Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related to Board Diversity, 80472-80505 [2020-27091]

Download as PDF 80472 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90574; File No. SR– NASDAQ–2020–081] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related to Board Diversity December 4, 2020. jbell on DSKJLSW7X2PROD with NOTICES2 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 1, 2020, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt listing rules related to board diversity, as described in more detail below: (i) To adopt Rule 5605(f) (Diverse Board Representation), which would require Nasdaq-listed companies, subject to certain exceptions, (A) to have at least one director who self-identifies as a female, and (B) to have at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (C) to explain why the company does not have at least two directors on its board who self-identify in the categories listed above; (ii) to adopt Rule 5606 (Board Diversity Disclosure), which would require Nasdaq-listed companies, subject to certain exceptions, to provide statistical information in a proposed uniform format on the company’s board of directors related to a director’s selfidentified gender, race, and selfidentification as LGBTQ+; and (iii) to update Rule 5615 and IM– 5615–3 (Foreign Private Issuers) and Rule 5810(c) (Types of Deficiencies and Notifications) to incorporate references to proposed Rule 5605(f) and Rule 5606; and (iv) to make certain other nonsubstantive conforming changes. 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 The text of the proposed rule change is available on the Exchange’s website at https://listingcenter.nasdaq.com/ rulebook/nasdaq/rules, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose I. The Diversity Imperative for Corporate Boards Over the past year, the social justice movement has brought heightened attention to the commitment of public companies to diversity and inclusion. Controversies arising from corporate culture and human capital management challenges, as well as technology-driven changes to the business landscape, already underscored the need for enhanced board diversity—diversity in the boardroom is good corporate governance. The benefits to stakeholders of increased diversity are becoming more apparent and include an increased variety of fresh perspectives, improved decision making and oversight, and strengthened internal controls. Nasdaq believes that the heightened focus on corporate board diversity by companies,3 investors,4 corporate 3 See Deloitte and the Society for Corporate Governance, Board Practices Quarterly: Diversity, equity, and inclusion (Sept. 2020), available at: https://www2.deloitte.com/us/en/pages/center-forboard-effectiveness/articles/diversity-equity-andinclusion.html (finding, in a survey of over 200 companies, that ‘‘most companies and/or their boards have taken, or intend to take, actions in response to recent events surrounding racial inequality and inequity; 71% of public companies and 65% of private companies answered this question affirmatively’’). 4 See ISS Governance, 2020 Global Benchmark Policy Survey, Summary of Results 6 (Sept. 24, 2020), available at: https://www.issgovernance.com/ wp-content/uploads/publications/2020-iss-policysurvey-results-report-1.pdf (finding that ‘‘a significant majority of investors (61 percent) indicated that boards should aim to reflect the company’s customer base and the broader societies PO 00000 Frm 00002 Fmt 4701 Sfmt 4703 governance organizations,5 and legislators 6 demonstrates that investor confidence is enhanced when boardrooms are comprised of more than one demographic group. Nasdaq has also observed recent calls from SEC commissioners 7 and investors 8 for in which they operate by including directors drawn from racial and ethnic minority groups’’). 5 See International Corporate Governance Network, ICGN Guidance on Diversity on Boards 5 (2016), available at: https://www.icgn.org/sites/ default/files/ICGN%20Guidance%20on%20 Diversity%20on%20Boards%20-%20Final.pdf (‘‘The ICGN believes that diversity is a core attribute of a well-functioning board which supports greater long-term value for shareholders and companies.’’). 6 See, e.g., John J. Cannon et al., Sherman & Sterling LLP, Washington State Becomes Next to Mandate Gender Diversity on Boards (May 28, 2020), available at: https://www.shearman.com/ perspectives/2020/05/washington-state-becomesnext-to-mandate-gender-diversity-on-boards; Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020) (California legislation requiring companies headquartered in the state to have at least one director who self-identifies as a Female and one from an Underrepresented Community). 7 See Commissioner Allison Herren Lee, Regulation S–K and ESG Disclosures: An Unsustainable Silence (Aug. 26, 2020), available at: https://www.sec.gov/news/public-statement/leeregulation-s-k-2020-08-26#_ftnref15 (‘‘There is evergrowing recognition of the importance of diversity from all types of investors . . . [a]nd large numbers of commenters on this [SEC] rule proposal emphasized the need for specific diversity disclosure requirements.’’); see also Commissioner Caroline Crenshaw, Statement on the ‘‘Modernization’’ of Regulation S–K Items 101, 103, and 105 (August 26, 2020), available at: https:// www.sec.gov/news/public-statement/crenshawstatement-modernization-regulation-s-k (‘‘As Commissioner Lee noted in her statement, the final [SEC] rule is also silent on diversity, an issue that is extremely important to investors and to the national conversation. The failure to grapple with these issues is, quite simply, a failure to modernize.’’); Mary Jo White, Keynote Address, International Corporate Governance Network Annual Conference: Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, NonGAAP, and Sustainability (June 27, 2016), available at: https://www.sec.gov/news/speech/chair-whiteicgn-speech.html (‘‘Companies’ disclosures on board diversity in reporting under our current requirements have generally been vague and have changed little since the rule was adopted . . . Our lens of board diversity disclosure needs to be refocused in order to better serve and inform investors.’’). 8 See Vanguard, Investment Stewardship 2019 Annual Report (2019), available at: https:// about.vanguard.com/investment-stewardship/ perspectives-and-commentary/2019_investment_ stewardship_annual_report.pdf (‘‘We want companies to disclose the diversity makeup of their boards on dimensions such as gender, age, race, ethnicity, and national origin, at least on an aggregate basis.’’); see also State Street Global Advisors, Diversity Strategy, Goals & Disclosure: Our Expectations for Public Companies (Aug. 27, 2020) https://www.ssga.com/us/en/individual/etfs/ insights/diversity-strategy-goals-disclosure-ourexpectations-for-public-companies (announcing expectation that State Street’s portfolio companies (including US companies ‘‘and, to the greatest extent possible, non-US companies’’) provide board level ‘‘[d]iversity characteristics, including racial and ethnic makeup, of the board of directors’’). E:\FR\FM\11DEN2.SGM 11DEN2 jbell on DSKJLSW7X2PROD with NOTICES2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices companies to provide more transparency regarding board diversity. Nasdaq conducted an internal study of the current state of board diversity among Nasdaq-listed companies based on public disclosures, and found that while some companies already have made laudable progress in diversifying their boardrooms, the national market system and the public interest would best be served by an additional regulatory impetus for companies to embrace meaningful and multidimensional diversification of their boards. It also found that current reporting of board diversity data was not provided in a consistent manner or on a sufficiently widespread basis. As such, investors are not able to readily compare board diversity statistics across companies. Accordingly, Nasdaq is proposing to require each of its listed companies, subject to certain exceptions, to: (i) Provide statistical information regarding diversity among the members of the company’s board of directors under proposed Rule 5606; and (ii) have, or explain why it does not have, at least two ‘‘Diverse’’ directors on its board under proposed rule 5605(f)(2). ‘‘Diverse’’ means a director who selfidentifies as: (i) Female, (ii) an Underrepresented Minority, or (iii) LGBTQ+. Each listed company must have, or explain why it does not have, at least one Female director and at least one director who is either an Underrepresented Minority or LGBTQ+. Foreign Issuers (including Foreign Private Issuers) and Smaller Reporting Companies, by contrast, have more flexibility and may satisfy the requirement by having two Female directors. ‘‘Female’’ means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth. ‘‘Underrepresented Minority’’ means, consistent with the categories reported to the Equal Employment Opportunity Commission (‘‘EEOC’’) through the Employer Information Report EEO–1 Form (‘‘EEO–1 Report’’), an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities. ‘‘LGBTQ+’’ means an individual who self-identifies as any of the following: Lesbian, gay, bisexual, transgender or a member of the queer community. Under proposed Rule 5606, Nasdaq proposes to provide each company with one calendar year from the date that the Commission approves this proposal (the ‘‘Approval Date’’) to comply with the VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 requirement for statistical information regarding diversity. Under proposed Rule 5605(f)(2), no later than two calendar years after the Approval Date, each company must have, or explain why it does not have, one Diverse director. Further, each company must have, or explain why it does not have, two Diverse directors no later than: (i) Four calendar years after the Approval Date for companies listed on the Nasdaq Global Select or Global Market tiers; or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market tier. Nasdaq undertook extensive research and analysis and has concluded that the proposal will fulfill the objectives of the Act in that it is designed to remove impediments to and perfect the mechanism of a free and open market and a national market system, to prevent fraudulent and manipulative acts and practices, and to protect investors and the public interest. In addition to conducting its own internal analysis as described above, Nasdaq reviewed a substantial body of thirdparty research and interviewed leaders representing a broad spectrum of market participants and other stakeholders to: • Determine whether empirical evidence demonstrates an association between board diversity, shareholder value, investor protection and board decision-making; • understand investors’ interest in, and impediments to obtaining, information regarding the state of board diversity at public companies; • review the current state of board diversity and disclosure, both among Nasdaq-listed companies and more broadly within the U.S.; • gain a better understanding of the causes of underrepresentation on boards; • obtain the views of leaders representing public companies, investment banks, corporate governance organizations, investors, regulators and civil rights groups on the value of more diverse corporate boards, and on various approaches to encouraging more diversity on corporate boards; and • evaluate the success of approaches taken by exchanges, regulators, and governments in both the U.S. and foreign jurisdictions to remedy underrepresentation on boards. While gender diversity has improved among U.S. company boards in recent years, the pace of change has been gradual, and the U.S. still lags behind other jurisdictions that have imposed requirements related to board diversity. Moreover, progress toward bringing underrepresented racial and ethnic groups into the boardroom has been PO 00000 Frm 00003 Fmt 4701 Sfmt 4703 80473 even slower. Nasdaq is unable to provide definitive estimates regarding the number of listed companies that will be affected by the proposal due to the inconsistent disclosures and definitions of diversity across companies and the extremely limited disclosure of race and ethnicity information—an information gap the proposed rule addresses. Based on the limited information that is available, Nasdaq believes a supermajority of listed companies have made notable strides to improve gender diversity in the boardroom and have at least one woman on the board. Nasdaq also believes that listed companies are diligently working to add directors with other diverse attributes, although consistent with other studies of U.S. companies, Nasdaq believes the pace of progress, in this regard, is happening more gradually. While studies suggest that current candidate selection processes may result in diverse candidates being overlooked, Nasdaq also believes that the lack of reliable and consistent data creates a barrier to measuring and improving diversity in the boardroom. Nasdaq reviewed dozens of empirical studies and found that an extensive body of academic research demonstrates that diverse boards are positively associated with improved corporate governance and financial performance. For example, as discussed in detail below in Section II, Academic Research: The Relationship between Diversity and Shareholder Value, Investor Protection and Decision Making, studies have found that companies with gender-diverse boards or audit committees are associated with: More transparent public disclosures and less information asymmetry; better reporting discipline by management; a lower likelihood of manipulated earnings through earnings management; an increased likelihood of voluntarily disclosing forward-looking information; a lower likelihood of receiving audit qualifications due to errors, noncompliance or omission of information; and a lower likelihood of securities fraud. In addition, studies found that having at least one woman on the board is associated with a lower likelihood of material weaknesses in internal control over financial reporting and a lower likelihood of material financial restatements. Studies also identified positive relationships between board diversity and commonly used financial metrics, including higher returns on invested capital, returns on equity, earnings per share, earnings before interest and taxation margin, asset valuation multiples and credit ratings. E:\FR\FM\11DEN2.SGM 11DEN2 80474 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 Nasdaq believes there are additional compelling reasons to support the diversification of company boards beyond a link to improved corporate governance and financial performance: • Investors are calling in greater numbers for diversification of boardrooms. Vanguard, State Street Advisors, BlackRock, and the NYC Comptroller’s Office include board diversity expectations in their engagement and proxy voting guidelines.9 The heightened investor focus on corporate diversity and inclusion efforts demonstrates that investor confidence is undermined when a company’s boardroom is homogenous and when transparency about such efforts is lacking. Investors frequently lack access to information about corporate board diversity that could be material to their decision making, and they might divest from companies that fail to take into consideration the demographics of their corporate stakeholders when they refresh their boards. Nasdaq explores these investor sentiments in Section III, Current State of Board Diversity and Causes of Underrepresentation on Boards. • Nasdaq believes, consistent with SEC disclosure requirements in other contexts,10 that management’s vision on 9 Vanguard announced in 2020 it would begin asking companies about the race and ethnicity of directors. See Vanguard, Investment Stewardship 2020 Annual Report (2020), available at: https:// about.vanguard.com/investment-stewardship/ perspectives-and-commentary/2020_investment_ stewardship_annual_report.pdf. Starting in 2020, State Street Global Advisors will vote against the entire nominating committee of companies that do not have at least one woman on their boards and have not addressed questions on gender diversity within the last three years. See State Street Global Advisors, Summary of Material Changes to State Street Global Advisors’ 2020 Proxy Voting and Engagement Guidelines (2020), available at: https:// www.ssga.com/library-content/pdfs/global/proxyvoting-and-engagement-guidelines.pdf. Beginning in 2018, BlackRock stated in proxy voting guidelines they ‘‘would normally expect to see at least 2 women directors on every board.’’ See BlackRock Investment Stewardship, Corporate governance and proxy voting guidelines for U.S. securities (Jan. 2020), available at: https:// www.blackrock.com/corporate/literature/fact-sheet/ blk-responsible-investment-guidelines-us.pdf. The NYC Comptroller’s Office in 2019 asked companies to adopt policies to ensure women and people of color are on the initial list for every open board seat. See Scott M. Stringer, Remarks at the Bureau of Asset Management ‘Emerging Managers and MWBE Managers Conference (Oct. 11, 2019), available at: https://comptroller.nyc.gov/wpcontent/uploads/2019/10/10.11.19-SMS-BAMremarks_distro.pdf. 10 See Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, 68 FR 75,056 (Dec. 29, 2003) (‘‘We believe that management’s most important responsibilities include communicating with investors in a clear and straightforward manner. MD&A is a critical component of that communication. The VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 key issues impacting the company should be communicated with investors in a clear and straightforward manner. Indeed, transparency is the bedrock of federal securities laws regarding disclosure, and this sentiment is reflected in the broad-based support for uniform disclosure requirements regarding board diversity that Nasdaq observed during the course of its outreach to the industry. In addition, organizational leaders representing every category of corporate stakeholders Nasdaq spoke with (including business, investor, governance, regulatory and civil rights communities) were overwhelmingly in favor of diversifying boardrooms. Nasdaq summarizes the findings of its stakeholder outreach in Section IV, Stakeholder Perspectives. • Legislators at the federal and state level increasingly are taking action to encourage or mandate corporations to diversify their boards and improve diversity disclosures. Congress currently is considering legislation requiring each SEC-registered company to provide board diversity statistics and disclose whether it has a board diversity policy. To date, eleven states have passed or proposed legislation related to board diversity.11 SEC regulations require companies to disclose whether diversity is considered when identifying director nominees and, if so, how. Nasdaq explores various state and federal initiatives in Section V, U.S. Regulatory Framework and Section VI, Nasdaq Proposal. In considering the merits and shaping the substance of the proposed listing rule, Nasdaq also sought and received valuable input from corporate stakeholders. During those discussions, Nasdaq found consensus across every constituency in the inherent value of board diversity. Business leaders also expressed concern that companies—and particularly smaller companies—would prefer an approach that allows flexibility to comply in a manner that fits their unique circumstances and stakeholders. Nasdaq recognizes that the Commission has long sought through its rules, enforcement actions and interpretive processes to elicit MD&A that not only meets technical disclosure requirements but generally is informative and transparent.’’); see also Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Release No. 33–10890 (Nov. 19, 2020) (citing the 2003 MD&A Interpretative Release and stating that the purpose of the MD&A section is to enable investors to see a company ‘‘through the eyes of management’’). 11 See Michael Hatcher and Weldon Latham, States are Leading the Charge to Corporate Boards: Diversify!, Harv. L. Sch. Forum on Corp. Governance (May 12, 2020), available at: https:// corpgov.law.harvard.edu/2020/05/12/states-areleading-the-charge-to-corporate-boards-diversify/. PO 00000 Frm 00004 Fmt 4701 Sfmt 4703 operations, size, and current board composition of each Nasdaq-listed company are unique, and Nasdaq therefore endeavored to provide a regulatory impetus to enhance board diversity that balances the need for flexibility with each company’s particular circumstances. The Exchange also considered the experience of its parent company, Nasdaq, Inc., as a public company.12 In 2002, Nasdaq, Inc. met the milestone of welcoming its first woman, Mary Jo White, who later served as SEC Chair, to its board of directors. In her own words, ‘‘I was the first and only woman to serve on the board when I started, but, happily, I was joined by another woman during my tenure . . . And then there were two. Not enough, but better than one.’’ 13 In 2019, Nasdaq, Inc. also welcomed its first Black director. As a Charter Pledge Partner of The Board Challenge, Nasdaq supports The Board Challenge’s goal of ‘‘true and full representation on all boards of directors.’’ 14 As a self-regulatory organization, Nasdaq also is cognizant of its role in advancing diversity within the financial industry, as outlined in the Commission’s diversity standards issued pursuant to Section 342 of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Standards’’).15 Authored jointly by the Commission and five other financial regulators, the Standards seek to provide a framework for exchanges and financial services organizations ‘‘to create and strengthen 12 While the Exchange recognizes that it is only one part of an ecosystem in which multiple stakeholders are advocating for board diversity, that part is meaningful: The United Nations Sustainable Stock Exchanges Initiative, of which Nasdaq, Inc., is an official supporter, recognized that ‘‘[s]tock exchanges are uniquely positioned to influence their market in a way few other actors can.’’ See United Nations Sustainable Stock Exchanges Initiative, How Stock Exchanges Can Advance Gender Equality 2 (2017), available at: https:// sseinitiative.org/wp-content/uploads/2019/12/Howstock-exchanges-can-advance-gender-equality.pdf. 13 See Mary Jo White, Completing the Journey: Women as Directors of Public Companies (Sept. 16, 2014), available at: https://www.sec.gov/news/ speech/2014-spch091614-mjw#.VBiLMhaaXDo. 14 See The Board Challenge, https:// theboardchallenge.org/. See also Nasdaq, Inc., Notice of 2020 Annual Meeting of Shareholders and Proxy Statement 52 (Mar. 31, 2020), available at: https://ir.nasdaq.com/static-files/ce5519d4-3a0b48ac-8441-5376ccbad4e5 (Nasdaq, Inc. believes that ‘‘[d]iverse backgrounds lead to diverse perspectives. We are committed to ensuring diverse backgrounds are represented on our board and throughout our organization to further the success of our business and best serve the diverse communities in which we operate.’’). 15 See Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015). E:\FR\FM\11DEN2.SGM 11DEN2 jbell on DSKJLSW7X2PROD with NOTICES2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices [their] diversity policies and practices.’’ Through these voluntary Standards, the Commission and other regulators ‘‘encourage each entity to use the[ ] Standards in a manner appropriate to its unique characteristics.’’ 