CII backs Nasdaq’s proposal to improve diversity on boards

Companies could be delisted if they fail to meet ‘comply or explain’ requirement

The Council of Institutional Investors (CII) has thrown its weight behind Nasdaq’s proposal that would require companies to disclose board diversity or potentially face delisting.

In a letter filed with the Securities Exchange Commission on 30 December, the non-profit association of US asset owners said it supported Nasdaq’s proposed requirement for listed companies to disclose statistical information on diversity of board members.

It also backed the rule for most listed companies to have, or explain why they do not have, a minimum of two “diverse” directors – including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.

The CII believes the US stock exchange’s proposal will improve transparency and comparability of disclosure across companies, which will help investors make better-informed investment and voting decisions.

The CII said in the letter: “[Our] policy on board diversity reflects the view that corporate governance best practices include the expectation that corporate boards will reflect the diversity of their communities, customers, and employees. And that diverse boards can have a significant positive effect on financial performance.”

The council believes diverse boards can be achieved without quotas, which could result in ‘check-the-box’ diversity.

The comply-or-explain model provides “a transparent framework for listed companies to present their board composition, with the flexibility to explain why the Nasdaq proposed standards cannot be met,” said the CII.

Under the proposal, all Nasdaq-listed companies would have to comply with the disclosure requirements within one year of the SEC approving the listing rule.

All companies listed on Nasdaq would be expected to have one diverse director within two years of the SEC’s approval of the listing rule.

Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market would be expected to have two diverse directors within four years of the SEC’s approval.

Foreign companies and smaller reporting companies would have additional flexibility in satisfying the requirement with two female directors.

Companies that are not in a position to meet the board composition objectives within the timeframes would not be subject to delisting if they publicly explain their reasons.

Doug Chia, president of corporate governance consulting firm Soundboard Governance, has also supported Nasdaq’s proposal and urged the SEC to approve it.

In a letter addressed to the SEC, dated 29 December, he said the proposal is “in the public interest of ensuring efficient and well-functioning capital markets”, as well as protecting investors.

He added: “There is now a widespread and growing consensus among investors and business industry groups on the importance of board diversity. Today, board diversity is no longer just a social issue – it is a governance issue. As such, it is appropriate for Nasdaq to require listed companies to make disclosures related to board diversity.”

Last Updated: 8 January 2021
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