation on their boards, a move that could prompt change at hundreds of companies.

The exchange operator filed a proposal with the Securities and Exchange Commission that would require listed companies to have at least one woman on their boards, in addition to a director who is a minority or one who is lesbian, gay, bisexual or transgender. Nasdaq defined underrepresented minorities as individuals self-identifying as Black, Hispanic, Asian, Native American and other races.

The plan is Wall Street's latest effort to diversify the predominantly white and male boardrooms of American corporations. But it could have more impact than previous attempts because of Nasdaq's ability to set rules for the more than 3,000 companies listed on its stock exchange. Potentially, companies that fail to meet the requirements could be delisted.

In a review carried out over the past six months, Nasdaq found that more than three-quarters of its listed companies would have fallen short of the proposed requirements.

Around 80% or 90% of companies had at least one female director, but only about a quarter had a second board member that would meet the diversity requirements, a person familiar with the review said. Nasdaq said it was difficult to measure precisely because of inconsistencies in the way companies report such data.

The review found smaller companies tended to have less diverse boards and would need to do more to respond to the proposed rule, said Nelson Griggs, an executive vice president at Nasdaq who leads its listing business. "With smaller issuers, there will be greater impact," he said in an interview.

Foreign companies and smaller companies could meet the requirement with two female directors, Nasdaq said.

Of the 2,830 companies in the Nasdaq Composite Index, which includes most companies listed on the exchange, 556 don't have any female board members, according to a Dow Jones Market Data analysis of FactSet data. Many of them are Chinese firms such as internet companies Pinduoduo Inc., JD.com Inc. and Baidu Inc., but others included solar company Array Technologies Inc., biotechnology company Allakos Inc. and soft-drink company National Beverage Corp., maker of LaCroix sparkling water.

If the proposal is approved by the SEC, companies would be required to disclose board-diversity statistics within a year. Time frames to meet diversity requirements for board composition would depend on a company's listing tier, Nasdaq said.

Companies listed in Nasdaq's most selective tiers would be expected to have at least two diverse directors within four years of the SEC approving the rule, while others would have to meet the requirements within five years. Nasdaq would rely on companies' self-reporting to determine how many board members belonged to various groups.

Nasdaq Chief Executive Adena Friedman said the rule would help promote inclusive representation in corporate leadership. In the exchange operator's proposal to the SEC, Nasdaq also cited multiple studies which found that greater diversity on boards is associated with improved corporate governance and financial performance.

Like other proposed changes to exchange listing rules, Nasdaq's proposal is subject to review by the SEC and will undergo a public-comment process, meaning it will likely be months before the commission approves or rejects the plan. That means such a decision would likely come under the incoming administration of President-elect Joe Biden, who will appoint a new chairman to lead the commission. Mr. Biden has made diversity a priority in selecting White House staffers and nominees for his cabinet.

Under former SEC Chairman Mary Jo White, who was appointed by Barack Obama, the regulator explored a draft plan to require companies to provide more details on the diversity of their boards, but never put forward a formal proposal.

SEC Chairman Jay Clayton, an appointee of President Trump who is stepping down at the end of the year, said in a statement: "We welcome dialogue on how to improve diversity, inclusion and opportunity in the financial services sector and our economy more broadly."

Nasdaq's push for more diversity shouldn't be a heavy lift for companies, said Evan Epstein, founder and managing director of corporate governance advisory firm Pacifica Global in San Francisco.

"It's not that intrusive. It's only one woman on a board and one woman of a diverse background. They're just saying, 'Hey, let's have a minimum amount of diversity on the board,'" Mr. Epstein said.

He noted that California faced some legal pushback over its own law requiring gender diversity on boards. In one lawsuit, a shareholder of a California company with an all-male board argued the state's mandate was unconstitutional and invasive because it would prevent him from voting for board candidates he preferred, instead forcing him to discriminate on the basis of sex. A federal-district court ultimately struck down the suit.

"I think you'll see some pushback from some hard-line libertarian groups that don't want to have any quotas imposed on them," Mr. Epstein said.

Corporate boards have made their ranks somewhat more diverse. Last year, 44% of nonexecutive director appointments that companies made in the U.S. were women, according to executive search firm Heidrick & Struggles. That marked the highest share since the firm began tracking the data 11 years ago.

Big institutions have also become more vocal about the importance of diversity in recent years.

Earlier this year, Goldman Sachs Group Inc. said it would no longer underwrite initial public offerings of companies in the U.S. and Europe unless they had at least one "diverse" board member, with a focus on women, a requirement that the bank plans to expand to two diverse board members next year.

Pressure to diversify corporate boards has also come from big asset managers like BlackRock Inc. and State Street Global Advisors, which have pushed companies that they invest in to have more female directors.

Brian Breheny, a former SEC staffer now at law firm Skadden, Arps, Slate, Meagher & Flom LLP, said the Nasdaq proposal is another clear indication that corporate boards need to take action to improve boardroom diversity.

"There's no more, 'We're working on it, we'll do the best we can,'" he said. "You have to show concrete changes."

Andrew Ackerman contributed to this article.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com, Akane Otani at akane.otani@wsj.com and Matt Grossman at matt.grossman@wsj.com

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