16 To that end, the proposed rule leverages the Exchange’s unique ability to influence corporate governance in furtherance of the goal of Section 342, which is to address the lack of diversity in the financial services industry.17 Finally, while the Exchange recognizes the importance of maximizing shareholder value, its role as a listing venue is to establish and enforce substantive standards that promote investor protection. As a self-regulatory organization, the Exchange must demonstrate to the Commission that any proposed rule is consistent with Section 6(b) of the Act because, among other things, it is designed to protect investors, promote the public interest, prevent fraudulent and manipulative acts and practices, and remove impediments to the mechanism of a free and open market. The Exchange must also balance promoting capital formation, efficiency, and competition, among other things, alongside enhancing investor confidence. With these objectives in mind, Nasdaq believes that a listing rule designed to enhance transparency related to board diversity will increase consistency and comparability of information across Nasdaq-listed companies, thereby increasing transparency and decreasing information collection costs. Nasdaq further believes that a listing rule designed to encourage listed companies to increase diverse representation on their boards will result in improved corporate governance, thus strengthening the integrity of the market, enhancing capital formation, efficiency, and competition, and building investor confidence. To the extent a company chooses not to meet the diversity objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will provide investors with additional transparency through disclosure explaining the company’s reasons for not doing so. For example, the company may choose to disclose that it does not meet the diversity objectives of Rule 5605(f)(2) because it is subject to an alternative standard under state or foreign laws and has chosen to meet that standard instead, or has a board philosophy regarding diversity that differs from the diversity objectives set forth in Rule 5605(f)(2). Nasdaq believes that such disclosure will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions, thereby promoting capital formation and efficiency. Nasdaq observed that studies suggest that certain groups may be underrepresented on boards because the traditional director nomination process is limited by directors looking within their own social networks for candidates with previous C-suite experience.18 Leaders from across the spectrum of stakeholders with whom Nasdaq spoke reinforced the notion that if companies recruit by skill set and expertise rather than title, they will find there is more than enough diverse talent to satisfy demand. In order to assist companies that strive to meet the diversity objectives of Rule 5605(f)(2), Nasdaq is proposing to provide listed companies that have not yet met its diversity objectives with free access to a network of board-ready diverse candidates and a tool to support board evaluation, benchmarking and refreshment. Nasdaq is contemporaneously submitting a rule filing to the Commission regarding the provision of such services. Nasdaq also plans to publish FAQs on its Listing Center to provide guidance to companies on the application of the proposed rules, and to establish a dedicated mailbox for companies and their counsel to email additional questions to Nasdaq regarding the application of the proposed rule. Nasdaq believes that these services will help to ease the compliance burden on companies whether they choose to meet the listing rule’s diversity objectives or provide an explanation for not doing so. II. Academic Research: The Relationship Between Diversity and Shareholder Value, Investor Protection and Decision Making A company’s board of directors plays a critical role in formulating company strategy; appointing, advising and overseeing management; and protecting investors. Nasdaq has recognized the importance of varied perspectives on boards since 2003, when the Exchange adopted a listing rule intended to enhance investor confidence by requiring listed companies, subject to certain exceptions and cure periods, to have a majority independent board.19 Accompanying the rule are interpretive materials recognizing that independent directors ‘‘play an important role in assuring investor confidence. Through 18 See 16 Id. at 33,023. 17 156 Cong. Rec. H5233–61 (June 30, 2010). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 infra Section III. Nasdaq Stock Market Rulebook, Rules 5605(b), 5615(a), and 5605(b)(1)(A). 19 See PO 00000 Frm 00005 Fmt 4701 Sfmt 4703 80475 the exercise of independent judgment, they act on behalf of investors to maximize shareholder value in the Companies they oversee and guard against conflicts of interest.’’ 20 a. Diversity and Shareholder Value There is a significant body of research suggesting a positive association between diversity and shareholder value.21 In the words of SEC Commissioner Allison Herren Lee: ‘‘to the extent one seeks economic support for diversity and inclusion (instead of requiring economic support for the lack of diversity and exclusion), the evidence is in.’’ 22 The Carlyle Group (2020) found that its portfolio companies with two or more diverse directors had average earnings growth of 12.3% over the previous three years, compared to 0.5% among portfolio companies with no diverse directors, where diverse directors were defined as female, Black, Hispanic or Asian.23 ‘‘After controlling for industry, fund, and vintage year, companies with diverse boards generate earnings growth that’s five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth.’’ 24 Several other studies also found a positive association between diverse boards and company performance. FCLTGlobal (2019) found that ‘‘the most diverse boards (top 20 percent) added 3.3 percentage points to [return on invested capital], as compared to their least diverse peers (bottom 20 percent).’’ 25 McKinsey (2015) found 20 Id., IM–5605–1 (emphasis added). companies recently have expressed the belief that a company must consider the impact of its activities on a broader group of stakeholders beyond shareholders. See Business Roundtable, Statement on the Purpose of a Corporation (Aug. 19, 2019), available at: https://s3.amazonaws.com/ brt.org/BRT-StatementonthePurposeofaCorporation October2020.pdf. Commentators articulated this view as early as 1932. See E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1153 (1932). 22 See Commissioner Allison Herren Lee, Diversity Matters, Disclosure Works, and the SEC Can Do More: Remarks at the Council of Institutional Investors Fall 2020 Conference (September 22, 2020), available at: https:// www.sec.gov/news/speech/lee-cii-2020-conference20200922. 23 See Jason M. Thomas and Megan Starr, The Carlyle Group, Global Insights: From Impact Investing to Investing for Impact 5 (Feb. 24, 2020), available at: https://www.carlyle.com/sites/default/ files2020-02/From%20Impact%20Investing %20to%20Investing%20for%20Impact_022420.pdf (analyzing Carlyle U.S. portfolio company data, February 2020). 24 Id. 25 See FCLTGlobal, The Long-term Habits of a Highly Effective Corporate Board 11 (March 2019), available at: https://www.fcltglobal.org/wp-content/ uploads/long-term-habits-of-highly-effective21 Some E:\FR\FM\11DEN2.SGM Continued 11DEN2 80476 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 that ‘‘companies in the top quartile for racial/ethnic diversity were 35 percent more likely to have financial returns above their national industry median.’’ 26 Carter, Simkins and Simpson (2003) found among Fortune 1000 companies ‘‘statistically significant positive relationships between the presence of women or minorities on the board and firm value.’’ 27 Bernile, Bhagwat and Yonker (2017) found that greater diversity on boards—including gender, ethnicity, educational background, age, financial expertise and board experience—is associated with increased operating performance, higher asset valuation multiples, lower stock return volatility, reduced financial leverage, increased dividend payouts to shareholders, higher investment in R&D and better innovation.28 The authors observed that ‘‘[t]his is in line with the results in Carter, Simkins, and Simpson (2003), which show a positive association between local demographic diversity and firm value.’’ 29 Several studies have found a positive association between gender diversity and financial performance. Credit Suisse (2014) found companies with at least one woman on the board had an average sector-adjusted return on equity (‘‘ROE’’) of 12.2%, compared to 10.1% for companies with no female directors, and average sector-adjusted ROEs of 14.1% and 11.2%, respectively, for the previous nine years.30 MSCI (2016) found that U.S. companies with at least corporate-boards.pdf (analyzing 2017 MSCI ACWI constituents from 2010 to 2017 using Bloomberg data). 26 See Vivian Hunt et al., McKinsey & Company, Diversity Matters (February 2, 2015), available at: https://www.mckinsey.com/∼/media/mckinsey/ business%20functions/organization/ our%20insights/why%20diversity%20matters/ diversity%20matters.pdf (analyzing 366 public companies in the United Kingdom, Canada, the United States, and Latin America in industries for the years 2010 to 2013, using the ethnic and racial categories African ancestry, European ancestry, Near Eastern, East Asian, South Asian, Latino, Native American, and other). 27 See David A. Carter et al., Corporate Governance, Board Diversity, and Firm Value. 38(1) Fin. Rev. 33 (analyzing 638 Fortune 1000 firms in 1997, measuring firm value by Tobin’s Q, with board diversity defined as the percentage of women, African Americans, Asians and Hispanics on the board of directors). 28 See Gennaro Bernile et al., Board Diversity, Firm Risk, and Corporate Policies (March 6, 2017), available at: https://ssrn.com/abstract=2733394 (analyzing 21,572 firm-year observations across non-financial, non-utility firms for the years 1996 to 2014, based on the ExecuComp, RiskMetrics, Compustat and CRSP databases). 29 Id. at 32. 30 See Credit Suisse, The CS Gender 3000: Women in Senior Management 16 (Sept. 2014), available at: https://www.credit-suisse.com/media/assets/ corporate/docs/about-us/research/publications/thecs-gender-3000-women-in-senior-management.pdf (analyzing 3,000 companies across 40 countries from the period from 2005 to 2013). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 three women on the board in 2011 experienced median gains in ROE of 10% and earnings per share (‘‘EPS’’) of 37% over a five year period, whereas companies that had no female directors in 2011 showed median changes of ¥1% in ROE and ¥8% in EPS over the same five-year period.31 Catalyst (2011) found that the ROE of Fortune 500 companies with at least three women on the board (in at least four of five years) was 46% higher than companies with no women on the board, and return on sales and return on invested capital was 84% and 60% higher, respectively.32 Credit Suisse (2016) found an association between LGBTQ+ diversity and stock performance, finding that a basket of 270 companies ‘‘supporting and embracing LGBT employees’’ outperformed the MSCI ACWI index by an average of 3.0% per year over the past 6 years.33 Further, ‘‘[a]gainst a custom basket of companies in North America, Europe and Australia, the LGBT 270 has outperformed by 140 bps annually.’’ 34 Nasdaq acknowledges that this study focused on LGBTQ+ employees as opposed to directors, and that there is a lack of published research on the issue of LGBTQ+ representation on boards. However, Out Leadership (2019) suggests that the relationship between board gender diversity and corporate performance may extend to LGBTQ+ diversity: While the precise reason for the positive correlation between gender diversity and better corporate performance is unknown, many of the reasons that gender diversity is considered beneficial are also applicable to LGBT+ diversity. LGBT+ diversity in the boardroom may create a dynamic that enables better decisionmaking, and it brings to the boardroom the perspective of a 31 See Meggin Thwing Eastman et al., MSCI, The tipping point: Women on boards and financial performance 3 (December 2016), available at: https://www.msci.com/documents/10199/fd1f8228cc07-4789-acee-3f9ed97ee8bb (analyzing of U.S. companies that were constituents of the MSCI World Index for the entire period from July 1, 2011 to June 30, 2016). 32 See Harvey M. Wagner, Catalyst, The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004–2008) (March 1, 2011), available at: https://www.catalyst.org/ research/the-bottom-line-corporate-performanceand-womens-representation-on-boards-2004-2008/ (analyzing gender diversity data from Catalyst’s annual Fortune 500 Census of Women Board Directors report series for the years 2005 to 2009, and corresponding financial data from S&P’s Compustat database for the years 2004 to 2008). 33 See Credit Suisse ESG Research, LGBT: The value of diversity 1 (April 15, 2016), available at: https://research-doc.credit-suisse.com/docView? language=ENG&source=emfromsendlink &format=PDF&document_id=807075590&extdocid= 807075590_1_eng_pdf&serialid=evu4w XNcHexx7kusNLaZQphUkT9naxi1Pvpt ZQvPjr1k%3d. 34 Id. PO 00000 Frm 00006 Fmt 4701 Sfmt 4703 community that is a critical component of the company’s consumer population and organizational talent.35 McKinsey (2020) found ‘‘a positive, statistically significant correlation between company financial outperformance and [board] diversity, on the dimensions of both gender and ethnicity,’’ with companies in the top quartile for board gender diversity ‘‘28 percent more likely than their peers to outperform financially,’’ and a statistically significant correlation between board gender diversity and outperformance on earnings before interest and taxation margin.36 Moody’s (2019) found that greater board gender diversity is associated with higher credit ratings, with women accounting for an average of 28% of board seats at Aaarated companies but less than 5% of board seats at Ca-rated companies.37 While the overwhelming majority of studies on the association between economic performance and board diversity, including gender diversity, present a compelling case that board diversity is positively associated with financial performance, the results of some other studies on gender diversity are mixed. For example, Pletzer et al. (2015) found that board gender diversity alone has a ‘‘small and non-significant’’ relationship with a company’s financial performance.38 Post and Byron (2014) found a ‘‘near zero’’ relationship with a company’s market performance, but a positive relationship with a company’s 35 See Quorum, Out Leadership’s LGBT+ Board Diversity and Disclosure Guidelines 3 (2019), available at: https://outleadership.com/content/ uploads/2019/01/OL-LGBT-Board-DiversityGuidelines.pdf. 36 See McKinsey & Company, Diversity wins: How inclusion matters 13 (May 2020), available at: https://www.mckinsey.com/∼/media/McKinsey/ Featured%20Insights/Diversity%20and %20Inclusion/Diversity%20wins%20How %20inclusion%20matters/Diversity-wins-Howinclusion-matters-vF.pdf (analyzing 1,039 companies across 15 countries for the period from December 2018 to November 2019). 37 See Moody’s Investors Service, Gender diversity is correlated with higher ratings, but mandates pose short-term risk 2 (Sept. 11, 2019), available at: https://www.moodys.com/research/ Moodys-Corporate-board-gender-diversityassociated-with-higher-credit-ratingsPBC_1193768 (analyzing 1,109 publicly traded North American companies rated by Moody’s). 38 See Jan Luca Pletzer et al., Does Gender Matter? Female Representation on Corporate Boards and Firm Financial Performance—A Meta-Analysis 1, PLOS One (June 18, 2015); see also Alice H. Eagly (2016), When Passionate Advocates Meet Research on Diversity, Does the Honest Broker Stand a Chance?, 72 J. Social Issues 199 (2016), available at https://doi.org/10.1111/josi.12163 (concluding that the ‘‘research findings are mixed, and repeated meta-analyses have yielded average correlational findings that are null or extremely small’’ with respect to board gender diversity and company performance). E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 accounting returns.39 Carter, D’Souza, Simkins and Simpson (2010) found that ‘‘[w]hen Tobin’s Q is used as the measure of financial performance, we find no relationship to gender diversity or ethnic minority diversity, neither positive nor negative.’’ 40 A study conducted by Campbell and MinguezVera (2007) ‘‘suggests, at a minimum, that increased gender diversity can be achieved without destroying shareholder value.’’ 41 Adams and Ferreira (2009) found that ‘‘gender diversity has beneficial effects in companies with weak shareholder rights, where additional board monitoring could enhance firm value, but detrimental effects in companies with strong shareholder rights.’’ 42 Carter et al. (2010) 43 and the U.S. Government Accountability Office (‘‘GAO’’) (2015) 44 concluded that the mixed nature of various academic 39 See Corinne Post and Kris Byron, Women on Boards and Firm Financial Performance: A MetaAnalysis 1 (2014). In 2016, the same authors, based on a review of the results for 87 studies, ‘‘found that board gender diversity is weakly but significantly positively correlated with [corporate social responsibility],’’ although they noted that ‘‘a significant correlational relationship does not prove causality.’’ See Corinne Post and Kris Byron, Women on Boards of Directors and Corporate Social Performance: A Meta-Analysis, 24(4) Corp. Governance: An Int’l Rev. 428 (July 2016), available at https://dx.doi.org/10.1111/corg.12165. 40 See David A. Carter et al., The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance, 18(5) Corp. Governance 396, 410 (2010) (analysis of 541 S&P 500 companies for the years 1998–2002). 41 See Kevin Campbell and Antonio MinguezVera, Gender Diversity in the Boardroom and Firm Financial Performance, 83(3) J. Bus. Ethics 13 (Feb. 2008) (analyzing 68 non-financial companies listed on the continuous market in Madrid during the period from January 1995 to December 2000, measuring firm value by an approximation of Tobin’s Q defined as the sum of the market value of stock and the book value of debt divided by the book value of total assets). 42 See Renee B. Adams and Daniel Ferreira, Women in the boardroom and their impact on governance and performance, 94 J. Fin. Econ. 291 (2009) (analyzing 1,939 S&P 500, S&P MidCaps, and S&P SmallCap companies for the period 1996 to 2003, measuring company performance by a proxy for Tobin’s Q (the ratio of market value to book value) and return on assets). 43 See Carter et al., supra note 40, at 400 (observing that the different ‘‘statistical methods, data, and time periods investigated vary greatly so that the results are not easily comparable.’’). 44 See United States Government Accountability Office, Report to the Ranking Member, Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services, House of Representatives, Corporate Boards: Strategies to Address Representation of Women Include Federal Disclosure Requirements 5 (Dec. 2015) (the ‘‘GAO Report’’), available at: https://www.gao.gov/assets/680/674008.pdf (‘‘Some research has found that gender diverse boards may have a positive impact on a company’s financial performance, but other research has not. These mixed results depend, in part, on differences in how financial performance was defined and what methodologies were used’’). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 studies may be due to differences in methodologies, data samples and time periods. While there are studies drawing different conclusions, Nasdaq believes that there is a compelling body of credible research on the association between economic performance and board diversity. At a minimum, Nasdaq believes that the academic studies support the conclusion that board diversity does not have adverse effects on company financial performance. This is not the first time Nasdaq has considered whether, on balance, various studies finding mixed results related to board composition and company performance are a sufficient rationale to propose a listing rule. For example, in 2003, notwithstanding the varying findings of studies at the time regarding the relationship between company performance and board independence,45 Nasdaq adopted listing rules requiring a majority independent board that were ‘‘intended to enhance investor confidence in the companies that list on Nasdaq.’’ 46 In its Approval Order, the SEC stated that ‘‘[t]he Commission has long encouraged exchanges to adopt and strengthen their corporate governance listing standards in order to, among other things, enhance investor confidence in the securities markets.’’ 47 Along the same lines, even without clear consensus among studies related to board diversity and company performance, the heightened focus on corporate board diversity by investors demonstrates that investor confidence is undermined when data on board diversity is not readily available and when companies do not explain the reasons for the apparent absence of diversity on their boards. Therefore, Nasdaq believes that the proposal will enhance investor confidence that all 45 See, e.g., Benjamin E. Hermalin and Michael S. Weisbach, The Effects of Board Composition and Direct Incentives on Firm Performance, 20 Fin. Mgmt. 101, 111 (1991) (finding that ‘‘there appears to be no relation between board composition and performance’’); Sanjai Bhagat and Bernard Black, The Uncertain Relationship Between Board Composition and Firm Performance, 54(3) Bus. Law. 921, 950 (1999) (‘‘At the very least, there is no convincing evidence that increasing board independence, relative to the norms that currently prevail among large American firms, will improve firm performance. And there is some evidence suggesting the opposite—that firms with supermajority-independent boards perform worse than other firms, and that firms with more inside than independent directors perform about as well as firms with majority- (but not supermajority-) independent boards.’’). 46 See Order Approving Proposed Rule Changes, 68 FR 64,154, 64,161 (Nov. 12, 2003) (approving SR–NASD–2002–77, SR–NASD–2002–80, SR– NASD–2002–138, SR–NASD–2002–139, and SR– NASD–2002–141). 47 Id. at 64,176. PO 00000 Frm 00007 Fmt 4701 Sfmt 4703 80477 listed companies are considering diversity in the context of selecting directors, either by including at least two Diverse directors on their boards or by explaining their rationale for not meeting that objective. Further, Nasdaq believes that the proposal is consistent with the Act because it will not negatively impact capital formation, competition or efficiency among its public companies, and will promote investor protection and the public interest.48 b. Diversity and Investor Protection There is substantial evidence that board diversity enhances the quality of a company’s financial reporting, internal controls, public disclosures and management oversight. In reaching this conclusion, Nasdaq evaluated the results of more than a dozen studies spanning more than two decades that found a positive association between gender diversity and important investor protections, and the assertions by some academics that such findings may extend to other forms of diversity, including racial and ethnic diversity. The findings of the studies reviewed by Nasdaq are summarized below. Adams and Ferreira (2009) found that women are ‘‘more likely to sit on’’ the audit committee,49 and a subsequent study by Srinidhi, Gul and Tsui (2011) found that companies with women on the audit committee are associated with ‘‘higher earnings quality’’ and ‘‘better reporting discipline by managers,’’ 50 leading the authors to conclude that ‘‘including female directors on the board and the audit committee are plausible ways of improving the firm’s reporting discipline and increasing 48 See also Lee, supra note 22 (‘‘I could never quite buy in to the view that some 40 percent of the population in our country (if we’re talking about minorities) or over half the country (if we’re talking about women) must rationalize their inclusion in corporate boardrooms and elsewhere in economic terms instead of the reverse. How can one possibly justify—in economic terms—the systematic exclusion of a major portion of our talent base from the corporate pool?’’). 49 See Adams and Ferreira, supra note 42, at 292. 50 See Bin Srinidhi et al., Female Directors and Earnings Quality, 28(5) Contemporary Accounting Research 1610, 1612–16 (Winter 2011) (analyzing 3,132 firm years during the period from 2001 to 2007 based on S&P COMPUSTAT, Corporate Library’s Board Analyst, and IRRC databases; ‘‘choos[ing] the accruals quality as the metric that best reflects the ability of current earnings to reflect future cash flows’’ (noting that it ‘‘best predicts the incidence and magnitude of fraud relative to other commonly used measures of earnings quality’’) and analyzing surprise earnings results that exceeded previous earnings or analyst forecasts, because ‘‘managers of firms whose unmanaged earnings fall marginally below the benchmarks have [an] incentive to manage earnings upwards so as to meet or beat previous earnings’’). E:\FR\FM\11DEN2.SGM 11DEN2 80478 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices investor confidence in financial statements.’’ 