Five Actions To Meet NASDAQ’s Diversity Requirements

On Aug. 6, 2021, the Securities and Exchange Commission (SEC) approved Nasdaq’s Board Diversity Rule, creating a disclosure standard “designed to encourage a minimum board diversity objective for companies and provide stakeholders with consistent, comparable disclosures concerning a company’s current board composition.”

While diversity is an ethical imperative, in recent years it has increasingly been recognized as a business driver for shareholders and other key stakeholders. The key requirement for meeting the new Nasdaq rule is that companies must 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 the company will have to explain why it has failed to do so and disclose this information annually.”

While Nasdaq says the board diversity stipulation is not mandated because it also offers companies an opportunity to explain why it does not meet the diversity objective, it is a new step toward more transparency. By fostering better relationships with shareholders, the customers and employees will also feel better knowing that their companies are actively seeking diversity at the highest levels, which will drive innovation, engagement, and increased retention. To assist in the effort, Nasdaq-listed companies now have access to a variety of free board recruiting services, focused on diverse, board ready candidates. Information about accessing these services can be found in their statement.

What You Can Do

Here are five steps you can take towards increasing your company’s board diversity and  meeting Nasdaq’s diversity requirements:

● Review your board’s selection criteria.

Assess your search process and talent requirements to be as broad and expansive as possible. Don’t limit the talent pool to those who have served on previous boards, or those who have the ability to contribute financially. Shift the value of board members to expertise, counsel, or the ability to bring in diverse perspectives. Leverage the network of the industry and the organization.

Support the shift.

Taking steps to increase board diversity means there will need to be board member attrition or expansion, and both will require thoughtful succession planning. Working with a facilitator to discuss race and institutional bias could help, as all need to understand how the new diverse perspectives are tied to the organization’s mission, so cohesion and progress can happen.

Assess your company’s compliance.

With the increasing trend of diversity requirements, the board’s governance committee should review the bylaws and ensure a clear understanding of the applicable state’s diversity statutes and take steps to be in compliance. For example, California already requires that boards have at least one woman, as well as directors from underrepresented racial, ethnic, or LGBT communities. Other states, including Washington, Illinois, Colorado, and Pennsylvania, have also passed legislation to encourage diverse boards, and more are considering similar requirements. So even companies that are not subject to the Nasdaq rules may have to address board diversity and/or be transparent about their efforts.

Go beyond the numbers.

While current regulations primarily address representation of board members from under-represented backgrounds, it is important to understand that the ultimate goal is to include diverse voices in the boardroom. This is driven by ample evidence that inclusive organizations are more successful in meeting business goals, hence increasing shareholder value and minimizing risk. So it is important for all board members and management to understand their responsibilities in contributing to an inclusive environment in the boardroom, where all voices can be heard.

Prepare for reporting.

Given diversity will be included in SEC filings or on the corporate website, establish appropriate information controls in connection with the recording, aggregation and disclosure of sensitive data.

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