Will Nasdaq’s Proposed Listing Rules Make Board Diversity A Governance Best Practice?

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Prudential Financial chief governance officer Peggy Foran tells boards not to overreact; Nasdaq rules are meant to be "a push," not a mandate.

The Nasdaq proposal to adopt new listing rules supporting board diversity is a major step toward making the transparent disclosure of information regarding board composition a more widely accepted “best practice” in governance. Although the proposal still needs approval from the Securities Exchange Commission, the fact that the SEC will now weigh in on what level of diversity regulations will need to be adhered to in order for a company to trade publicly sends the strongest message yet that board diversity should be considered an essential part of corporate governance.

According to a December press release, the proposal would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose diversity statistics regarding their board of directors. Company boards would also have to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+, or explain why they do not.

In the release, Nasdaq president and CEO Adena Friedman said, “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders.”

Nasdaq also said the proposal would “enhance investor confidence” and offered analysis of over two dozen studies that found that diverse boards achieve better financial performance and practice better corporate governance to emphasize that point.

As the SEC solicits public comments on Nasdaq’s proposed rule before making a formal decision, corporate boards should review their policy on disclosure of board composition data and diversification of their board to prepare to comply should the proposal be approved.

In an interview, Margaret (Peggy) Foran, Chief Governance Officer, Vice President and Corporate Secretary of Prudential Financial said boards shouldn’t overreact to the proposal because it’s not really a mandate.

“I think what they’re saying is, if you don’t do it, you have to explain why. That’s my call on it,” says Foran, who is also a director on the Occidental Petroleum, MONY Group Inc., and MONY Life Insurance Company boards.

“[Nasdaq] essentially did this as a push. If you don’t reach the requirement, you’ve got to explain why not,” she says. “What that will do is give them the extra push… Nasdaq companies will have to say, ‘Okay I need to look at a broader group of resumes that includes diverse candidates.’”

The Nasdaq proposal should also be an indicator to corporate directors that the issue of board diversity is not going away. California and Washington State have already passed laws mandating gender diversity on boards, so Nasdaq’s effort may accelerate those efforts. If other exchanges follow Nasdaq’s lead, board diversity will become best practice in the U.S.

Corporate boards should begin discussions on how they intend to diversify their board or how they will maintain or improve upon the diversity of their board in the future. Companies that do not have diverse boards may want to speak to their largest shareholders about the matter to make sure that they supply an acceptable rationale for not having a diverse board. The reasons for not diversifying the board will potentially need to meet SEC scrutiny and satisfy shareholder activists who could use lack of board diversity as a reason to remove certain board members. Last year also saw a wave of “lack of board diversity lawsuits” filed, which can bring reputational damage and financial settlements that no board will want to deal with. But perhaps the best reason for boards to discuss board diversity this year is to get a better understanding how board diversity can enhance their company’s performance. If diversifying the board will make their company better, why wouldn’t directors want to implement a practice that is in the best interest of all stakeholders?

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