51 A study conducted in 2016 by Pucheta-Martı´nez et al. concluded that gender diversity on the audit committee ‘‘improves the quality of financial information.’’ 52 They found that ‘‘the percentage of females on [audit committees] reduces the probability of [audit] qualifications due to errors, noncompliance or the omission of information,’’ 53 and found a positive association between gender diverse audit committees and disclosing audit reports with uncertainties and scope limitations. This suggests that gender diverse audit committees ‘‘ensure that managers do not seek to pressure auditors into issuing a clean opinion instead of a qualified opinion’’ when any uncertainties or scope limitations are identified.54 More recently, a study by Gull in 2018 found that the presence of female audit committee members with business expertise is associated with a lower magnitude of earnings management,55 and a study conducted in 2019 by Bravo and Alcaide-Ruiz found a positive association between women on the audit committee with financial or accounting expertise and the voluntary disclosure of forward-looking information.56 Bravo and Alcaide-Ruiz concluded that ‘‘female [audit committee] members with financial expertise play an important role in influencing disclosure strategies that provide forward-looking information containing projections and financial data useful for investors.’’ 57 51 Id. at 1612. Maria Consuelo Pucheta-Martı´nez et al., Corporate governance, female directors and quality of financial information. 25(4) Bus. Ethics: A European Rev. 363, 378 (2016) (analyzing a sample of non-financial companies listed on the Madrid Stock Exchange during 2004–2011). 53 Id. at 363. 54 Id. at 368. 55 See Ammar Gull et al., Beyond gender diversity: How specific attributes of female directors affect earnings management, 50(3) British Acct. Rev. 255 (Sept. 2017), available at: https://ideas.repec.org/a/ eee/bracre/v50y2018i3p255-274.html (analyzing 394 French companies belonging to the CAC AllShares index listed on Euronext Paris from 2001 to 2010, prior to the implementation of France’s gender mandate law that required women to comprise 20% of a company’s board of directors by 2014 and 40% by 2016). 56 See Francisco Bravo and Maria Dolores Alcaide-Ruiz, The disclosure of financial forwardlooking information, 34(2) Gender in Mgmt. 140, 142–44 (2019) (analyzing companies included in the S&P 100 Index in 2016, ‘‘focus[ing] on the disclosure of financial forward-looking information (which is likely to require financial expertise), such as earnings forecasts, expected revenues, anticipated cash flows or any other financial indicator’’). 57 Id. at 150. jbell on DSKJLSW7X2PROD with NOTICES2 52 See VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 While the above studies demonstrate a positive association between gender diverse audit committees and the quality of a company’s earnings, financial information and public disclosures, other studies found a positive association between board gender diversity and important investor protections regardless of whether or not women are on the audit committee. Abbott, Parker & Persley (2012) found, within a sample of non-Fortune 1000 companies, ‘‘a significant association between the presence of at least one woman on the board and a lower likelihood of [a material financial] restatement.’’ 58 Their findings are consistent with a subsequent study by Wahid (2017), which concluded that ‘‘gender-diverse boards commit fewer financial reporting mistakes and engage in less fraud.’’ 59 Specifically, companies with female directors have ‘‘fewer irregularity-type [financial] restatements, which tend to be indicative of financial manipulation.’’ 60 Wahid suggested that the implications of her study extend beyond gender diversity: If you’re going to introduce perspectives, those perspectives might be coming not just from male versus female. They could be coming from people of different ages, from different racial backgrounds . . . [and] [i]f we just focus on one, we could be essentially taking away from other dimensions of diversity and decreasing perspective.61 Cumming, Leung and Rui (2015) also examined the relationship between gender diversity and fraud, and found 58 See Lawrence J. Abbott et al., Female Board Presence and the Likelihood of Financial Restatement, 26(4) Accounting Horizons 607, 626 (2012) (analyzing a sample of 278 pre-SOX annual financial restatements and 187 pre-SOX quarterly financial restatements of U.S. companies from January 1, 1997 through June 30, 2002 identified by the U.S. General Accounting Office restatement report 03–138 (which only included ‘‘material misstatements of financial results’’), and 75 postSOX annual financial restatements from July 1, 2002, to September 30, 2005 identified by U.S. General Accounting Office restatement report 06– 678 (which only included ‘‘restatements that were being made to correct material misstatements of previously reported financial information’’), consisting almost exclusively of non-Fortune 1000 companies). 59 See Aida Sijamic Wahid, The Effects and the Mechanisms of Board Gender Diversity: Evidence from Financial Manipulation, J. Bus. Ethics (forthcoming) (Dec. 2017) Rotman School of Management Working Paper No. 2930132 at 1, available at: https://ssrn.com/abstract=2930132 (analyzing 6,132 U.S. public companies during the period from 2000 to 2010, for a total of 38,273 firmyear observations). 60 Id. at 23. 61 See Barbara Shecter, Diverse boards tied to fewer financial ‘irregularities,’ Canadian study finds. Financial Post (Feb. 5, 2020), https:// business.financialpost.com/news/fp-street/diverseboards-tied-to-fewer-financial-irregularitiescanadian-study-finds (last accessed Nov. 27, 2020). PO 00000 Frm 00008 Fmt 4701 Sfmt 4703 that the presence of women on boards is associated with a lower likelihood of securities fraud; indeed, they found ‘‘strong evidence of a negative and diminishing effect of women on boards and the probability of being in our fraud sample.’’ 62 The authors suggested that ‘‘other forms of board diversity, including but not limited to gender diversity, may likewise reduce fraud.’’ 63 Chen, Eshleman and Soileau (2016) suggested that the relationship between gender diversity and higher earnings quality observed by Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced weaknesses in internal control over financial reporting, noting that ‘‘prior literature has established a negative relationship between internal control weaknesses and earnings quality.’’ 64 The authors found that having at least one woman on the board (regardless of whether or not she is on the audit committee) ‘‘may lead to [a] reduced likelihood of material weaknesses [in internal control over financial reporting].’’ 65 Board gender diversity also was found to be positively associated with more transparent public disclosures. Gul, Srinidhi & Ng (2011) concluded that ‘‘gender diversity improves stock price informativeness by increasing voluntary public disclosures in large firms and increasing the incentives for private information collection in small firms.’’ 66 Abad et al. (2017) concluded that companies with gender diverse boards are associated with lower levels of information asymmetry, suggesting that increasing board gender diversity is associated with ‘‘reducing the risk of 62 See Douglas J. Cumming et al., Gender Diversity and Securities Fraud, Academy of Management Journal 34 (forthcoming) (Feb. 2, 2015), available at https://ssrn.com/abstract=2562399 (analyzing China Securities Regulatory Commission data from 2001 to 2010, including 742 companies with enforcement actions for fraud, and 742 nonfraudulent companies for a control group). 63 Id. at 33. 64 See Yu Chen et al., Board Gender Diversity and Internal Control Weaknesses, 33 Advances in Acct. 11 (2016) (analyzing a sample of 4267 Érm-year observations during the period from 2004 to 2013, beginning ‘‘the first year internal control weaknesses were required to be disclosed under section 404 of SOX’’). 65 Id. at 18. 66 See Ferdinand A. Gul et al., Does board gender diversity improve the informativeness of stock prices?, 51(3) J. Acct. & Econ. 314 (April 2011) (analyzing 4,084 firm years during the period from 2002 to 2007, excluding companies in the utilities and financial industries, measuring public information disclosure using ‘‘voluntary continuous disclosure of ‘other’ events in 8K reports’’ and measuring stock price informativeness by ‘‘idiosyncratic volatility,’’ or volatility that cannot be explained to systematic factors and can be diversified away). E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices informed trading and enhancing stock liquidity.’’ 67 Other studies have found that diverse boards are better at overseeing management. Adams and Ferreira (2009) found ‘‘direct evidence that more diverse boards are more likely to hold CEOs accountable for poor stock price performance; CEO turnover is more sensitive to stock return performance in firms with relatively more women on boards.’’ 68 Lucas-Perez et al. (2014) found that board gender diversity is positively associated with linking executive compensation plans to company performance,69 which may be an effective mechanism to deter opportunistic behavior by management and align their interests with shareholders.70 A lack of diversity has been found to have the opposite effect. Westphal and Zajac (1995) found that ‘‘increased demographic similarity between CEOs and the board is likely to result in more generous CEO compensation contracts.’’ 71 c. Diversity and Decision Making Wahid (2017) suggests that ‘‘at a minimum, gender diversity on corporate boards has a neutral effect on governance quality, and at best, it has positive consequences for boards’ ability to monitor firm management.’’ 72 Nasdaq reviewed studies suggesting that board diversity can indeed enhance a company’s ability to monitor management by reducing ‘‘groupthink’’ and improving decision making. In 2009, the Commission, in adopting rules requiring proxy disclosure describing whether a company considers diversity in identifying director nominees, recognized the impact of diversity on decision making and corporate governance: jbell on DSKJLSW7X2PROD with NOTICES2 A board may determine, in connection with preparing its disclosure, that it is beneficial to disclose and follow a policy of seeking diversity. Such a policy may encourage boards to conduct broader director searches, evaluating a wider range of candidates and potentially improving board 67 See David Abad et al., Does Gender Diversity on Corporate Boards Reduce Information Asymmetry in Equity Markets? 20(3) BRQ Business Research Quarterly 192, 202 (July 2017) (analyzing 531 company-year observations from 2004 to 2009 of non-financial companies traded on the electronic trading platform of the Spanish Stock Exchange (SIBE)). 68 See Adams and Ferreira, supra note 42, at 292. 69 See Maria Encarnacion Lucas-Perez et al., Women on the Board and Managers’ Pay: Evidence from Spain, 129 J. Bus. Ethics 285 (April 2014). 70 Id. 71 See James D. Westphal and Edward J. Zajac, Who Shall Govern? CEO/Board Power, Demographic Similarity, and New Director Selection, 40(1) Admin. Sci. Q. 60, 77 (March 1995). 72 See Wahid, supra note 59, at 5. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 quality. To the extent that boards branch out from the set of candidates they would ordinarily consider, they may nominate directors who have fewer existing ties to the board or management and are, consequently, more independent. To the extent that a more independent board is desirable at a particular company, the resulting increase in board independence could potentially improve governance. In addition, in some companies a policy of increasing board diversity may also improve the board’s decision making process by encouraging consideration of a broader range of views.73 Nasdaq agrees with the Commission’s suggestion that board diversity improves board quality, governance and decision making. Nasdaq is concerned that boards lacking diversity can inadvertently suffer from ‘‘groupthink,’’ which is ‘‘a dysfunctional mode of group decision making characterized by a reduction in independent critical thinking and a relentless striving for unanimity among members.’’ 74 The catastrophic financial consequences of groupthink became evident in the 2008 global financial crisis, after which the IMF’s Independent Evaluation Office concluded that ‘‘[t]he IMF’s ability to correctly identify the mounting risks [as the crisis developed] was hindered by a high degree of groupthink.’’ 75 Other studies suggest that increased diversity reduces groupthink and leads to robust dialogue and better decision making. Dallas (2002) observed that ‘‘heterogeneous groups share conflicting opinions, knowledge, and perspectives that result in a more thorough consideration of a wide range of interpretations, alternatives, and consequences.’’ 76 Bernile et al. (2017) found that ‘‘diversity in the board of directors reduces stock return volatility, which is consistent with diverse backgrounds working as a governance mechanism, moderating decisions, and alleviating problems associated with 73 See Proxy Disclosure Enhancements, 74 FR 68,334, 68,355 (Dec. 23, 2009). 74 See Daniel P. Forbes and Frances J. Milliken, Cognition and Corporate Governance: Understanding Boards of Directors as Strategic Decision-Making Groups, 24(3) Acad. Mgmt. Rev. 489, 496 (Jul. 1999). 75 See International Monetary Fund, IMF Performance in the Run-Up to the Financial and Economic Crisis (August 2011), available at: https:// www.elibrary.imf.org/view/IMF017/115709781616350789/11570-9781616350789/ ch04.xml?language=en&redirect=true (‘‘The evaluation found that incentives were not well aligned to foster the candid exchange of ideas that is needed for good surveillance—many staff reported concerns about the consequences of expressing views contrary to those of supervisors, [m]anagement, and country authorities.’’). 76 See Lynne L. Dallas, Does Corporate Law Protect the Interests of Shareholders and Other Stakeholders?: The New Managerialism and Diversity on Corporate Boards of Directors, 76 Tul. L. Rev. 1363, 1391 (June 2002). PO 00000 Frm 00009 Fmt 4701 Sfmt 4703 80479 ‘groupthink.’’’ 77 Dhir (2015) concluded that gender diversity may ‘‘promote cognitive diversity and constructive conflict in the boardroom.’’ 78 After interviewing 23 directors about their experience with Norway’s board gender mandate, he observed: First, many respondents contended that gender diversity promotes enhanced dialogue. Interviewees frequently spoke of their belief that heterogeneity has resulted in: (1) Higher quality boardroom discussions; (2) broader discussions that consider a wide range of angles or viewpoints; (3) deeper or more thorough discussions; (4) more frequent and lengthier discussions; (5) better informed discussions; (6) discussions that are more frequently brought inside the boardroom (as opposed to being held in spaces outside the boardroom, either exclusively or in addition to inside the boardroom); or (7) discussions in which items that directors previously took for granted are drawn out and addressed— where the implicit becomes explicit. Second, and intimately related, many interviewees indicated that diversification has led to (or has the potential to lead to) better decision making processes and/or final decisions.79 Investors also have emphasized the importance of diversity in decision making. A group of institutional investors charged with overseeing state investments and the retirement savings of public employees asserted that ‘‘board members who possess a variety of viewpoints may raise different ideas and encourage a full airing of dissenting views. Such a broad pool of talent can be assembled when potential board candidates are not limited by gender, race, or ethnicity.’’ 80 Nasdaq believes that cognitive diversity is particularly important on boards because in their advisory role, especially related to corporate strategy, ‘‘the ‘output’ that boards produce is entirely cognitive in nature.’’ 81 While in 1999, Forbes and Milliken characterized boards as ‘‘large, elite, and episodic decision making groups that face complex tasks pertaining to strategicissue processing,’’ 82 over the past two decades, their role has evolved; boards are now more active, frequent advisors on areas such as cybersecurity, social media, and environmental, social and governance (‘‘ESG’’) issues such as climate change and racial and gender 77 See Bernile et al., supra note 28, at 38. Aaron A. Dhir, Challenging Boardroom Diversity: Corporate Law, Governance, and Diversity 150 (2015) (emphasis removed) (sample included 23 directors of Norwegian corporate boards, representing an aggregate of 95 board appointments at more than 70 corporations). 79 Id. at 124 (emphasis removed). 80 See Petition for Amendment of Proxy Rule (March 31, 2015), available at: https://www.sec.gov/ rules/petitions/2015/petn4-682.pdf. 81 See Forbes and Milliken, supra note 74, at 492. 82 Id. 78 See E:\FR\FM\11DEN2.SGM 11DEN2 80480 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices inequality. Nasdaq believes that boards comprised of directors from diverse backgrounds enhance investor confidence by ensuring that board deliberations include the perspectives of more than one demographic group, leading to more robust dialogue and better decision making. jbell on DSKJLSW7X2PROD with NOTICES2 III. Current State of Board Diversity and Causes of Underrepresentation on Boards While the above studies suggest a positive association between board diversity, company performance, investor protections, and decision making, there is a noticeable lack of diversity among U.S. public companies. Nasdaq is a global organization and operates in many countries around the world that already have implemented diversity-focused directives. In fact, Nasdaq-listed companies in Europe already are subject to diversity requirements.83 This first-hand experience provides Nasdaq with a unique perspective to incorporate global best practices into its proposal to advance diversity on U.S. corporate boards. Given that the U.S. ranks 53rd in board gender diversity, according to the World Economic Forum in its 2020 Global Gender Gap Report, Nasdaq believes advancing board diversity in the U.S. is a critical business and market imperative. This same report also found that ‘‘American women still struggle to enter the very top business positions: only 21.7% of corporate managing board members are women.’’ 84 As of 2019, women directors held 19% of Russell 3000 seats (up from 16% in 2018).85 In comparison, women hold more than 30% of board seats in Norway, France, 83 On Nasdaq’s Nordic and Baltic exchanges, large companies must comply with EU Directive 2014/ 95/EU (the ‘‘EU Directive’’), as implemented by each member state, which requires companies to disclose a board diversity policy with measurable objectives (including gender), or explain why they do not have such a policy. On Nasdaq Vilnius, companies are also required to comply with the Nasdaq Corporate Governance Code for Listed Companies or explain why they do not, which requires companies to consider diversity and seek gender equality on the board. Similarly, on Nasdaq Copenhagen, companies are required to comply with the Danish Corporate Governance Recommendations or explain why they do not, which requires companies to adopt and disclose a diversity policy that considers gender, age and international experience. On Nasdaq Iceland, listed companies must have at least 40% women on their board (a government requirement) and comply with the EU Directive. 84 See World Economic Forum, Global Gender Gap Report 2020 33 (2019), available at: https:// www3.weforum.org/docs/WEF_GGGR_2020.pdf. 85 See Kosmas Papadopoulos, ISS Analytics, U.S. Board Diversity Trends in 2019 4–5 (May 31, 2019), available at: https://www.issgovernance.com/file/ publications/ISS_US-Board-Diversity-Trends2019.pdf. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 Sweden and Finland.86 At the current pace, the U.S. GAO estimates that it could take up to 34 years for U.S. companies to achieve gender parity on their boards.87 Progress toward greater racial and ethnic diversity in U.S. company boardrooms has been even slower. Over the past ten years, the percentage of African American/Black directors at Fortune 500 companies has remained between 7 and 9%, while the percentage of women directors has grown from 16 to 23%.88 In 2019, only 10% of board seats at Russell 3000 companies were held by racial minorities, reflecting an incremental increase from 8% in 2008.89 Among Fortune 500 companies in 2018, there were fewer than 20 directors who publicly self-identified as LGBT+, and only nine companies reported considering sexual orientation and/or gender identity when identifying director nominees.90 Women and minority directors combined accounted for 34% of Fortune 500 board seats in 2018.91 While women of color represent 18% of the U.S. population, they held only 4.6% of Fortune 500 board seats in 2018.92 Male underrepresented minorities held 11.5% of board seats at Fortune 500 companies in 2018, compared to 66% of board seats held by Caucasian/White men. Overall in 2018, 83.9% of board seats among Fortune 500 companies were held by Caucasian/White individuals (who represent 60.1% of the U.S. population), 8.6% by African American/Black individuals (who represent 13% of the U.S. population), 3.8% by Hispanic/ Latino(a) individuals (who represent 19% of the U.S. population) and 3.7% by Asian/Pacific Islander individuals (who represent 6% of the U.S. population).93 In its analysis of Russell 86 See Deloitte, Women in the Boardroom: A global perspective (6th ed. 2019), available at: https://www2.deloitte.com/content/dam/Deloitte/ global/Documents/Risk/gx-risk-women-in-theboardroom-sixth-edition.pdf. 87 See GAO Report, supra note 44. 88 See Russell Reynolds, Ethnic & Gender Diversity on US Public Company Boards 6 (September 8, 2020). 89 See Papadopoulous, supra note 85, at 5. 90 See Out Leadership, supra note 35. 91 See Deloitte, Missing Pieces Report: The 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards 9 (2018), available at: https://www2.deloitte.com/content/dam/Deloitte/us /Documents/center-for-board-effectiveness/us-cbemissing-pieces-report-2018-board-diversitycensus.pdf. 92 See Catalyst, Too Few Women of Color on Boards: Statistics and Solutions (Jan. 31, 2020), https://www.catalyst.org/research/womenminorities-corporate-boards/. 93 See Deloitte, Missing Pieces Report, supra note 91; United States Census Bureau, QuickFacts, available at: https://www.census.gov/quickfacts/ fact/table/US/PST045219. PO 00000 Frm 00010 Fmt 4701 Sfmt 4703 3000 companies, 2020 Women on Boards concluded that ‘‘larger companies do better with their diversity efforts than smaller companies.’’ 94 Based on the limited information that is available, Nasdaq believes a supermajority of listed companies have made notable strides to improve gender diversity in the boardroom and have at least one woman on the board. Nasdaq also believes that listed companies are diligently working to add directors with other diverse attributes, although consistent with other studies of U.S. companies, Nasdaq believes the pace of progress, in this regard, is happening more gradually. Thus, and for the reasons discussed in this Section II.A.1.III, Nasdaq has concluded that a regulatory approach to encouraging greater diversity and data transparency would be beneficial. Nasdaq reviewed academic studies on the causes of underrepresentation on boards and the approaches taken by other jurisdictions to remedy underrepresentation. Those studies suggest that the traditional director candidate selection process may create barriers to considering qualified diverse candidates for board positions. Dhir (2015) explains that ‘‘[t]he presence of unconscious bias in the board appointment process, coupled with closed social networks, generates a complex set of barriers for diverse directors; these are the ‘phantoms’ that prevent entry.’’ 95 In 2011, the Davies Review found that ‘‘informal networks influential in board appointments’’ contribute to the underrepresentation of women in the boardrooms of U.K. listed companies.96 In 2017, the Parker Review acknowledged that ‘‘as is the case with gender, people of colour within the UK have historically not had the same opportunities as many mainstream candidates to develop the skills, networks and senior leadership experience desired in a FTSE Boardroom.’’ 