Bloomberg Law
Aug. 10, 2021, 5:48 PM

Nasdaq Diversity Rules Give Investors More Tools in Proxy Fights

Lydia Beyoud
Lydia Beyoud
Corporate Governance Reporter
Andrew Ramonas
Andrew Ramonas
Corporate Disclosure Reporter

New Nasdaq Inc. rules meant to boost corporate board diversity are giving investors new ammunition to call out companies falling behind in adding women and minority directors.

The stock exchange’s rules, approved by the SEC last week, aim to push companies to get more serious about not just recruiting qualified directors from underrepresented communities, but also push stragglers to disclose why they’re falling behind.

Under Nasdaq’s rules, companies on the exchange are required to have at least one female board member and at least one who identifies as an underrepresented minority or LGBTQ—or provide statements explaining why they can’t meet the requirements. Companies also must annually disclose the gender and racial composition of their boards, as early as next year’s proxy season for some firms.

Shareholders concerned about diversity will have the data to vote against directors and offer proposals to spur diverse boards. Investors will also be able to scrutinize corporate statements about why they can’t recruit female or minority board directors. Companies will need to publish those statements on their websites or in the proxy materials they send to investors before annual meetings.

“Investors will have access to an arsenal of information on board diversity that they can use to analyze the issuer, compare it to peers, and apply pressure,” said Valeska Pederson Hintz, a partner in Lowenstein Sandler LLP’s corporate governance practice.

That dynamic will cause companies to think very carefully about how they disclose their board’s composition or their diversification efforts, said Elizabeth Bieber, counsel and head of shareholder engagement at Freshfields Bruckhaus Deringer LLP.

A statement that isn’t narrowly tailored and carefully worded can reverberate unfavorably among investors, employees, and other stakeholders, she said.

“It’s going to be difficult for a company to credibly put forward its explanation for not having diverse directors,” Bieber said.

Under Pressure

While Nasdaq itself won’t assess the substance of company statements and diversity data, the exchange’s new rules add to the pressure that investors have already brought on corporate America.

Some asset managers, including BlackRock Inc., Vanguard Group Inc., and State Street Corp., are already pushing companies to disclose board demographics. The California Public Employees’ Retirement System and California State Teachers’ Retirement System pension funds seek companies’ information on board diversity, too.

Proxy advisory firms Institutional Shareholder Services Inc. and Glass, Lewis & Co. also have prioritized board diversity in their voting recommendations to investors.

“I don’t think investors will be happy if a director who didn’t seem like the right fit were added,” said Laura McIntosh, a Wachtell, Lipton, Rosen & Katz consulting attorney, who advises on corporate governance matters. “I also don’t think they’d be happy if it seems like a company weren’t making any effort to find directors who are a good fit.”

The new rules could change companies’ traditional reticence about asking board directors to self-identify their racial or ethnic backgrounds or other characteristics, such as sexual orientation.

The vast majority of directors don’t voluntarily disclose their ethnic or racial background. As of March 31, about 84% of directors at Russell 3000 Index companies—which include many of the same companies that list on the Nasdaq—chose not to self-identify their race, according to data from Equilar, a corporate board data company.

Nasdaq has “left it very open to companies on how they choose to disclose,” said Amy Rojik, head of consulting firm BDO’s Center for Corporate Governance and Financial Reporting.

More or Less

Some companies might provide detailed disclosure on an aggregate or director-by-director basis. Others may opt for a more general statement about a board’s diversity “given the relative sensitivities and complexities around diversity disclosure,” Rojik said.

Whatever disclosures are made will require companies to consider how the information will be viewed by various stakeholders, she said.

Companies that choose terse or brief explanations about their noncompliance with the Nasdaq rules likely won’t be well received, particularly if they’re not performing well, Rojik said.

The effort to gain more diversity disclosures “will fall on deaf ears” if a company’s investors don’t care about board diversity, Pederson Hintz said.

“My bet is that a significant number of investors do care,” she said.

To contact the reporter on this story: Lydia Beyoud in Washington at; Andrew Ramonas in Washington at

To contact the editors responsible for this story: Michael Ferullo at; Roger Yu at