SEC’s approval of Nasdaq diversity plans draws passionate industry response 

The US’ Securities Exchange Commission has approved a proposed “comply or explain” rule by Nasdaq, which introduces measures aimed at increasing the number of women, racial minorities and LGBTQ+ people on US corporate boards.

Nasdaq has outlined a ‘comply or explain’ policy that will encourage listed companies within the exchange to hire at least one woman on their board of directors, along with one person from a racial minority or who self-identifies as either an “underrepresented minority or LGBTQ+” person. By Nasdaq’s own calculations, 75% of companies listed with the exchange do not meet this standard.

Moreover, it will encourage listed corporations to disclose the composition of its board members using a Board Diversity Matrix. Where a company has five or fewer directors, the obligations are less stringent and will only require one diverse director to be appointed.

How has the industry responded?

As is to be expected, the SEC’s approval of the Nasdaq diversity proposals has been met with both criticism and celebration. Interestingly, the most passionate responses came from within the SEC itself.

SEC Chair, Gary Gensler, remained characteristically impartial, noting that the rules will allow investors to have a better understanding of Nasdaq-listed companies’ approach to board diversity, and give them “greater transparency about the people who lead public companies”. He added that “our markets work best when investors have access to such information.”

Commissioner Hester Peirce made her opposing voice clear in a public statement on the Nasdaq rules. She noted that while she supports the overarching goal of expanding opportunity, she believes the proposal to be “outside of the scope of the [Exchange] Act and contrary to fundamental constitutional principles”. In particular, Pierce criticises the rules for “treating women as interchangeable with one another because it assumes that, if nothing else, any given woman necessarily will bring a consistently different, womanly perspective to the board than would a male director”.

Moreover, she added that “two people who look different may share very similar backgrounds and attitudes toward a range of issues, including corporate governance, whereas two people who look similar may bring very different qualities to a board’s decision-making.” This is a point, she believes, that the rules fail to address.

Commissioner’s Caroline Crenshaw and Allison Herren Lee appeared to endorse the Nasdaq diversity rule, adding:

“There is more work to be done in improving both diversity and transparency at public companies and in our capital markets more broadly. […] There is a continued, harmful disparity in the representation of a wide range of communities in our capital markets. Because enhanced diversity is critically important for investors, the markets, and our economy, we hope this is a starting point for initiatives related to diversity, not the finish line.”

The difference of opinion from within the SEC is striking, but not surprising given its makeup of Republican and Democrat commissioners.

What happens if a company fails to comply with the Nasdaq rule?

Nasdaq has said that any company that does not comply with the new rules must submit an explanation as to why it has not complied. This will likely include instances where companies have taken an alternative approach to diversity and inclusion.

However, the Exchange has said that while it will verify that a company has provided an explanation, it will not look at the merits of such an application as “there is no right or wrong reason that a company may give for not having a least two directors”.

In any event, Nasdaq has said that it is prepared to delist companies where they fail to meet the new obligations.

CUBE comment

Nasdaq’s proposals were always going to be contentious and stir up passionate opinions on both sides. The SEC’s approval of the ‘comply or explain’ rule has whipped up a storm, which really was inevitable. However, it remains to be seen how seriously such measures will be taken – and will be especially interesting to see how far Nasdaq will go in terms of implementation. What happens, for instance, if a company has not complied and cannot explain why? How much leniency will Nasdaq have before they delist? At this stage, I would anticipate they would be lenient. Perhaps that will change with time.

It is a bold move from Nasdaq to take such a stand, especially given that current Nasdaq listed companies who do not comply with the new rules may simply jump ship and list on another exchange.

It is a contentious area and, as above, the industry response has been mixed but passionate on all sides. One concern is that, when hiring for boards under this new rule, people will put ideas of race, gender, sexual orientation, and identity in front of factors that are more aligned with the functioning of a business: experience, knowledge, expertise etc.

I don’t necessarily agree with this standpoint. The two are not mutually exclusive. And it often seems as though people assume that older white (predominantly) males are best suited to the job because of experience, knowledge etc. But is it not the existing system that enabled them to gain that experience and knowledge? And is that not the same system that (until now) has prevented minority groups and women from obtaining the very same?

Moreover, there is as much to be said about experience as there is for diversity of thought, for innovation, for new ideas and open-mindedness. That is not to say that all racial minorities, women, and LGBTQ+ people possess these attributes, but there is no denying that will inevitably bring more of these features to a board than existing members – 75% of which fail to have any diversity whatsoever.

It’s a very difficult area to navigate, and while I don’t entirely disagree with Commissioner Pierce’s standpoint, I am broadly in favour of any measure taken – by any company – that is aimed to encourage diversity, inclusivity, progression and open-mindedness. Perhaps there will be a few board members appointed that haven’t got the same experience as other applicants, but that is not to say they won’t do the job well – if not better. You only have to look at emerging FinTechs and neo banks to see that experience isn’t everything.

It is often said “If it ain’t broke, don’t fix it”. In this instance, the opposite applies. That 75% of Nasdaq listed boards lack any diversity whatsoever suggests that the system is broke and should, therefore, be fixed. The old ways aren’t always the best ways.