97 In 2020, the United Kingdom Financial Reporting Council commissioned a report to analyze barriers to LGBTQ+ inclusion and promotion in the workplace. Leaders who self-identified as LGBTQ+ expressed concerns about the current 94 See 2020 Women On Boards Gender Diversity Index 4 (2019), available at: https://2020wob.com/ wp-content/uploads/2019/10/2020WOB_Gender_ Diversity_Index_Report_Oct2019.pdf. 95 See Dhir, supra note 78, at 47. 96 See Women on Boards 17 (Feb. 2011), available at: https://ftsewomenleaders.com/wp-content/ uploads/2015/08/women-on-boards-review.pdf. 97 See Sir John Parker, A Report into the Ethnic Diversity of UK Boards 38 (Oct. 12, 2017), available at: https://assets.ey.com/content/dam/ey-sites/eycom/en_uk/news/2020/02/ey-parker-review-2017report-final.pdf. E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices board nomination process, which includes ‘‘relying on personal recommendations without transparent competition or due process [and] informal ‘interviewing’ outside the selection process.’’ 98 These concerns are not unique to the United Kingdom. The U.S. GAO (2015) found that women’s representation on corporate boards may be hindered by directors’ tendencies to ‘‘rely on their personal networks to identify new board candidates.’’ 99 Vell (2017) found that ‘‘92% of board seats [of public U.S. and Canadian technology companies] are filled through networking, and women have less access to these networks.’’ 100 Deloitte and the Society for Corporate Governance (2019) found that this is also common in other industries including media, communications, energy, consumer products, financial services and life sciences.101 They observed that although 94% of companies surveyed were looking to increase diversity among their boards, 77% of those boards looked to referrals from current directors when identifying diverse director candidates, suggesting that ‘‘networking is still key to board succession.’’ 102 Dhir (2015), in a qualitative study of Norwegian directors, observed that ‘‘[b]oard seats tend to be filled by directors engaging their networks, and the resulting appointees tend to be of the same sociodemographic background.’’ 103 Another contributing factor may be the traditional experience sought in director nominees. Rhode & Packel (2014) observed that: jbell on DSKJLSW7X2PROD with NOTICES2 One of the most common reasons for the underrepresentation of women and minorities on corporate boards is their underrepresentation in the traditional pipeline to board service. The primary route to board directorship has long been through experience as a CEO of a public corporation. . . . Given the low 98 See Catriona Hay et al., The Financial Reporting Council, Building more open business 25 (2020), available at: https://www.frc.org.uk/ getattachment/19f3b216-bd45-4d46-af2ff191f5bf4a07/The-Good-Side-x-FinancialReporting-Council-1811-AMENDED.pdf. 99 See GAO Report, supra note 44, at 15. 100 See Vell Executive Search, Women Board Members in Tech Companies: Strategies for Building High Performing Diverse Boards 6 (2017), available at: https://www.vell.com/images/pdf/ VELL%20Report%20Women%20Board%20 Members%20on%20Tech%20Boards %202017%203%2029.pdf. 101 See Deloitte and the Society of Corporate Governance, Board Practices Report: Common threads across boardrooms 5 (2019), available at: https://higherlogicdownload.s3.amazonaws.com/ GOVERNANCEPROFESSIONALS/a8892c7c-62974149-b9fc-378577d0b150/UploadedImages/ 1202241_2018_Board_Practices_Report_FINAL.pdf. 102 Id. at 6. 103 See Dhir, supra note 78, at 52. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 representation of women and minorities in top executive positions, their talents are likely to be underutilized if selection criteria are not broadened.104 Hillman et al. (2002) found that while white male directors of public companies were more likely to have current or former experience as a CEO, senior manager or director, AfricanAmerican and white women directors were more likely to have specialized expertise in law, finance, banking, public relations or marketing, or community influence from positions in politics, academia or clergy.105 Dhir (2015) suggests that ‘‘[c]onsidering persons from other, non-management pools, such as academia, legal and accounting practice, the not-for-profit sector and politics, may help create a broader pool of diverse candidates.’’ 106 Directors surveyed by the U.S. GAO also ‘‘suggested, for example, that boards recruit high performing women in other senior executive level positions, or look for qualified female candidates in academia or the nonprofit and government sectors. . . . [I]f boards were to expand their director searches beyond CEOs more women might be included in the candidate pool.’’ 107 Investors have begun calling for greater transparency surrounding ethnic diversity on company boards, and in the past several months as the U.S. has seen an uprising in the racial justice movement, there has been an increase in the number of African Americans appointed to Russell 3000 corporate boards.108 In a five-month span, 130 directors appointed were African American, in comparison to the 38 African American directors who were appointed in the preceding five months.109 Although tracking the acceleration in board diversity is feasible for some Russell 3000 104 See Deborah Rhode and Amanda K. Packel, Diversity on Corporate Boards: How Much Difference Does Difference Make?, 39(2) Del. J. Corp. L. 377, 402–403 (2014); see also Dhir, supra note 78, at 39 (‘‘[T]here is an apparent preference for either CEOs (whether current or retired) or senior management who have experience at the helm of a particular business stream or unit. . . . The fact that far fewer women than men have been CEOs has a potentially devastating effect on access to the boardroom, which in turn can have an effect on the number of women who rise to the level of CEO and to the executive suite.’’). 105 See Amy J. Hillman et al., Women and Racial Minorities in the Boardroom: How Do Directors Differ?, 28(6) J. Mgmt. 747, 749, 754 (2002). 106 See Dhir, supra note 78, at 42. 107 See GAO Report supra note 44, at 18. 108 See Leslie P. Norton, The Number of Black Board Members Surged After George Floyd’s Death, Barron’s, Oct. 27, 2020, available at: https:// www.barrons.com/articles/after-george-floydsdeath-the-number-of-black-board-members-surges51603809011. 109 Id. PO 00000 Frm 00011 Fmt 4701 Sfmt 4703 80481 companies, many of the companies do not disclose the racial makeup of the board, making it impossible to more broadly assess the impact of recent events on board diversity. IV. Stakeholder Perspectives To gain a better understanding of the current state of board diversity, benefits of diversity, causes of underrepresentation on boards and potential remedies to address underrepresentation, Nasdaq spoke with leaders representing a broad spectrum of market participants and other stakeholders. Nasdaq sought their perspectives to inform its analysis of whether the proposed rule changes would promote the public interest and protection of investors without unduly burdening competition or conflicting with existing securities laws. The group included representatives from the investor, regulatory, investment banking, venture capital and legal communities. Nasdaq also spoke with leaders of civil rights and corporate governance organizations, and organizations representing the interests of private and public companies, including Nasdaq-listed companies. Specifically, Nasdaq obtained their views on: • The current state of board diversity in the U.S.; • the inherent value of board diversity; • increasing pressure from legislators and investors to improve diverse representation on boards and board diversity disclosure; • whether a listing rule related to board diversity is in the public interest; • how to define a ‘‘diverse’’ director; and • the benefits and challenges of various approaches to improving board diversity disclosures and increasing diverse representation on boards, including mandates and disclosurebased models. The discussions revealed strong support for disclosure requirements that would standardize the reporting of board diversity statistics. The majority of organizations also were in agreement that companies would benefit from a regulatory impetus to drive meaningful and systemic change in board diversity, and that a disclosure-based approach would be more palatable to the U.S. business community than a mandate. While many organizations recognized that mandates can accelerate the rate of change, they expressed that a disclosure-based approach is less controversial and would spur companies to take action and achieve the same results. Business leaders also E:\FR\FM\11DEN2.SGM 11DEN2 80482 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices expressed concern that smaller companies would require flexibility and support to comply with any timesensitive requirements to add diverse directors. Some stakeholders highlighted additional challenges that smaller companies, and companies in certain industries, may face finding diverse board members. Leaders from across the spectrum of stakeholders that Nasdaq surveyed reinforced the notion that if companies recruit by skill set and expertise rather than title, then they will find there is more than enough diverse talent to satisfy demand. Leaders from the legal community emphasized that any proposed rule that imposed additional burdens beyond, or is inconsistent with, existing securities laws—by, for example, requiring companies to adopt a diversity policy or include disclosure solely in their proxy statements—would present an additional burden and potentially more legal liability for listed companies. V. U.S. Regulatory Framework jbell on DSKJLSW7X2PROD with NOTICES2 As detailed above, diversity has been the topic of a growing number of studies over the past decade and, in recent years, some investors have been increasingly advocating for greater diversity among directors of public companies.110 Over the past year, the social justice movement has underscored the importance of having diverse perspectives and representation at all levels of decision-making, including on public company boards. In recent years, diversity has become increasingly important to the public, including institutional investors, pension funds and other stakeholders who believe that board diversity enhances board performance and is an important factor in the voting decisions 110 In 2009, when the Commission proposed enhancements to proxy disclosures, including addressing board diversity disclosures, the Commission received over 130 comment letters related to its proposal, including from corporations, pension funds, professional associations, trade unions, accounting firms, law firms, consultants, academics, individual investors and other interested parties. See Proxy Disclosure Enhancements, 74 FR at 68,335; see also David A. Katz and Laura McIntosh, Raising the Stakes for Board Diversity, Law.com (July 22, 2020), available at: https://www.law.com/newyorklawjournal/2020/ 07/22/raising-the-stakes-for-board-diversity/ ?slreturn=20201017021522; Office of the Illinois State Treasurer, The Investment Case For Board Diversity: A Review of the Academic and Practitioner Research on the Value of Gender and Racial/Ethnic Board Diversity for Investors 7 (Oct. 2020), available at: https:// illinoistreasurergovprod.blob.core. usgovcloudapi.net/twocms/media/doc/il%20 treasurer%20white%20paper%20-%20the% 20investment%20case%20for%20 board%20diversity%20(oct%202020).pdf. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 of some investors.111 Legislators increasingly are taking action to encourage corporations to diversify their boards and improve diversity disclosures.112 a. SEC Diversity Disclosure Requirements—Background In 2009, the Commission sought comment on whether to amend Item 407(c)(2)(vi) of Regulation S–K to require disclosure of whether a nominating committee considers diversity when selecting a director for a position on the board.113 The Commission received more than 130 comment letters on its proposal. According to a University of Dayton Law Review analysis of those comment letters, most were submitted by groups with a specific interest in diversity, or by institutional investors, including mutual funds, pension funds, and socially responsible investment funds.114 Further, the analysis showed that 56 commenters addressed the issue of diversity disclosures, and only 5 of those 56 commenters did not favor such disclosure.115 Twenty-seven of the 56 mentioned gender diversity, 18 mentioned racial diversity, and 13 mentioned ethnic diversity. However, neither the proposed rule nor the final rule defined diversity.116 Ten years after its adoption of board diversity disclosure rules, the Commission revisited the rules by establishing new Compliance and Disclosure Interpretations (‘‘C&DI’’). 111 See Comments on Proposed Rule: Proxy Disclosure and Solicitation Enhancements, available at: https://www.sec.gov/comments/s7-1309/s71309.shtml. See also CGLytics, Diversity on the Board? Metrics Used by Fortune 100 Companies (June 29, 2020), available at: https:// www.cglytics.com/diversity-on-the-board-metricsof-fortune-100-companies/; Office of the Illinois State Treasurer, supra note 110. 112 For example, California requires companies headquartered in the state to have at least one director who self-identifies as a Female and one director from an Underrepresented Community. See Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020). Washington requires companies headquartered in the state to have at least 25% women on the board by 2022 or provide certain disclosures. See Wash. Subst. S.B. 6037 (June 11, 2020). At least eleven states have proposed diversity-related requirements. See Hatcher and Latham, supra note 11. 113 See Proxy Disclosure and Solicitation Enhancements, 74 FR 35,076, 35,084 (July 17, 2009) (proposed rule). 114 See Thomas Lee Hazen and Lissa Lamkin Broome, Board Diversity and Proxy Disclosure, 37:1 Univ. Dayton L. Review 41, 51, n. 82 (citing the comment letters). 115 In the five comments that opposed diversity disclosure, three stated that diversity was an important value. See Comments on Proposed Rule, supra note 111; see also Hazen and Broome, supra note 114, at 54 n.88 (citing the 56 comment letters). 116 See Hazen and Broome, supra note 114, at 53 n. 84–86. PO 00000 Frm 00012 Fmt 4701 Sfmt 4703 However, the Commission did not provide a definition of diversity, and therefore issuers currently are not required to disclose the race, ethnicity or gender of their directors or nominees. Currently, Item 401(e)(1) of Regulation S–K requires a company to ‘‘briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director.’’ 117 The C&DI clarifies that if a board considered a director’s self-identified diversity characteristics (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) during the nomination process, and the individual consents to disclose those diverse characteristics, the Commission ‘‘would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered.’’ 118 Rather than providing a specific definition of diversity, the C&DI provides a non-exhaustive list of examples of diverse characteristics that a company could consider for purposes of Item 401(e)(1), including ‘‘race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background.’’ 119 Additionally, the Commission stated that any description of a company’s diversity policy would be expected to include ‘‘a discussion of how the company considers the selfidentified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socioeconomic or demographic characteristics.’’ 120 Item 407(c)(2)(vi) of Regulation S–K requires proxy disclosure regarding whether diversity is considered when identifying director nominees and, if so, how. In addition, if the board or nominations committee has adopted a diversity policy, the company must describe how the policy is implemented and its effectiveness is assessed.121 When adopting Item 407(c)(2)(vi), the Commission explained: We recognize that companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to 117 See 17 CFR 229.401(e)(1). Securities and Exchange Commission, Regulation S–K Compliance & Disclosure Interpretations (Sept. 21, 2020), available at: https:// www.sec.gov/divisions/corpfin/guidance/regskinterp.htm. 119 Id. 120 Id. 121 See 17 CFR 229.407(c)(2)(vi). 118 See E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin. We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate. As a result we have not defined diversity in the amendments.122 Moreover, Item 407(c)(2)(vi) does not require companies to adopt a formal policy and does not require them to explain why they have not. It also does not require public disclosure of boardlevel diversity statistics. jbell on DSKJLSW7X2PROD with NOTICES2 b. Complaints Surrounding Current Diversity Disclosure Requirements Given the broad latitude afforded to companies by the Commission’s rules related to board diversity and proxy disclosure, current reporting of boardlevel diversity statistics has been significantly unreliable and unusable to investors. This has been due to myriad data collection challenges, including the scarcity of reported information, the lack of uniformity in the information that is disclosed and inconsistencies in the definitions of diversity characteristics across companies.123 The heightened national discourse around diversity and mounting grievances from investors surrounding transparency on board diversity prompted Nasdaq to examine the state of board diversity among its listed companies. While conducting that research, Nasdaq identified a number of key challenges, such as: (1) Inconsistent disclosure and definitions of diversity across companies; (2) limited data on diverse characteristics outside of gender; (3) inconsistent or no disclosure of a director’s race, ethnicity, or other diversity attributes (e.g., nationality); (4) difficult-to-extract data because statistics are often embedded in graphics; and (5) aggregation of information, making it difficult to separate gender from other categories of diversity. Investors and data analysts have raised similar criticisms. As the Illinois Treasurer observed, the paucity of data on race and ethnicity creates barriers to investment analysis, due diligence and academic study.124 For example, the scarcity of such data 122 See Proxy Disclosure Enhancements, 74 FR at 68,344. 123 See Petition for Rulemaking (July 6, 2017), available at: https://www.sec.gov/rules/petitions/ 2017/petn4-711.pdf. 124 See Press Release, Illinois State Treasurer Frerichs Calls on Russell 3000 Companies to Disclose Diversity Data (Oct. 28, 2020), available at https://illinoistreasurer govprod.blob.core.usgovcloudapi.net/twocms/ media/doc/october2020_russell3000.pdf. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 is an impediment to academics who want to study the performance impact of racially diverse boards.125 Nasdaq is concerned that investors also face the many data collection challenges Nasdaq encountered, rendering current diversity disclosures unreliable, unusable, and insufficient to inform investment and voting decisions. Commissioner Allison Herren Lee expressed similar concerns, stating that the current SEC disclosure requirements have ‘‘led to spotty information that is not standardized, not consistent period to period, not comparable across companies, and not necessarily reliable. . . . And the current state of disclosure reveals the shortcomings of a principles-based materiality regime in this area.’’ 126 Some stakeholders believe there is a correlation between companies that disclose the gender, racial and ethnic composition of their board and the number of diverse directors on those companies’ boards.127 Currently, the lack of reliable and consistent data makes it difficult to measure diversity in the boardroom, and a common set of standards for diversity definitions and disclosure format is greatly needed. At present, U.S. companies must navigate a complex patchwork of federal and state regulations and disclosure requirements. The limited disclosure currently provided voluntarily, which is primarily focused on gender (due in part to that data being the most readily available), fails to provide the full scope of a board’s diverse characteristics.128 It is difficult to improve what one cannot accurately measure. This lack of transparency is impacting investors who are increasingly basing public advocacy, proxy voting and direct shareholdercompany engagement decisions on board diversity considerations.129 125 See Office of Illinois State Treasurer, supra note 110, at 3–4. 126 See Lee, supra note 22. 127 See Proxy Disclosure Enhancements, 74 FR at 68,355 (‘‘Although the[se] amendments are not intended to steer behavior, diversity policy disclosure may also induce beneficial changes in board composition. A board may determine, in connection with preparing its disclosure, that it is beneficial to disclose and follow a policy of seeking diversity.’’); see also Office of Illinois State Treasurer, supra note 110, at 3. 128 See, e.g., CGLytics, supra note 111, at https:// www.cglytics.com/diversity-on-the-board-metricsof-fortune-100-companies/; Petition for Amendment of Proxy Rule, supra note 80; Office of Illinois State Treasurer, supra note 110. 129 See Office of the Illinois State Treasurer, Russell 3000 Board Diversity Disclosure Initiative, https://www.illinoistreasurer.gov/Financial_ Institutions/Equity,_Diversity__Inclusion/Russell_ 3000_Board_Diversity_Disclosure_Initiative (last accessed Nov. 25, 2020). PO 00000 Frm 00013 Fmt 4701 Sfmt 4703 80483 c. Support for Updating Diversity Disclosure Requirements Nasdaq’s surveys of investors and reviews of their disclosed policies and actions show that board diversity is a priority when assessing companies, and investors report, in some cases, relying on intuition when there is a lack of empirical, evidenced-based data. Furthermore, the continued growth of ESG investing raises the importance of quality data, given the data-driven nature of investment products such as diversity-specific indices and broader ESG funds. Investors have a unique platform from which to engage and influence a company’s position on important topics like diversity. Similarly, Nasdaq, like other self-regulatory organizations, is uniquely positioned to establish practices that will assist in carrying out Nasdaq’s mandate to protect investors and remove impediments from the market. Various stakeholders, including Nasdaq, believe that clear and concise annual disclosure of board diversity information that disaggregates the data by race, ethnicity, gender identity and sexual orientation will provide the public, including key stakeholders, with a better sense of a company’s approach to improving corporate diversity and the support needed to effectuate any changes. Required disclosures also would eliminate the number of shareholder proposals asking for these key metrics and the need for companies to respond to multiple investor requests for information.130 Moreover, companies manage issues more closely and demonstrate greater progress when data is available.131 In 2015, nine large public pension funds who collectively supervised $1.12 trillion in assets at the time petitioned the Commission to require registrants to disclose information related to, among other things, the gender, racial, and ethnic diversity of the registrant’s board nominees.132 In 2017, Human Capital Management Coalition, which described itself as a group of institutional investors with $2.8 trillion in assets at the time, made a similar petition to the Commission.133 More recently, in October 2020, the Illinois Treasurer spearheaded an initiative along with twenty other investor organizations, asking for all companies in the Russell 130 See Petition for Rulemaking, supra note 123, at 2. 131 See, e.g., Gwen Le Berre, Parametric, Investors Need Data to Make Diversity a Reality (Aug. 24, 2020), https://www.parametricportfolio.com/blog/ investors-need-data-to-make-diversity-a-reality. 132 See Petition for Amendment of Proxy Rule, supra note 80. 133 See Petition for Rulemaking, supra note 123. E:\FR\FM\11DEN2.SGM 11DEN2 80484 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices 3000 Index to disclose the composition of their board, including each board member’s gender, race and ethnicity.134 The largest proxy advisory firms have aligned their voting policies to encourage increased board diversity disclosure. Institutional Shareholder Services (‘‘ISS’’), recently adopted a new voting policy under which it will identify boards of companies in the Russell 3000 or S&P 1500 that ‘‘lack racial and ethnic diversity (or lack disclosure of such)’’ in 2021 and, beginning in 2022, will recommend voting against the chair of the nominating committee of such companies. The stated goal of the policy is ‘‘helping investors identify companies with which they may wish to engage and to foster dialogue between investors and companies on this topic.’’ 135 In 2017, proxy advisory firm Glass Lewis announced a policy regarding board gender diversity that took effect in 2019. Glass Lewis generally recommends voting against the nominating committee chair of a board that has no female members, and when making such a recommendation, the firm closely examines the company’s disclosure of its board diversity considerations and other relevant contextual factors.136 On November 24, 2020, Glass Lewis announced the publication of its 2021 Proxy Voting Policy Guidelines, which expand its board gender diversity policy to vote against nominating chairs if there are fewer than two female directors, beginning in 2022.137 Most notably, beginning with the 2021 proxy season, the company will include an assessment report of company proxy disclosures relating to board diversity, skills and the director nomination process for companies in the S&P 500 index. According to Glass Lewis, it ‘‘will reflect how a company’s proxy statement presents: (i) The board’s current percentage of racial/ethnic diversity; (ii) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; 134 See Press Release, supra note 124. ISS Governance, ISS Announces 2021 Benchmark Policy Updates (November 12, 2020), available at: https://www.issgovernance.com/issannounces-2021-benchmark-policy-updates/. 136 See Glass Lewis, 2019 Policy Guideline Updates (Oct. 24, 2018), available at: https:// www.glasslewis.com/2019-policy-guidelineupdates-united-states-canada-shareholderinitiatives-israel/. 137 See Glass Lewis, 2021 Proxy Paper Guidelines: An Overview of the Glass Lewis Approach to Proxy Advice—United States (2020), available at: https:// www.glasslewis.com/wp-content/uploads/2020/11/ US-Voting-GuidelinesGL.pdf?hsCtaTracking=7c712e31-24fb-4a3a-b3969e8568fa0685%7C86255695-f1f4-47cb-8dc0e919a9a5cf5b. jbell on DSKJLSW7X2PROD with NOTICES2 135 See VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 (iii) whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (aka ‘Rooney Rule’); and (iv) board skills disclosure.’’ 138 Congress and members of the Commission also have weighed in on the importance of improving board transparency. In 2017, Representative Carolyn Maloney introduced the ‘‘Gender Diversity in Corporate Leadership Act of 2017,’’ which proposed requiring public companies to provide proxy disclosure regarding the gender diversity of the board of directors and nominees.139 In November 2019, the U.S. House of Representatives, with bipartisan support, passed the ‘‘Corporate Governance Through Diversity Act of 2019,’’ which requires certain registrants annually to disclose the racial, ethnic, and gender composition of their boards and executive officers, as well as the veteran status of any of those directors and officers, in their proxy statements.140 The bill also requires the disclosure of any policy, plan or strategy to promote racial, ethnic, and gender diversity among these groups. Legislators have proposed a companion bill in the U.S. Senate.141 The Council of Institutional Investors (‘‘CII’’), U.S. Chamber of Commerce,142 National Urban League, Office of New York State Comptroller and the National Association for the Advancement of Colored People praised the House of Representatives’ for passing the 2019 legislation. According to the U.S. Chamber of Commerce’s members and associations, it has become increasingly important to see improvements in board diversity.143 Additionally, CII’s General Counsel stated that the proxy statement disclosure requirement in the legislation ‘‘could contribute to enhancing U.S. public company board consideration of diversity.’’ 144 138 Id. 139 Gender Diversity in Corporate Leadership Act of 2017, H.R. 1611, 115th Cong. (2017). 140 Improving Corporate Governance Through Diversity Act of 2019, H.R. 5084, 116th Cong. (2019). 141 Improving Corporate Governance Through Diversity Act of 2019, S. 360, 116th Cong. (2019). 142 See Letter from Various U.S. Chamber of Commerce Associations and Members to Chairman Mike Crapo and Ranking Member Sherrod Brown, U.S. House Committee on Banking, Housing, and Urban Affairs (July 27, 2020), available at: https:// www.uschamber.com/sites/default/files/200727_ coalition_h.r._5084_senatesmallbusiness.pdf. 143 Id. 144 See Joe Mont, SEC, Congress seek better diversity disclosures, Compliance Week (Feb. 20, 2019), https://www.complianceweek.com/seccongress-seek-better-diversity-disclosures/ 24802.article. PO 00000 Frm 00014 Fmt 4701 Sfmt 4703 More recently, SEC Commissioners have called for greater transparency surrounding ethnic diversity on company boards. In a September 2020 speech titled ‘‘Diversity Matters, Disclosure Works, and the SEC Can Do More’’ given at the CII Fall Conference, Commissioner Lee advocated advancing corporate diversity and for various approaches by which the Commission could promote diversity, including among other things, strengthening the C&DI’s guidance related to disclosure of board candidate diversity characteristics.145 Commissioner Lee stated: [The SEC has] largely declined to require diversity-related disclosure. In 2009, we adopted a requirement for companies to disclose if and how diversity is considered as a factor in the process for considering candidates for board positions, including any policies related to the consideration of diversity. In 2018, we issued guidance encouraging the disclosure of self-identified characteristics of board candidates. While I appreciate these measures, given that women of color hold just 4.6% of Fortune 500 board seats and less than one percent of Fortune 500 CEOs are Black, it’s time to consider how to get investors the diversity information they need to allocate their capital wisely.146 VI. Nasdaq Proposal a. Overview of Disclosure Requirements Disclosure of information material to an investor’s voting and investment decision is the bedrock of federal securities laws. The Exchange’s listing rules require companies to comply with federal securities laws, including the registration requirements under the Securities Act of 1933. Once listed, companies are obligated to solicit proxies and file all annual and periodic reports with the Commission under the Act at the prescribed times.147 In discharging its obligation to protect investors, Nasdaq monitors listed companies for compliance with those disclosure obligations, and the failure to do so results in a notice of deficiency or delisting. Nasdaq believes it is well within the Exchange’s delegated regulatory authority to propose listing rules designed to enhance transparency so long as they do not conflict with existing federal securities laws. For example, Nasdaq requires listed companies to publicly disclose compensation or other payments by third parties to a company’s directors or 145 See Lee, supra note 22. Commissioner Crenshaw also expressed disappointment with the Commission’s silence on diversity. See Crenshaw, supra note 7. 147 See Nasdaq Stock Market Rulebook, Rules 5250(c) and (d). 146 Id. E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices nominees, notwithstanding that such disclosure is not required by federal securities laws. In approving that proposed rule, the Commission noted: jbell on DSKJLSW7X2PROD with NOTICES2 To the extent there are certain factual scenarios that would require disclosure not otherwise required under Commission rules, we believe that it is within the purview of a national securities exchange to impose heightened governance requirements, consistent with the Act, that are designed to improve transparency and accountability into corporate decision making and promote investor confidence in the integrity of the securities markets.148 Nasdaq is concerned that while investors have increasingly emphasized that they consider board diversity information to be material, the current lack of transparency and consistency makes it difficult for Nasdaq and investors to determine the state of diversity among listed companies as well as each board’s philosophy regarding diversity. Investors also have voiced dissatisfaction about having to independently collect board-level data about race, ethnicity and gender identity because such investigations can be time consuming, expensive, and fraught with inaccuracies.149 Moreover, in some instances, based on Nasdaq’s own investigation, such information is either unavailable, or, if available, not comparable across companies. To the extent investors must obtain this information on their own through an imperfect process, Nasdaq is concerned that it increases information asymmetries between larger stakeholders, who are able to collect this data directly from companies, and smaller investors, who must rely on incomplete public disclosures. For all investors who take on the burden of independently obtaining the current information, there is a cost and time burden related to the data collection. Nasdaq believes that additional disclosure regarding a board’s composition and philosophy related to board diversity will improve transparency and accountability into corporate decision making. Nasdaq proposes to improve transparency regarding board diversity by requiring all listed companies to publicly disclose unbundled, consistent data utilizing a uniform, transparent framework on their website or in their proxy statement under Rule 5606. Similarly, Nasdaq proposes to promote accountability in corporate decision-making by requiring companies who do not have at least two 148 See Order Granting Accelerated Approval of a Proposed Rule Change, 81 FR 44,400, 44,403 (July 7, 2016). 149 See Petition for Amendment of Proxy Rule, supra note 80, at 2. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 Diverse directors on their board to provide investors with a public explanation of the board’s reasons for not doing so under Rule 5605(f)(3). Nasdaq designed the proposal to avoid a conflict with existing disclosure requirements under Regulation S–K and to mitigate additional burdens for companies by providing them with flexibility to provide such disclosure on their website or in their proxy statement, and not requiring them to adopt a formal diversity policy. Nasdaq proposes to foster consistency in board diversity data disclosure by defining ‘‘Diverse’’ under Rule 5605(f)(1) as ‘‘an individual who selfidentifies in one or more of the following categories: Female, Underrepresented Minority or LGBTQ+,’’ and by adopting the following definitions under Rule 5605(f)(1): • ‘‘Female’’ means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth. • ‘‘LGBTQ+’’ means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community. • ‘‘Underrepresented Minority’’ means an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities. The terms in the proposed definition of ‘‘Underrepresented Minority’’ reflect the EEOC’s categories and are construed in accordance with the EEOC’s definitions.150 The terms in the proposed definition of LGBTQ+ are similar to the identities defined in California’s A.B. 979, described below, but have been expanded to include the queer community based on Nasdaq’s consultation with stakeholders, including human rights organizations.151 In constructing its proposed definition of ‘‘Diverse,’’ Nasdaq considered various state and federal legislation, stakeholder sentiments and academic studies. For example, 150 While the EEO–1 report refers to ‘‘Hispanic or Latino’’ rather than Latinx, Nasdaq proposes to use the term Latinx to apply broadly to all gendered and gender-neutral forms that may be used by individuals of Latin American heritage, including individuals who self-identify as Latino/a/e. 151 Further, Nasdaq agrees with the United Kingdom Financial Reporting Council that the acronym LGBTQ+ ‘‘does not attempt to exclude other groups, nor does it imply that the experiences of people under its umbrella are the same.’’ See Hay et al., supra note 98, at 14. PO 00000 Frm 00015 Fmt 4701 Sfmt 4703 80485 California requires public companies headquartered in the state to have at least one individual who self-identifies as a female on the board by 2019 under S.B. 826 152 and at least one director who is a member of an ‘‘underrepresented community’’ by 2021 under A.B. 979.153 S.B. 826 defines ‘‘Female’’ as ‘‘an individual who selfidentifies her gender as a woman, without regard to the individual’s designated sex at birth,’’ consistent with legislation proposed by New Jersey, Michigan and Hawaii related to board gender diversity.154 A.B. 979 considers directors from underrepresented communities to be individuals who selfidentify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or as gay, lesbian, bisexual or transgender. Since S.B. 826 was passed, 669 women have joined public company boards in the state and the number of public companies with all male boards has declined from 30% in 2018 to 3% in 2020.155 The state of Washington requires public companies whose boards are not comprised of at least 25% directors who self-identify as women by January 1, 2022 to provide public disclosures related to the board’s consideration of ‘‘diverse groups’’ during the director nomination process. The state considers ‘‘diverse groups’’ to include ‘‘women, racial minorities, and historically underrepresented groups.’’ 156 As discussed above, Congress has proposed legislation relating to disclosure of racial, ethnic, gender and veteran status among the company’s directors. Section 342 of the Dodd-Frank Act defines ‘‘minority’’ as ‘‘Black American, Native American, Hispanic American, and Asian American,’’ 157 and the Diversity Assessment Report for Entities Regulated by the SEC requires the Exchange to report workforce composition data to the SEC based on 152 See Cal. S.B. 826, supra note 112. Cal. A.B. 979, supra note 112. 154 See Cal. S.B. 826, supra note 112. See also N.J. Senate No. 3469, § 3(b)(2) (2019); Mich. S.B. 115, § 505a(2)(b) (2019); Haw. H.B. 2720, § 414–1(b)(2) (2020). 155 See California Partners Project, Claim Your Seat: A Progress Report on Women’s Representation on California Corporate Boards 4 (2020), available at: https://www.calpartnersproject.org/ claimyourseat. 156 See Wash. Subst. S.B. 6037, supra note 112. At least 11 states have proposed diversity-related requirements. See Hatcher and Latham, supra note 11. 157 See 12 U.S.C. 5452(g)(3) and Public Law 101– 73 § 1204(c)(3). 153 See E:\FR\FM\11DEN2.SGM 11DEN2 80486 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices the EEOC’s categories.158 Most companies are required by law to provide similar workforce data to the EEOC through the EEO–1 Report, which requires employers to report statistical data related to race, ethnicity and gender to the EEOC.159 Nasdaq has designed the proposed rule to require all companies to provide consistent, comparable data under Rule 5606 by utilizing the existing EEO–1 reporting categories that companies are already familiar with, and by requiring companies to have, or publicly explain why they do not have, at least two directors who are diverse in terms of race, ethnicity, sexual orientation or gender identity under Rule 5605(f)(2). While the EEO–1 report does not currently include sexual orientation or gender identity, Nasdaq believes it is reasonable and in the public interest to include a reporting category for LGBTQ+ status in recognition of the U.S. Supreme Court’s recent decision in Bostock v. Clayton County that sexual orientation and gender identity are ‘‘inextricably’’ intertwined with sex.160 The proposal does not preclude companies from considering additional diverse attributes, such as nationality, disability, or veteran status in selecting board members; however, the company would still have to provide the required disclosure under Rule 5605(f)(3) if the company does not also have at least two directors who are otherwise considered Diverse under Rule 5605(f)(1). Nor would the proposal prevent companies from disclosing information related to other diverse attributes of board members beyond those highlighted in the rule if they felt such disclosure jbell on DSKJLSW7X2PROD with NOTICES2 158 See Securities and Exchange Commission, Diversity Assessment Report for Entities Regulated by the SEC, available at: https://www.sec.gov/files/ OMWI-DAR-FORM.pdf. 159 All companies with 100 or more employees are required to complete the EEO–1 Report. See U.S. Equal Employment Opportunity Commission, EEO–1: Who Must File, https://www.eeoc.gov/ employers/eeo-1-survey/eeo-1-who-must-file (last accessed Nov. 27, 2020). 160 See Bostock v. Clayton Cty., 140 S. Ct. 1731, 1742 (2020) (‘‘But unlike any of these other traits or actions, homosexuality and transgender status are inextricably bound up with sex. Not because homosexuality or transgender status are related to sex in some vague sense or because discrimination on these bases has some disparate impact on one sex or another, but because to discriminate on these grounds requires an employer to intentionally treat individual employees differently because of their sex.’’). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 would benefit investors. Nasdaq believes such disclosure would provide investors with additional information about the company’s philosophy regarding broader diversity characteristics. Overall, Nasdaq believes the proposal will enhance investor confidence that all listed companies are considering diversity of race, ethnicity, sexual orientation and gender identity in the context of selecting directors. Investors will be confident that board discussions at listed companies with at least two Diverse directors include the perspectives of more than one demographic group. They will also be confident that boardrooms without at least two Diverse directors are having a thoughtful discussion about their reasons for not doing so and publicly explaining those reasons. On balance, the proposal will advance the public interest and enhance investor confidence in the integrity of the securities markets by ensuring investors that Nasdaq is monitoring all listed companies to verify that they have at least two Diverse directors or explain why they do not, and by requiring all listed companies to provide consistent, comparable diversity disclosures. b. Board Statistical Disclosure Given the increased interest in, and advocacy for, improvements in board transparency related to diversity disclosure information, the Exchange is proposing to adopt new Rule 5606(a), which would require each company to publicly disclose, to the extent permitted by applicable law, information on each director’s voluntary self-identified gender and racial characteristics and LGBTQ+ status. All Nasdaq-listed companies that are subject to proposed Rule 5605(f), whether they choose to meet the diversity objectives of proposed Rule 5605(f)(2) or to explain why they do not, would be required to make the proposed Rule 5606 disclosure. This proposed rule also will assist the Exchange in assessing whether companies meet the diversity objectives of proposed Rule 5605(f). Under Rule 5606(e), Nasdaq proposes to make proposed Rule 5606 operative for listed companies one year after the SEC Approval Date of this proposal. PO 00000 Frm 00016 Fmt 4701 Sfmt 4703 Pursuant to proposed Rule 5606(a), each company would be instructed to annually provide its board-level diversity data in a format substantially similar to the Board Diversity Matrix in proposed Rule 5606(a) and attached [sic] as Exhibit 3. The company would be required to provide the total number of directors on its board. If a director voluntarily self-identifies, each company, other than a Foreign Issuer (as defined under Rule 5605(f)(1)), would include the following in a table titled ‘‘Board Diversity Matrix,’’ in accordance with the instructions accompanying the proposed disclosure format: (1) the number of directors based on gender identity (male, female or non-binary 161); (2) the number of directors based on race and ethnicity (African American or Black, Alaskan Native or American Indian, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two or More Races or Ethnicities); and (3) the number of directors who self-identify as LGBTQ+. Any director who chooses not to disclose a gender would be included under ‘‘Gender Undisclosed’’ and any director who chooses not to identify as any race or not to identify as LGBTQ+ would be included in the ‘‘Undisclosed’’ category at the bottom of the table. The defined terms for the race and ethnicity categories in the instructions to the Board Diversity Matrix disclosure format are substantially similar to the terms and definitions used in the EEO–1 Report.162 LGTBQ+ is defined similarly to proposed Rule 5605(f)(1) as a person who identifies as any of the following: lesbian, gay, bisexual, transgender or a member of the queer community. Below is an example of a Board Diversity Matrix that companies may use, which is also attached [sic] as Exhibit 3: 161 Although non-binary is included as a category in the proposed Board Diversity Matrix, a company would not satisfy the diversity requirement proposed by Rule 5605(f)(2) if a director selfidentifies solely as non-binary. 162 See supra note 159. Additionally, the EEOC does not categorize LGBTQ+ or any other sexual orientation identifier on its EEO–1 Report. The definitions of the EEO–1 race and ethnicity categories may be found in the appendix to the EEO–1 Report instructional booklet, available at https://www.eeoc.gov/employers/eeo-1-survey/eeo1-instruction-booklet. E:\FR\FM\11DEN2.SGM 11DEN2 80487 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices BOARD DIVERSITY MATRIX [As of [DATE]] Board Size: Total Number of Directors ........................................................................ Gender: Number of directors based on gender identity ......................................... Number of directors who identify in any of the categories below: African American or Black ........................................................................ Alaskan Native or American Indian .......................................................... Asian ......................................................................................................... Hispanic or Latinx ..................................................................................... Native Hawaiian or Pacific Islander .......................................................... White ......................................................................................................... Two or More Races or Ethnicities ............................................................ Male Female Non-Binary # # # Gender undisclosed # # # # # # # # # # # # # # # # # # # # # # # # # # # # # LGBTQ+ .................................................................................................... # Undisclosed ..................................................................................................... # Nasdaq recognizes that some Foreign Issuers, including Foreign Private Issuers as defined by the Act,163 may have their principal executive offices located outside of the United States and in jurisdictions that may impose laws limiting or prohibiting selfidentification questionnaires, particularly as they relate to race, ethnicity or LGBTQ+ status. In such countries, a Foreign Issuer may be precluded by law from requesting diversity data from its directors. Moreover, Nasdaq’s definition of Underrepresented Minority proposed in Rule 5606(f)(1) may be inapplicable to a Foreign Issuer, making this Board Matrix data less relevant for such companies and not useful for investors. As a result of these limitations, Nasdaq is proposing the option of a separate Board Diversity Matrix for Foreign Issuers. Similar to other companies, a Foreign Issuer would be required to provide the total number of directors on its board. If a director voluntarily self-identifies, the company would include the following in a table titled ‘‘Board Diversity Matrix’’: (1) The number of directors based on gender identity (male, female or non-binary 164); (2) the number of directors who are considered underrepresented in the company’s home country jurisdiction;165 and (3) the number of directors who self-identify as LGBTQ+. 163 See 17 CFR 240.3b–4. non-binary is included as a category in the proposed Board Diversity Matrix, a company would not satisfy any aspect of the diversity requirement proposed by Rule 5605(f)(2) if a director self-identifies solely as non-binary. 165 To clarify, although a Foreign Issuer may disclose directors that meet the requirement of Underrepresented Minority pursuant to new Rule 5605(f)(1), such disclosure may not meet the diversity objectives of new Rule 5605(f)(2)(B)(ii). 164 Although jbell on DSKJLSW7X2PROD with NOTICES2 # VerDate Sep<11>2014 02:00 Dec 11, 2020 Jkt 253001 An ‘‘Underrepresented Individual in Home Country Jurisdiction’’ is defined in the instructions to the Board Diversity Matrix as a person who selfidentifies as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in a Foreign Issuer’s home country jurisdiction. Rule 5605(f)(2)(B)(i) also proposes the same definition for Diverse directors of Foreign Issuers. Nasdaq is also proposing new Rule 5606(b), which would require each company to provide the disclosure required under Rule 5606(a) in either the company’s proxy statement or information statement for its annual meeting for shareholders, or on the company’s website. If the company elects to disclose the information on its website, the company must also submit such disclosure along with a URL link to the information through the Nasdaq Listing Center within 15 calendar days of the company’s annual shareholder meeting. The proposed time period to submit the information to the Nasdaq Listing Center is aligned with the time period provided in proposed Rule 5605(f)(3) for a company to submit its explanation for why it does not have at least two Diverse directors. Disclosure of the statistical data is not in lieu of any SEC requirements for a company to disclose any required information pursuant to Regulation S–K or any other federal, state or foreign laws or regulations. As described in the instructions to the Board Diversity Matrix and Rule 5606(a), each year following the first year that a company publishes its annual Board Diversity Matrix, the company would be required to publish its data for the current and immediately prior years. PO 00000 Frm 00017 Fmt 4701 Sfmt 4703 Additionally, Nasdaq is proposing Rule 5606(c), which exempts the following types of companies from proposed Rule 5606(a): acquisition companies listed under IM–5101–2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series. The exemption of these companies is consistent with the approach taken by Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate governance standards for board composition. Nasdaq is also proposing Rule 5606(d) to allow for a company newly listing on Nasdaq, including a company listing in connection with a business combination under IM–5101–2, to satisfy the requirement of Rule 5606 within one year of listing on Nasdaq. The disclosure required by proposed Rule 5606(d) would be required to be included in the company’s annual proxy statement or information statement for its annual meeting of shareholders or on the company’s website. If the company provides such disclosure on its website, the company must also submit the disclosure and a URL link to the disclosure through the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholder meeting. When a company does not timely provide the required disclosure, Nasdaq will notify the company that it is not in compliance with a listing requirement E:\FR\FM\11DEN2.SGM 11DEN2 80488 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices and allow the company to provide a plan to regain compliance. Consistent with deficiencies from most other rules that allow a company to submit a plan to regain compliance,166 Nasdaq proposes to allow companies deficient under proposed Rule 5606 45 calendar days to submit a plan in accordance with Rule 5810(c)(2) to regain compliance and, based on that plan, Nasdaq can provide the company with up to 180 days to regain compliance. If the company does not do so, it would be issued a Staff Delisting Determination, which the company could appeal to a Hearings Panel pursuant to Rule 5815. Although proposed Rule 5606 is not identical to the current Commission requirements, it is similar to, and does not deviate from, the Commission’s CD&I related to Items 401(e)(1) and 407(c)(2)(vi) of Regulation S–K. Moreover, the proposed rule strengthens the Commission’s requirements by providing clarity to the definition of diversity and streamlining investors’ desire for clear, complete and consistent disclosures. Nasdaq believes that the format of the Board Diversity Matrix and the information that it will provide offers greater transparency into a company’s board composition and will enable the data to be easily aggregated across issuers.167 Nasdaq also believes that requiring annual disclosure of the data will ensure that the information remains current and easy for investors, data analysts and other parties to track. jbell on DSKJLSW7X2PROD with NOTICES2 c. Diverse Board Representation or Explanation Nasdaq is proposing to adopt new Rule 5605(f)(2) to require each listed company to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one who selfidentifies as Female and one who selfidentifies as an Underrepresented 166 Pursuant to Nasdaq Rule 5810(c)(2)(A)(iii), a company is provided 45 days to submit a plan to regain compliance with Rules 5620(a) (Meetings of Shareholders), 5620(c) (Quorum), 5630 (Review of Related Party Transactions), 5635 (Shareholder Approval), 5250(c)(3) (Auditor Registration), 5255(a) (Direct Registration Program), 5610 (Code of Conduct), 5615(a)(4)(D) (Partner Meetings of Limited Partnerships), 5615(a)(4)(E) (Quorum of Limited Partnerships), 5615(a)(4)(G) (Related Party Transactions of Limited Partnerships), and 5640 (Voting Rights). Pursuant to Nasdaq Rule 5810(c)(2)(A)(iv), a company is also provided 45 days to submit a plan to regain compliance with Rule 5250(b)(3)(Disclosure of Third Party Director and Nominee Compensation). A company is generally provided 60 days to submit a plan to regain compliance with the requirement to timely file periodic reports contained in Rule 5250(c)(1). 167 Various stakeholders have requested easier aggregation. See Petition for Amendment of Proxy Rule, supra note 80, at 1. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 Minority or LGBTQ+.168 A company does not need to provide additional public disclosures if the company discloses under Rule 5606 that it has at least two Diverse directors satisfying this requirement. The terms in the proposed definition of ‘‘Underrepresented Minority’’ reflect the EEOC’s categories and are construed in accordance with the EEOC’s definitions. Nasdaq has provided additional flexibility for Smaller Reporting Companies and Foreign Issuers (including Foreign Private Issuers). Under proposed Rule 5605(f)(3), if a company satisfies the requirements of Rule 5605(f)(2) by explaining why it does not have two Diverse directors, the company must: (i) Specify the requirements of Rule 5605(f)(2) that are applicable (e.g., the applicable subparagraph, the applicable diversity objectives, and the timeframe applicable to the company’s market tier); and (ii) explain the reasons why it does not have two Diverse directors. Such disclosure must be provided: (i) In the company’s proxy statement or information statement for its annual meeting of shareholders; or (ii) on the company’s website. If the company provides such disclosure on its website, the company must also notify Nasdaq of the location where the information is available by submitting the URL link through the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholder meeting. Nasdaq would not assess the substance of the company’s explanation, but would verify that the company has provided one. If the company has not provided any explanation, or has provided an explanation that does not satisfy subparagraphs (i) and (ii) of Rule 5605(f)(3), the explanation will not satisfy the requirements of Rule 5605(f)(3). For example, it would not satisfy Rule 5605(f)(3) merely to state that ‘‘the Company does not comply with Nasdaq’s diversity rule.’’ As described above, the company must specify the requirements of Rule 5605(f)(2) that are applicable and explain the reasons why it does not have two Diverse directors. For example, a company could disclose the following to satisfy subparagraph (i) of Rule 5605(f)(3): ‘‘As a Smaller Reporting Company listed on the Nasdaq Capital Market tier, the Company is subject to Nasdaq Rule 5605(f)(2)(C), which requires the company to have, or explain why it does not have, at least 168 Nasdaq plans to publish an FAQ on the Listing Center clarifying that ‘‘two members of its board of directors who are Diverse’’ would exclude emeritus directors, retired directors and members of an advisory board. PO 00000 Frm 00018 Fmt 4701 Sfmt 4703 two Diverse directors, including at least one director who self-identifies as Female. Under Rule 5605(f)(7), the Company is required to have at least one Diverse director by March 10, 2023, and a second Diverse director by March 10, 2026. The Company has chosen to satisfy Rule 5605(f)(2)(C) by explaining its reasons for not meeting the diversity objectives of Rule 5605(f)(2)(C), which the Company has set forth below.’’ i. Effective Dates and Phase-in Period Proposed Rule 5605(f)(7) provides a transition period before companies must fully satisfy the requirement to have two Diverse directors or explain why they do not upon the initial implementation of the rule. Under this transition rule, each company must have, or explain why it does not have, one Diverse director no later than two calendar years after SEC approval of the proposed rule (the ‘‘Approval Date’’), and two Diverse directors no later than (i) four calendar years after the Approval Date for companies listed on the Nasdaq Global Select (‘‘NGS’’) or Global Market (‘‘NGM’’) tiers, or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market (‘‘NCM’’) tier. For example, if the Approval Date is March 10, 2021, all companies would be required to have, or explain why they do not have, one Diverse director by March 10, 2023 and two Diverse directors by March 10, 2025 (for NGS/NGM companies) or March 10, 2026 (for NCM companies). Under proposed Rule 5605(f)(5)(A), a newly listed company that was not previously subject to a substantially similar requirement of another national securities exchange will be allowed one year from the date of listing to satisfy the requirement described above. This ‘‘phase-in’’ period applies to companies listing in connection with an initial public offering, a direct listing, a transfer from another exchange or the over-the-counter market, or through a business combination with an acquisition company listed under IM– 5101–2, such that the company is no longer subject to IM–5101–2 after the combination. This phase-in period will apply after the end of the transition period provided in Rule 5605(f)(7). As a result, companies listing after the expiration of the phase-in periods provided by Rule 5605(f)(7) would be provided with one year from the date of listing to satisfy the applicable requirement of Rule 5605(f)(2) to have, or explain why they do not have, at least two Diverse directors. Companies listing after the Approval Date, but prior to the expiration of the phase-in periods provided by Rule 5605(f)(7), would be E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices provided with the latter of the periods set forth in Rule5605(f)(7) or one year from the date of listing. Nasdaq believes this proposed period is consistent with the phase-in periods granted to companies for Nasdaq’s other board composition requirements. For example, Rule 5615(b)(1) provides a company listing in connection with its initial public offering one year to fully comply with the compensation and nomination committee requirements of Rules 5605(d) and (e), and with the majority independent board requirement of Rule 5605(b). Similarly, SEC Rule 10A–3(b)(1)(iv)(A) allows a company up to one year from the date its registration statement is effective to fully comply with the applicable audit committee composition requirements. Nasdaq Rule 5615(b)(3) provides a oneyear timeframe for compliance with the board composition requirements for companies transferring from other listed markets that do not have a substantially similar requirement. jbell on DSKJLSW7X2PROD with NOTICES2 ii. Foreign Issuers Nasdaq recognizes that the EEOC categories of race and ethnicity may not extend to all countries globally because each country has its own unique demographic composition. However, Nasdaq observed that on average, women tend to be underrepresented in boardrooms across the globe, holding an estimated 16.9% of board seats in 2018.169 As an official supporter of the United Nations Sustainable Stock Exchanges Initiative, Nasdaq recognizes that ensuring women have equal opportunities for leadership in economic decision making is one of the United Nations Sustainable Development Goals to be accomplished by 2030.170 However, studies estimate that at current rates, it could take 18 171 to 34 years 172 for U.S. companies to achieve gender parity on their boards. Accordingly, under proposed Rule 5605(f)(2)(B), each Foreign Issuer must have, or explain why it does not have, at least two Diverse directors on its board, including at least one Female. Nasdaq proposes to provide Foreign Issuers with additional flexibility in that 169 See Deloitte, Women in the Boardroom, supra note 86. 170 See United Nations Sustainable Stock Exchanges Initiative, Gender Equality, https:// www.un.org/sustainabledevelopment/genderequality/ (last accessed Nov. 24, 2020). 171 See McKinsey & Company, supra note 36, at 17. 172 See GAO Report, supra note 44, at 9 (estimating ‘‘it could take about 10 years from 2014 for women to comprise 30 percent of board directors and more than 40 years for the representation of women on boards to match that of men’’). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 Foreign Issuers may satisfy the diversity requirement by having two Female directors. In addition, Foreign Issuers may also satisfy the diversity requirement by having one Female director, and an individual who self identifies as (i) LGBTQ+ or (ii) an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction. Alternatively, a company could satisfy Rule 5605(f)(2)(B) by publicly explaining the company’s reasons for not meeting the diversity objectives of the rule. Nasdaq proposes to define a Foreign Issuer under Rule 5605(f)(1) as (a) a Foreign Private Issuer (as defined in Rule 5005(a)(19)) or (b) a company that: (i) Is considered a ‘‘foreign issuer’’ under Rule 3b–4(b) under the Act; 173 and (ii) has its principal executive offices located outside of the United States. This definition will include all Foreign Private Issuers (as defined in Rule 5005(a)(19)),174 and any foreign issuers that are not foreign private issuers so long as they are also headquartered outside of the United States. This is designed to recognize that companies that are not Foreign Private Issuers but are headquartered outside of the United States are foreign companies notwithstanding the fact that they file domestic SEC reports. It is also designed to exclude companies that are domiciled in a foreign jurisdiction without having a physical presence in that country. Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be a Foreign Issuer one year from the date that the company no longer qualifies as a Foreign Issuer to satisfy the requirements of Rule 5605(f). Nasdaq also proposes to revise Rule 5615 and IM–5615–3, which currently permit a Foreign Private Issuer to follow home country practices in lieu of the requirements set forth in the Rule 5600 Series, subject to several exclusions. Nasdaq proposes to revise Rule 5615 and IM–5615–3 to add Rules 5605(f) and 5606 to the list of excluded corporate governance rules. As a result, Foreign Private Issuers must satisfy the requirements of Rule 5605(f) and 5606 and may not follow home country practices in lieu of such requirements. However, Foreign Private Issuers that elect to follow an alternative diversity 173 See 17 CFR 240.3b–4(b) (‘‘The term foreign issuer means any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.’’). 174 Under Nasdaq Rule 5005(a)(19), the term Foreign Private Issuer has ‘‘the same meaning as under Rule 3b–4 under the Act.’’ PO 00000 Frm 00019 Fmt 4701 Sfmt 4703 80489 objective in accordance with home country practices, or are located in jurisdictions that restrict the collection of personal data, may satisfy the requirements of Rule 5605(f) by explaining their reasons for doing so instead of meeting the diversity objectives of the rule. iii. Smaller Reporting Companies Nasdaq also recognizes that smaller companies, especially pre-revenue companies that depend on the capital markets to fund ground-breaking research and technological advancements, may not have the resources necessary to compensate an additional director or engage a search firm to search outside of directors’ networks. In recognition of the resource constraints faced by smaller companies, Nasdaq proposes to provide each Smaller Reporting Company with additional flexibility. Specifically, these companies could satisfy the two Diverse directors objective under Rule 5605(f)(2)(C) by having two Female directors. Like other companies, Smaller Reporting Companies could also satisfy the two Diverse directors by having one Female director and one director who self-identifies as either (i) an Underrepresented Minority, or (ii) a member of the LGBTQ+ community. Alternatively, a company could satisfy Rule 5605(f)(2)(C) by publicly explaining the company’s reasons for not meeting the diversity objectives of the rule. Under Rule 5605(f)(1), Nasdaq proposes to define a Smaller Reporting Company as set forth in Rule 12b–2 under the Act.175 Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be a Smaller Reporting Company one year from the date that the company no longer qualifies as a Smaller Reporting Company to satisfy the requirements of Rule 5605(f). iv. Cure Period Nasdaq proposes to adopt Rule 5605(f)(6) and a new Rule 5810(c)(3)(F) to specify what happens if a company does not have at least two Diverse directors as set forth under Rule 5605(f)(2) and fails to provide the disclosure required by Rule 175 Under 12b–2 of the Act, a Smaller Reporting Company ‘‘means an issuer that is not an investment company, an asset-backed issuer (as defined in § 229.1101 of this chapter), or a majorityowned subsidiary of a parent that is not a smaller reporting company and that: (1) Had a public float of less than $250 million; or (2) Had annual revenues of less than $100 million and either: (i) No public float; or (ii) A public float of less than $700 million.’’ See 17 CFR 240.12b–2. E:\FR\FM\11DEN2.SGM 11DEN2 80490 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices 5605(f)(3).176 Under those provisions, the Listing Qualifications Department will promptly notify the company that it has until the latter of its next annual shareholders meeting, or 180 days from the event that caused the deficiency, to cure the deficiency. The company can cure the deficiency either by nominating additional directors so that it satisfies the Diversity requirement of Rule 5605(f)(2) or by providing the disclosure required by Rule 5605(f)(3). If a company does not regain compliance within the applicable cure period, the Listings Qualifications Department would issue a Staff Delisting Determination Letter. A company that receives a Staff Delisting Determination can appeal the determination to the Hearings Panel through the process set forth in Rule 5815. Nasdaq also proposes revising Rule 5810(c)(2)(A)(iv) to make a non-substantive change clarifying that Rule 5250(b)(3) is related to ‘‘Disclosure of Third Party Director and Nominee Compensation.’’ jbell on DSKJLSW7X2PROD with NOTICES2 v. Exempt Companies Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the following types of companies from the requirements of Rule 5605(f) (‘‘Exempt Companies’’): acquisition companies listed under IM–5101–2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series. Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be an Exempt Company one year from the date that the company no longer qualifies as an Exempt Company to satisfy the requirements of Rule 5605(f). Nasdaq believes it is appropriate to exempt these types of companies from the proposed rule because such companies do not have boards, do not list equity securities, or are not operating companies. These companies are already exempt from certain of Nasdaq’s corporate governance standards related to board composition, as described in Rule 5615. d. Alternatives Considered Nasdaq considered whether requiring listed companies to have, or explain 176 Nasdaq proposes that existing Rules 5810(c)(3)(F) and (G) be renumbered as Rules 5810(c)(3)(G) and (H) respectively. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 why they do not have, two Diverse directors would better promote the public interest than an alternative threshold or approach. Nasdaq’s reasoned decision-making process included considering: (i) Mandate and disclosure-based approaches; (ii) higher and lower diversity objectives; (iii) longer and shorter timeframes; and (iv) broader and narrower definitions of ‘‘Diverse.’’ i. Mandate vs. Disclosure Based Approach Globally, gender mandates range from requiring at least one woman on the board,177 requiring two or more women based on board size,178 or requiring 30 to 50% women on the board.179 Some 177 For example, the Securities and Exchange Board of India requires public companies to have at least one woman on the board. See Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, Regulation 17(1)(a) (2015), available at: https:// www.sebi.gov.in/legal/regulations/jan-2020/ securities-and-exchange-board-of-india-listingobligations-and-disclosure-requirementsregulations-2015-last-amended-on-january-10-2020_37269.html. Similarly, the Israeli Companies Law requires public companies to have at least one woman on the board. See Paul Hastings, Breaking the Glass Ceiling: Women in the Boardroom 139 (2018), available at: https://www.paulhastings.com/ genderparity/. In the United States, California’s S.B. 826 requires public companies headquartered in California to have at least one woman on the board. See Cal. S.B. 826, supra note 112, at § 301.3(b)(3). 178 For example, California’s S.B. 826 requires public companies headquartered in California to have at least two women on the board if their board is comprised of five directors, and at least three women on the board if their board is comprised of six or more directors. See Cal. S.B. 826, supra note 112, at § 301.3(b)(1) and (2). Similar legislation has been proposed in New Jersey, Michigan and Hawaii. See N.J. Senate No. 3469, § 3(b)(2) (2019); Mich. S.B. 115, § 505a(2)(b) (2019); Haw. H.B. 2720, § 414–1(b)(2) (2020). 179 For example, Norway imposes a gender quota ranging from 33%–50% depending on board size. See Paul Hastings, supra note 177, at 103. Portugal requires listed companies to have at least 33.3% women on boards by 2020. See Deloitte, Women in the Boardroom, supra note 86, at 143. Germany requires public companies with co-determined boards (at least 50% employee representation) to have at least 30% women, and all other listed companies to establish a company-defined target. See Ulrike Binder and Guido Zeppenfeld, Mayer Brown, Germany Introduces Rules on Female Quota for Supervisory Boards and Leadership Positions (March 13, 2015), available at https:// www.mayerbrown.com/en/perspectives-events/ publications/2015/03/germany-introduces-rules-onfemale-quota-for-super. Belgium requires listed companies to have at least 33% women on the board. See Deloitte, Women in the Boardroom, supra note 86, at 85. Austria requires listed companies with more than 1,000 employees to have at least 30% women on the board. See id. at 81. Iceland requires public companies with more than 50 employees to have at least 40% women on the board. See Act respecting Public Limited Companies No. 2/199, Article 63, available at: https://www.government.is/publications/ legislation/lex/2018/02/06/TRANSLATION-OFRECENT-AMENDMENTS-OF-ICELANDIC-PUBLICAND-PRIVATE-LIMITED-COMPANIES- PO 00000 Frm 00020 Fmt 4701 Sfmt 4703 mandates vary by board size—for example, Norway imposes different standards for boards of two to three directors, four to five directors, six to eight directors, nine directors and ten or more directors.180 California imposes a higher standard for gender diversity that boards with five directors or six or more directors must satisfy by the end of 2021 under S.B. 826, and a higher standard for underrepresented communities that boards with five to eight directors and nine or more directors must satisfy by the end of 2022 under A.B. 979. Nasdaq did not observe a common denominator among the mandates applicable to varying board sizes. However, Nasdaq considered criticism that a model based on various board sizes could subject companies to a higher threshold by virtue of adding directors.181 Based on Nasdaq data, the average board size of its listed companies is eight directors. Soft targets ranging from 25% to 40% women on boards have been suggested by various corporate governance codes and corporate governance organizations. For example, Rule 4.1 of the Swedish Corporate Governance Code (the ‘‘Code’’) provides that listed companies are to ‘‘strive for gender balance on the board.’’ 182 Each company’s nominations committee is to publish a statement on its website at the time it issues notice of its shareholders meeting ‘‘with regard to the requirement in rule 4.1, that the proposed composition of the board is appropriate according to the criteria set out in the Code and that the company is to strive for gender balance.’’ 183 Companies are not LEGISLATION-2008-2010-including-Acts-13-2010sex-ratios-and-68-2010-minority-protectionremuneration/. France and Italy both require public companies to have at least 40% women on their boards. See Paul Hastings, supra note 177, at 91; White & Case, Italy increases gender quotas in corporate boards of listed companies (Jan. 29, 2020), available at: https://www.whitecase.com/ publications/alert/italy-increases-gender-quotascorporate-boards-listed-companies). 180 See Paul Hastings, supra note 177, at 103. 181 See David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, Gender Diversity and Board Quotas, New York Law Journal (July 25, 2018), available at: https://www.wlrk.com/webdocs/ wlrknew/AttorneyPubs/WLRK.26150.18.pdf (‘‘California legislators dispute that the bill requires men to be displaced by women, noting that boards can simply increase their size. This may be easier said than done, however: Because the required quota increases with board size, a company with a four-man board that did not wish to force out a current director would need to add three women to accommodate the requirements of the law by 2021.’’). 182 See Swedish Corporate Governance Board, The Swedish Corporate Governance Code § 4.1 17 (eff. Jan. 1, 2020), available at: https:// www.bolagsstyrning.se/UserFiles/Koden/The_ Swedish_Corporate_Governance_Code_1_January_ 2020.pdf. 183 See Swedish Corporate Governance Board, Annual Report 2020 22 (August 2020), available at: E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 required to comply with the Code, ‘‘but are allowed the freedom to choose alternative solutions which they feel are better suited to their particular circumstances, as long as they openly report every deviation, describe the alternative solution they have chosen and explain their reasons for doing so.’’ 184 Signifying progress, in 2019, 7% of nominations committees did not issue a statement on board gender balance, compared to 58% in 2013.185 In 2015, the Swedish Corporate Governance Board, which is responsible for administering the Code, established a goal to achieve representation of women on boards of small/mid cap (and Swedish companies listed on NGM Equity) and large cap companies of 30% and 35%, respectively, by 2017. Further, the Board aimed to achieve 40% representation of women on boards of all listed Swedish companies by 2020.186 Based on data as of June 30, 2020, among listed companies, women accounted for 32.7% of board seats on small/mid cap companies and NGM Equity, 38.6% of large cap companies and 34.7% of all listed companies.187 In the United Kingdom, the Financial Conduct Authority requires companies with a premium listing on the London Stock Exchange to publicly disclose whether or not they comply with the Financial Reporting Council’s U.K. Corporate Governance Code (the ‘‘U.K. Code’’), and if not, to explain their reasons for non-compliance.188 https://www.bolagsstyrning.se/userfiles/archive/ 3930/kodkoll_arsrapport-2020_eng.pdf. 184 See Swedish Corporate Governance Board, Gender balance on boards of listed companies: The Swedish Corporate Governance Board assesses the situation ahead of this year’s AGMs (February 3, 2015), available at: https://www.bolagsstyrning.se/ userfiles/archive/3856/pressrelease_gender_201402-03.pdf. 185 See Swedish Corporate Governance Board, Annual Report 2020, supra note 183, at 22. 186 See Swedish Corporate Governance Board, Gender balance, supra note 184. 187 See Swedish Corporate Governance Board, Statistics regarding gender balance (July 15, 2020), available at: https://www.bolagsstyrning.se/userfiles/ archive/3922/200715_gender_balance_on_ boards.pdf; see also Sammanfattning, available at https://www.bolagsstyrning.se/userfiles/archive/ 3922/statistik_konsfordelning_2020.pdf. 188 See Financial Conduct Authority, LR 9.8.6(6), available at: https://www.handbook.fca.org.uk/ handbook/LR/9/8.html; see also Financial Reporting Council, The UK Corporate Governance Code 3 (July 2018), available at https:// www.frc.org.uk/getattachment/88bd8c45-50ea4841-95b0-d2f4f48069a2/2018-UK-CorporateGovernance-Code-FINAL.PDF. In addition, ‘‘[i]n 2016, the [UK] Government also implemented the relevant provision of the EU Non-Financial Reporting Directive with a new reporting requirement in the FCA’s Disclosure and Transparency Rules. This requires issuers (excluding [small and medium-sized enterprises]) admitted to trading on an EU regulated market to disclose their diversity policy in the corporate VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 Provision 23 of the U.K. Code requires each company to publicly describe ‘‘the work of the nomination committee, including . . . the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented and progress on achieving the objectives,’’ 189 and Principle J states that board appointments and succession planning should, among other things, ‘‘promote diversity of gender, social and ethnic backgrounds.’’ 190 In addition, the Companies Act requires companies to disclose gender diversity statistics among the board, management and employees.191 In 2018, the Financial Reporting Council reported that 83% of FTSE 100 and 74% of FTSE 250 companies had established a board diversity policy specifying gender, with approximately 1⁄3 specifying ethnicity.192 More recently, a report commissioned by the Financial Reporting Council concluded that there is a lack of public disclosure regarding the LGBTQ+ status among directors and executives of public companies. While the report did not recommend amending Principle J of the U.K. Code to consider sexual orientation or gender identity, it emphasized that the U.K. Code ‘‘seeks to promote diversity and inclusion of all minority groups within business’’ 193 and suggested that the government ‘‘update corporate reporting requirements to require companies to demonstrate how they intend to capture data on the sexual orientation and gender identity of staff.’’ 194 In 2011, the Davies Review called on FTSE 100 boards to achieve 25% women on boards by 2015.195 After that milestone was achieved, the Hampton Alexander Review encouraged FTSE 350 boards to have 1⁄3 women by 2020, and it has been achieved by FTSE 100 companies.196 In 2017, the Parker Review called on FTSE 100 and 250 companies to have at least one director of color by 2021 and 2024, governance statement.’’ See Financial Reporting Council, Board Diversity Reporting 5 (September 2018), available at: https://www.frc.org.uk/ getattachment/62202e7d-064c-4026-bd19f9ac9591fe19/Board-Diversity-ReportingSeptember-2018.pdf. 189 See Financial Reporting Council, The UK Corporate Governance Code, supra note 188, at 9. 190 Id. at 8. 191 See UK Companies Act 2006, § 414C. 192 See Financial Reporting Council, Board Diversity Reporting, supra note 188, at 9. 193 See Hay et al., supra note 98, at 37. 194 Id. 195 See Women on boards, supra note 96. 196 See Hampton-Alexander Review: FTSE Women Leaders (November 2016), available at: https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_ data/file/613085/ftse-women-leaders-hamptonalexander-review.pdf. PO 00000 Frm 00021 Fmt 4701 Sfmt 4703 80491 respectively.197 As of February 2020, approximately 37% of FTSE 100 companies surveyed and 59% of FTSE 350 companies surveyed did not have one director of color on their board.198 Australian Securities Exchange (‘‘ASX’’)-listed companies must comply with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (the ‘‘ASX Recommendations’’) or explain why they do not. The ASX Recommendations require companies to have and disclose a diversity policy with measurable objectives and report on progress towards meeting those objectives. If the company is in the ASX/S&P 300, its objective for achieving gender diversity should be at least 30%.199 The Australian government also requires companies with 100 or more employees to provide an annual report about gender equality indicators, including the gender composition of the board and the rest of the workforce.200 In 2015, the ASX and KPMG found that 99% of S&P/ASX 200 companies and 88% of ASX 201–500 companies disclosed establishing a diversity policy rather than explaining why they do not have one.201 As of July 2020, women account for 28.4% and 31.8% of board seats among ASX 300 and ASX 100 companies, respectively.202 Nasdaq observed that women account for at least 30% of the boards of the largest companies in Australia, Sweden and the United Kingdom, and in three other countries that have implemented disclosure requirements or suggested milestones on a comply-or-explain 197 See Parker, supra note 97. Sir John Parker, Ethnic Diversity Enriching Business Leadership 19 (Feb. 5, 2020), available at: https://assets.ey.com/content/dam/ey-sites/ey-com/ en_uk/news/2020/02/ey-parker-review-2020-reportfinal.pdf. 199 See ASX Corporate Governance Council, Corporate Governance Principles and Recommendations 9 (4th ed. Feb. 2019), available at: https://www.asx.com.au/documents/asxcompliance/cgc-principles-and-recommendationsfourth-edn.pdf. 200 Workplace Gender Equality Act 2012, Part IV § 13 (March 25, 2015), available at: https:// www.legislation.gov.au/Details/C2015C00088. 201 See KPMG and ASX, ASX Corporate Governance Council Principles and Recommendations on Diversity: Analysis of disclosures for financial years ended 1 January 2015 and 31 December 2015 4 (2016) available at: https://www.asx.com.au/documents/asxcompliance/asx-corp-governance-kpmg-diversityreport.pdf. 202 See KPMG and 30% Club, Building Gender Diversity on ASX 300 Boards: Seven Learnings from the ASX 200 4 (July 2020), available at: https:// assets.kpmg/content/dam/kpmg/au/pdf/2020/ building-gender-diversity-asx-300-boards.pdf. The report also noted that diversity counteracts groupthink and that ASX 201–299 companies with at least 30% female directors ‘‘are more likely than not to [have seen] market capitalisation increases over the past 12 months.’’ Id. at 6. 198 See E:\FR\FM\11DEN2.SGM 11DEN2 80492 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 basis: Finland, New Zealand, and Canada.203 Nasdaq considered that countries that have implemented mandates have also seen progress in women’s representation on boards, including, for example, Austria, Iceland, Belgium, France, Germany, Italy and Portugal.204 On average, women account for 31% of board seats in countries with gender mandates.205 Nasdaq discussed the benefits and challenges of mandate and comply-orexplain models with over a dozen stakeholders, and while the majority of organizations were in agreement that companies would benefit from a regulatory impetus to drive meaningful and systemic change in board diversity, the majority also stated that a disclosure-based approach would be more palatable to the U.S. business community than a mandate. Most organizations Nasdaq spoke with expressed general discomfort with mandates, although they acknowledged that opposition is lessening in the wake of California’s S.B. 826 206 and A.B. 979.207 While many recognized that mandates can force boards to act more quickly and accelerate the rate of change, they believe that a disclosurebased approach is less controversial and would spur companies to take action and achieve the same results. Some stakeholders also highlighted additional challenges that smaller companies and companies in certain industries may face finding diverse board members. In contrast, a disclosure-based framework that provides companies with flexibility would empower companies to maintain decision-making authority over their board’s composition while providing stakeholders with a better understanding of the company’s current 203 See The Conference Board of Canada, Data Dashboard (Sept. 23, 2020), available at: https:// www.conferenceboard.ca/focus-areas/inclusion/ 2020/aob-comparisons-around-the-worldtable?AspxAutoDetectCookieSupport=1; Andrew MacDougall et al., Osler, Diversity Disclosure Practices 4 (2020), available at https:// www.osler.com/osler/media/Osler/reports/ corporate-governance/Diversity-and-Leadership-inCorporate-Canada-2020.pdf. But see Heike MensiKlarbach et al., The Carrot or the Stick: SelfRegulation for Gender-Diverse Boards via Codes of Good Governance, J. Bus. Ethics 11 (2019), available at: https://doi.org/10.1007/s10551-019-04336-z (reviewing longitudinal data from 2006 to 2016 on listed and state-owned companies in Austria and concluding that ‘‘self-regulation of gender diversity on boards is ineffective if merely based on recommendations in codes of good governance’’). Mensi-Klarbach recommends setting concrete targets and providing public monitoring to improve the effectiveness of comply-or-explain frameworks. 204 See Paul Hastings, supra note 177; see also Deloitte, Women in the Boardroom, supra note 86. 205 See Paul Hastings, supra note 177; The Conference Board of Canada, supra note 203. 206 See Cal. S.B. 826, supra note 112. 207 See Cal. A.B. 979, supra note 112. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 board composition and its philosophy regarding diversity. This approach would better inform the investment community and enable more informed analysis of, and conversations with, companies. Nasdaq believes that these goals will be achieved through the disclosure of consistent, comparable data across companies, as would be required by the Exchange’s proposed definition of Diverse. For example, if, under Israeli law regarding board diversity, an Israeli company is required only to have a minimum of one woman on the board and such Israeli company chooses to comply with Israeli home country law in lieu of meeting the diversity objectives of Rule 5605(f)(2)(B), it may choose to disclose that ‘‘the Company is incorporated in Israel and required by Israeli law to have a minimum of one woman on the board, and satisfies home country requirements in lieu of Nasdaq Rule 5605(f)(2)(B), which requires each Foreign Issuer to have at least two Diverse directors.’’ If a U.S. company had two Diverse directors but one resigned due to unforeseen circumstances, it could disclose, for example: ‘‘Due to the unexpected resignation of Ms. Smith this year, the Company does not have at least one director who self-identifies as Female and one director who self-identifies as an Underrepresented Minority or LGBTQ+. We intend to undertake reasonable efforts to meet the diversity objectives of Rule 5605(f)(2)(A) prior to our next annual shareholder meeting and have engaged a search firm to identify qualified Diverse candidates. However, due to unforeseen circumstances, we may not achieve this goal.’’ Or a U.S. company may disclose that it chooses to define diversity more broadly than Nasdaq’s definition by considering national origin, veteran status or individuals with disabilities when identifying nominees for director because it believes such diversity brings a wide range of perspectives and experiences to the board. In each case, investors will have a better understanding of the company’s reasons for not having at least two Diverse directors and can use that information to make an informed investment or voting decision. ii. Higher vs. Lower Diversity Objectives Nasdaq observed that existing empirical research spanned companies across several countries, including the United States, Spain, China, Canada, France and Norway. Nasdaq considered that the studies related to company performance and board diversity found positive associations at various levels PO 00000 Frm 00022 Fmt 4701 Sfmt 4703 and measures of board diversity, including having at least one woman on the board,208 two or more diverse directors (with diverse considered female, Black, Hispanic or Asian),209 at least three women on the board 210 and being in the top quartile for gender and ethnic diversity.211 Nasdaq considered that the academic studies related to investor protection and board diversity found positive associations at various levels and measures of board diversity, including having at least one woman on the board 212 or up to 50% women on the board, and the assertions of certain academics that their findings may extend to other forms of diversity, including racial and ethnic diversity.213 Nasdaq also reviewed academic research suggesting that ‘‘critical mass’’ is achieved by having three or more women on the board, and that having only one diverse director on the board risks ‘‘tokenism.’’ 214 Nasdaq considered that although the legislation enacted by Norway and California, and proposed by several other states, varies based on board size, the academic research considered companies across a spectrum of sizes and board sizes, including Fortune 100, S&P 500, Fortune 1000 and smaller (non-Fortune 1000) companies. Nasdaq concluded that there is no ‘‘one-size fits all’’ approach to promoting board diversity and that the academic literature regarding the relationship between board diversity, company performance and investor protections is continuing to evolve. However, in Nasdaq’s survey of academic studies described above—and of the targets or mandates promulgated by regulatory bodies and organizations worldwide—Nasdaq observed a common denominator of having at least one woman on the board. Similarly, Nasdaq observed a common denominator of having at least one director who is diverse in terms of race, ethnicity or sexual orientation among 208 See Credit Suisse, supra note 30, at 16. Thomas and Starr, supra note 23, at 5. 210 See Eastman et al., supra note 31, at 3; Wagner, supra note 32. 211 See McKinsey, supra note 36. 212 See Abbott et al., supra note 58; Chen et al., supra note 64. 213 See Wahid, supra note 59; Cumming et al., supra note 62, at 34. 214 See Alison M. Konrad et al., Critical Mass: The Impact of Three or More Women on Corporate Boards, 37(2) Org. Dynamics 145 (April 2008); Miriam Schwartz-Ziv, Gender and Board Activeness: The Role of a Critical Mass, 52(2) J. Fin. & Quant. Analysis 751 (April 2017); Mariateresa Torchia et al., Women Directors on Corporate Boards: From Tokenism to Critical Mass, 102(2) J. Bus. Ethics. 299 (Feb. 25, 2011), available at https:// ssrn.com/abstract=1858347. 209 See E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 the requirements related to, and academic research considering, board diversity beyond gender identity. Nasdaq therefore believes that a diversity objective of at least two Diverse directors provides a reasonable baseline for comparison across companies. Companies are not precluded from meeting a higher or lower alternative measurable objective. For example, a company may choose to disclose that it does not meet the diversity objectives under Rule 5605(f)(2) because it is subject to an alternative standard under state or foreign laws and has chosen to satisfy that diversity objective instead. On the other hand, many firms may strive to achieve even greater diversity than the objectives set forth in Nasdaq’s proposed rule. Nasdaq believes that providing flexibility and clear disclosure when the company determines to follow a different path will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions. iii. Longer vs. Shorter Timeframes Nasdaq considered whether an alternative timeframe for satisfying the diversity objectives of Rule 5605(f)(2) would better promote the public interest than the timeframe Nasdaq has proposed under Rule 5605(f)(7). While companies are not precluded from adding additional directors to their boards to satisfy Rule 5605(f)(2) by having two Diverse directors sooner than contemplated by the proposed rule, Nasdaq understands that some companies may need to obtain shareholder approval to amend their governing documents to allow for board expansion. Other companies may choose to replace an existing director on the board with a Diverse director, and board turnover may be low.215 Nasdaq recognizes that it also takes substantial lead time to identify, interview and select board nominees. To provide companies with sufficient time to satisfy Rule 5605(f) by having two Diverse directors, while recognizing that investors are calling for expedient change, Nasdaq has structured its proposal similarly to the approach taken by California, where companies must achieve one target by an earlier date and satisfy the entire diversity objective at a later date. Nasdaq also considered the approaches taken by foreign 215 See Matteo Tonello, Corporate Board Practices in the Russell 3000 and S&P 500, Harv. L. Sch. Forum on Corp. Governance (Oct. 18, 2020), https:// corpgov.law.harvard.edu/2020/10/18/corporateboard-practices-in-the-russell-3000-and-sp-500/ (last accessed Nov. 24, 2020). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 jurisdictions to implement diversity objectives. For example, Belgium and France implemented diversity objectives under a phased approach that provided companies with at least five years to fully satisfy the objectives,216 whereas Iceland and Portugal provided companies with three years or less.217 While companies may choose to satisfy Rule 5605(f)(2) on an alternative timeframe, a company that chooses a timeframe that is longer than the timeframes set forth in Rule 5605(f)(7) also must publicly explain its reasons for doing so. For example, an NGMlisted company that, while not technically a Smaller Reporting Company, views itself as similarly situated to a NCM-listed Smaller Reporting Company may disclose the following: ‘‘While the Company is listed on NGM and technically qualifies as a Smaller Reporting Company, it does not file its SEC reports utilizing the Smaller Reporting Company designation. However, the Company believes that it is similarly situated to other Smaller Reporting Companies listed on NCM in terms of its annual revenues and public float, and therefore has chosen to satisfy Rule 5605(f)(2)(C) in lieu of Rule 5605(f)(2)(A) and has satisfied this requirement by having at least two Diverse directors on the board who selfidentify as Female within the timeframe provided under Rule 5605(f)(7) applicable to NCM-listed companies.’’ iv. Broader vs. Narrower Definition of Diverse Nasdaq considered whether the definition of Diverse should include broader characteristics than those reported on the EEO–1 report, such as the examples provided by the Commission’s CD&I, including LGBTQ+, nationality, veteran status, and individuals with disabilities. During its stakeholder outreach, Nasdaq inquired whether a broad definition of Diversity would promote the public interest. While recognizing the diverse perspectives that different backgrounds can provide, most stakeholders supported a narrower definition of Diversity focused on gender, race and ethnicity, with several supporting broadening the definition to include the LGBTQ+ community. As discussed above, companies currently are permitted to define diversity ‘‘in ways they consider appropriate’’ under federal securities laws. One of the challenges of this 216 See Paul Hastings, supra note 177, at 79 and 90; see also supra note 179. 217 See Deloitte, Women in the Boardroom, supra note 86, at 115 and 143; see also supra note 179. PO 00000 Frm 00023 Fmt 4701 Sfmt 4703 80493 principles-based approach has been the disclosure of inconsistent and noncomparable data across companies. However, most companies are required by law to report data on race, ethnicity and gender to the EEOC through the EEO–1 Report. Nasdaq believes that adopting a broad definition of Diverse would maintain the status quo of inconsistent, noncomparable disclosures, whereas a narrower definition of Diverse focused on race, ethnicity, sexual orientation and gender identity will promote the public interest by improving transparency and comparability. Nasdaq also is concerned that the broader definitions of diversity utilized by some companies may result in Diverse candidates being overlooked, and may be hindering meaningful progress on improving diversity related to race, ethnicity, sexual orientation and gender identity. For example, a company may consider diversity to include age, education and board tenure. While such characteristics may provide laudable cognitive diversity, this focus may result in a homogenous board with respect to race, ethnicity, sexual orientation and gender identity that, by extension, does not reflect the diversity of a company’s communities, employees, investors or other stakeholders. Nasdaq also believes that a transparent, consistent definition of Diverse would provide stakeholders with a better understanding of the company’s current board composition and its philosophy regarding diversity if it does not have two Diverse directors. This would enable the investment community to conduct more informed analysis of, and have more informed conversations with, companies. To the extent a company chooses to satisfy the requirement of Rule 5605(f)(2) by having at least two Diverse directors on its board, it will have the ancillary benefit of making meaningful progress in improving board diversity related to race, ethnicity, sexual orientation and gender identity. Nasdaq’s review of academic research on board diversity revealed a dearth of empirical analysis on the relationship between investor protection or company performance and broader diversity characteristics such as veteran status or individuals with disabilities.218 Nasdaq 218 KPMG (2020) states that veterans are underrepresented in boardrooms, with retired General and Flag Officers (‘‘GFOs’’) occupying less than 1% of Fortune 500 board seats. See KPMG, The value of veterans in the boardroom 1 (2020), available at: https://boardleadership.kpmg.us/ content/dam/boardleadership/en/pdf/2020/thevalue-of-veterans-in-the-boardroom.pdf (noting that E:\FR\FM\11DEN2.SGM Continued 11DEN2 80494 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 acknowledges that there also is a lack of published research on the issue of LGBTQ+ representation on boards.219 This may be due to a lack of consistent, transparent data on broader diverse attributes, or because there is no voluntary self-disclosure workforce reporting requirements for LGBTQ+ status, such as the EEO–1 reporting framework for race, ethnicity, and gender. In any event, it is evident that while ‘‘[b]oardroom diversity is a topic that has gained significant traction . . . LGBT+ diversity, however, has largely been left out of the conversation.’’ 220 Nonetheless, Nasdaq believes it is reasonable and in the public interest to include a reporting category for LGBTQ+ in recognition of the U.S. Supreme Court’s recent affirmation that sexual orientation and gender identity are ‘‘inextricably’’ intertwined with sex,221 and based on studies demonstrating a positive association between board diversity and decision making, company performance and investor protections. Nasdaq also believes that the proposed rule would foster the development of data to conduct meaningful assessments of the association between LGBTQ+ board diversity, company performance and investor protections. As noted above, the proposal does not preclude companies from considering additional diverse attributes, such as nationality, disability, or veteran status in selecting board members; however, company would still have to provide the required disclosure under Rule 5605(f)(3) if the company does not also have at least two directors who are Diverse. Nor would the proposal prevent companies from disclosing information related to other diverse attributes of board members beyond those highlighted in the rule if they felt such disclosure would benefit investors. Nasdaq believes such disclosure would help inform the evolving body of research on the relationship between broader diverse attributes, company ‘‘[r]etired GFOs who have honed their leadership and critical decision-making skills in a high-threat environment can bring extensive risk oversight experience to the board, which may be especially valuable in the context of today’s risk landscape’’). Accenture (2018) observed that companies that offered inclusive working environments for employees with disabilities achieved an average of 28% higher revenue, 30% higher economic profit margins, and 2x net income than their industry peers. See Accenture, Getting to Equal: The Disability Inclusion Advantage (2018), available at: https://www.accenture.com/_acnmedia/PDF-89/ Accenture-Disability-Inclusion-ResearchReport.pdf. 219 See Credit Suisse ESG Research, supra note 33, at 1; see also Out Leadership, supra note 35. 220 See Out Leadership, supra note 35, at 3. 221 See Bostock v. Clayton Cnty., supra note 160. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 performance and investor protection and provide investors with additional information about the company’s philosophy regarding broader diversity characteristics. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,222 in general, and furthers the objectives of Section 6(b)(5) of the Act,223 in that it is designed to remove impediments to and perfect the mechanism of a free and open market and a national market system, to prevent fraudulent and manipulative acts and practices, and, in general, to protect investors and the public interest, for the reasons set forth below. Further, Nasdaq believes the proposal is not designed to permit unfair discrimination between issuers or to regulate by virtue of any authority conferred by the Act matters not related to the purposes of the Act or the administration of the Exchange, for the reasons set forth below. I. Board Statistical Disclosure Nasdaq has proposed what it believes to be a straightforward and clear approach for companies to publish their statistical data pursuant to proposed Rule 5606. The disclosure will assist investors in making more informed decisions by making meaningful, consistent, and reliable data readily available and in a clear and comprehensive format prescribed by the proposed rule. Nasdaq also believes that the disclosure format required by proposed Rule 5606 protects investors by eliminating data collection inaccuracies and decreasing costs, while enhancing investors’ ability to utilize the information. As a threshold matter, as discussed above, diversity has become an increasingly important subject and, in recent years, investors increasingly have been advocating for greater board diversity and for the disclosure of board diversity statistics. The current board diversity disclosure regime is lacking in several respects, and Nasdaq believes that its proposed Rule 5606 addresses many of the current concerns and responds to investors’ demands for greater transparency into the diversity characteristics of a company’s board composition by mandating disclosure and curing certain deficiencies that exist within the current SEC disclosure requirements. Investors have expressed their dissatisfaction with having to independently collect board-level data 222 See 223 Id. PO 00000 15 U.S.C. 78f(b). § 78f(b)(5). Frm 00024 Fmt 4701 Sfmt 4703 about race, ethnicity and gender identity because such investigations can be time consuming, expensive, and fraught with inaccuracies.224 The lack of consistency and specificity in Regulation S–K has been a major impediment for many investors and data collectors. As a general matter, the Commission’s requirements have not addressed the concerns expressed by commenters that ‘‘disclosure about board diversity was important information to investors.’’ 225 Nasdaq believes that its proposed Rule 5606 addresses many of the concerns that have been raised. Nasdaq believes that requiring the annual disclosure of a company’s board diversity, as proposed in Rule 5606(a), will provide consistent information to the public and will enable investors to continually review the board composition of a company to track trends and simplify or eliminate the need for a company to respond to multiple investor requests for information about the diverse characteristics of the company’s board. Requiring annual disclosures also would make information available to investors who otherwise would not be able to obtain individualized disclosures.226 Moreover, consistent disclosures may encourage boards to consider a wider range of board candidates in the nomination process, including candidates with fewer ties to the current board.227 The Commission’s 2009 amendments to Regulation S–K provide no definition for diversity and do not explicitly require disclosures specifically related to details about the board’s gender, racial, ethnic and LGBTQ+ composition. Additionally, the Commission’s CD&I does not address the definition of diversity, and it requires a registrant to disclose diversity information only in certain limited circumstances. Investors have expressed that current regulations and accompanying interpretations impair their ability to obtain clear and consistent data.228 As a result, Nasdaq believes that proposed Rule 5606(a) protects investors and the public 224 See Petition for Amendment of Proxy Rule, supra note 80, at 2. 225 See Proxy Disclosure Enhancements, 74 FR at 68,343–44 (amending Item 407(c)(2)(vi) of Regulation S–K, codified at 17 CFR 229.407(c)(2)(vi)). 226 See Petition for Rulemaking, supra note 123. 227 See Proxy Disclosure Enhancements, 74 FR at 68,355 (‘‘To the extent that boards branch out from the set of candidates they would ordinarily consider, they may nominate directors who have fewer existing ties to the board or management and are, consequently, more independent.’’); Hazen and Broome, supra note 114, at 57–58. 228 See Petition for Amendment of Proxy Rule, supra note 80, at 2; Petition for Rulemaking, supra note 123, at 7. E:\FR\FM\11DEN2.SGM 11DEN2 jbell on DSKJLSW7X2PROD with NOTICES2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices interest by making clear that a company’s annual diversity data disclosure must include information related to gender identity, race, ethnicity and LGBTQ+ status, thereby leaving less discretion for companies to selectively disclose certain diversity information and enhancing the comparability of such data across companies. Moreover, it is in the public interest to provide clear requirements for diversity disclosure, and Nasdaq’s proposed Board Diversity Matrix format provides such clarity. Nasdaq does not intend to obligate directors to self-identify in any of the categories related to gender identity, race, ethnicity and LGBTQ+. Nasdaq believes that a director should have autonomy to decide whether to provide such information to their company. Therefore, Nasdaq believes that it is reasonable and in the public interest to allow directors to opt out of disclosing the information required by proposed Rule 5606(a) by permitting a company to identify such directors in the ‘‘Undisclosed’’ category. Nasdaq believes that it is in the public interest to utilize the Board Diversity Matrix format for all companies as proposed in Rule 5606(a). Additionally, Nasdaq believes that the format removes any impediments to aggregating and analyzing data across all companies by requiring each company to disclose separately the number of male, female, and non-binary directors, the number of male, female, and non-binary directors that fall into certain racial and ethnic categories, and the number of directors that identify as LGBTQ+. The format allows investors to easily disaggregate the data and track directors with multiple diversity characteristics. As discussed above, most listed companies are required by law to complete an EEOC Employer Information Report EEO–1 Form. Although outside directors generally are not employees and therefore are not covered in the EEO–1,229 Nasdaq believes that collecting the information required by proposed Rule 5606(a) is familiar to most companies, and that it is reasonable to require disclosure of the additional board information. Nasdaq also believes that requiring currently listed companies to comply with proposed Rule 5606 within one year from the date of Commission approval is a reasonable amount of time, given that most companies already collect similar information for certain employees. Moreover, most companies 229 The EEO–1 Form does not require a company to disclose data for outside directors because such directors are not company employees. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 are required to prepare an annual proxy statement and update the Commission within four business days when a new director is appointed to the board.230 Further, Nasdaq believes that the disclosure required by proposed Rule 5606(a) will remove impediments to shareholders by making available information related to board-level diversity in a standardized manner, thereby enhancing the consistency and comparability of the information and helping to better protect investors. The proposed disclosure will also help protect investors and the public interest by enabling investors to determine the total number of diverse directors, which is information that is not consistently available in existing proxy disclosures in cases where a single director has multiple diverse characteristics. While companies can elect to make this information available either in a proxy statement or on the company’s website, Nasdaq believes it is in the public interest to allow companies the option to provide the disclosure in a way they believe will be most meaningful to their shareholders. Nasdaq recognizes that the proposed definition of Underrepresented Minority in Rule 5605(f)(1) may not apply to companies outside of the United States because each country has its own unique demographic composition. Moreover, Nasdaq’s definition of Underrepresented Minority proposed in Rule 5606(f)(1) may be inapplicable to a Foreign Issuer, making this Board Matrix data less relevant for such companies and not useful for investors. Therefore, Nasdaq believes that offering Foreign Issuers the option of a separate template that requires different disclosure categories will provide investors with more accurate disclosures related to the diversity of directors among the board of a Foreign Issuer. Additionally, Nasdaq believes that providing an ‘‘Underrepresented Individual in Home Country Jurisdiction’’ category provides Foreign Issuers with more flexibility to identify and disclose diverse directors within their home countries. The annual requirement in the proposed rule will guarantee that the information is available to the public on a continuous and consistent basis. As described in the instructions to the Board Diversity Matrix disclosure form and Rule 5606(a), each year following the first year that a company publishes the Board Diversity Matrix, the company will be required to publish its data for the current and immediately 230 See SEC Form 8–K, available at: https:// www.sec.gov/files/form8-k.pdf. PO 00000 Frm 00025 Fmt 4701 Sfmt 4703 80495 prior years. Nasdaq believes that disclosing at least two years of data allows the public to view any changes and track a board’s diversity progress. In addition to providing a means for shareholders to assess a company’s board-level diversity and measure its progress in improving that diversity over time, Nasdaq believes that proposed Rule 5606 will provide a means for Nasdaq to assess whether companies meet the diversity objectives of proposed Rule 5605(f). The ability to determine satisfaction of the proposed listing rule’s diversity objectives will protect investors and the public interest. Moreover, the proposed rule provides transparency into diversity based not only on race, ethnicity, and gender identity, but also on a director’s selfidentified sexual orientation. Nasdaq believes that expanding the diversity characteristics beyond those which are commonly reported by companies currently will broaden the way boards view diversity, and ensure that board diversity is occurring across all protected groups. Finally, Nasdaq believes that the proposal is not unfairly discriminatory because proposed Rule 5606 will apply to all Nasdaq-listed companies, except for the following companies: Acquisition companies listed under IM– 5101–2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series—which meet the definition of Exempt Companies as defined under proposed Rule 5605(f)(4). Nasdaq believes it is reasonable and not unfairly discriminatory to exempt these companies from the proposed rule because the exemption of these companies is consistent with the approach taken by Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate governance standards for board composition. Nasdaq further believes it is reasonable to provide companies with a one-year phase-in period to comply with proposed Rule 5606. Nasdaq believes there is only a de minimis burden placed on companies to collect the board data and prepare the Board Diversity Matrix. Moreover, as discussed above, companies already are required to gather similar information for certain employees. Therefore, Nasdaq believes that one year is E:\FR\FM\11DEN2.SGM 11DEN2 80496 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices sufficient time for companies to incorporate their directors into their data collection. Furthermore, newly listed companies have many obligations to meet under Nasdaq listing rules. Therefore, Nasdaq believes that it is reasonable under proposed Rule 5606(d) to provide newly listed Nasdaq companies, including companies listing in connection with a business combination under IM–5101–2, with one year from the time of listing to comply with the proposed rule. II. Diverse Board Representation or Explanation a. Removes Impediments to and Perfects the Mechanism of a Free and Open Market and a National Market System jbell on DSKJLSW7X2PROD with NOTICES2 As discussed above, studies suggest that the traditional director candidate selection process may create barriers to considering qualified diverse candidates for board positions by limiting the search for director nominees to existing directors’ social networks and candidates with C-suite experience.231 In analyzing Norway’s experience in implementing a gender mandate, Dhir (2015) observed that ‘‘[b]oard seats tend to be filled by directors engaging their networks, and the resulting appointees tend to be of the same sociodemographic background.’’ 232 Dhir concluded that broadening the search for directors outside of traditional networks ‘‘is unlikely to occur without some form of regulatory intervention, given the prevalence of homogenous social networks and in-group favoritism.’’ 233 Regulatory action was effective in increasing the representation of women on boards in Norway by ‘‘democratiz[ing] access to a space previously unavailable to women.’’ 234 The number of public company board seats held by women in Norway increased from 6% in 2002 to 231 See GAO Report, supra note 44; Vell, supra note 100; Rhode & Packel, supra note 104, at 39; Deloitte, Women in the Boardroom, supra note 86; see also Parker, supra note 97, at 38 (acknowledging that, ‘‘as is the case with gender, people of colour within the UK have historically not had the same opportunities as many mainstream candidates to develop the skills, networks and senior leadership experience desired in a FTSE Boardroom’’). 232 See Dhir, supra note 78, at 52. 233 Id. at 51. See also Albertine d’Hoop-Azar et al., Gender Parity on Boards Around the World, Harv. L. Sch. Forum on Corp. Governance (January 5, 2017), available at: https://corpgov.law. harvard.edu/2017/01/05/gender-parity-on-boardsaround-the-world/ (comparing gender diversity on boards in countries with varying requirements and enforcement measures and concluding that external pressures—‘‘progressive societal norms’’ and regulations—are needed to increase board diversity). 234 See Dhir, supra note 78, at 101. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 42% in 2020.235 One Norwegian director ‘‘grudgingly accept[ed] that the free market principles she held so dearly had disappointed her—and that the [mandate] was a necessary correction of market failure.’’ 236 In contrast, Nasdaq observed that other countries have made comparable progress using a disclosure-based model. Women account for at least 30% of the largest boards of companies in six countries using comply-or-explain models:237 Australia, Finland, Sweden, New Zealand, Canada and the United Kingdom.238 Nasdaq discussed the benefits and challenges of mandate and disclosure-based models with over a dozen stakeholders, and the majority of organizations were in agreement that companies would benefit from a regulatory impetus to drive meaningful and systemic change in board diversity, and that a disclosure-based approach would be more palatable to the U.S. business community than a mandate. While many organizations recognized that mandates can force boards to act more quickly and accelerate the rate of change, they believe that a disclosurebased approach is less controversial and would spur companies to take action and achieve the same results. Some stakeholders also highlighted additional challenges that smaller companies and companies in certain industries may face finding diverse board members. However, leaders from across the spectrum of stakeholders with whom Nasdaq spoke reinforced the notion that if companies recruit by skill set and expertise rather than title, then they will find there is more than enough diverse talent to satisfy demand. Nasdaq also considered Commissioner Lee’s observation that disclosure ‘‘gets investors the information they need to make investment decisions based on their own judgment of what indicators matter for long-term value. Importantly, it can also drive corporate behavior.’’ Specifically, she observed that: For one thing, when companies have to formulate disclosure on topics it can influence their treatment of them, something known as the ‘‘what gets measured, gets managed’’ phenomenon. Moreover, when 235 See Marianne Bertrand et al., Breaking the Glass Ceiling? The Effect of Board Quotas on Female Labor Market Outcomes in Norway, Nat’l Bureau of Econ. Rsch. Working Paper 20256 (June 2017), available at https://www.nber.org/papers/ w20256; Statistics Norway, Board and management in limited companies (Mar. 6, 2020), https:// www.ssb.no/en/styre (last accessed Nov. 27, 2020). 236 See Dhir, supra note 78, at 116. 237 See Paul Hastings, supra note 177; Deloitte, Women in the Boardroom, supra note 86. 238 See Conference Board of Canada, supra note 201; Osler, supra note 203, at 4. PO 00000 Frm 00026 Fmt 4701 Sfmt 4703 companies have to be transparent, it creates external pressure from investors and others who can draw comparisons company to company. The Commission has longrecognized that influencing corporate behavior is an appropriate aim of our regulations, noting that ‘‘disclosure may, depending on determinations made by a company’s management, directors and shareholders, influence corporate conduct’’ and that ‘‘[t]his sort of impact is clearly consistent with the basic philosophy of the disclosure provisions of the federal securities laws.239 Nasdaq believes that a disclosurebased framework may influence corporate conduct if a company chooses to meet the diversity objective of Rule 5605(f)(2) by having two Diverse directors on the board. A company may satisfy that objective by broadening the search for qualified candidates and considering candidates from other professional pathways that bring a wider range of skills and perspectives beyond traditional C-suite experience.240 Nasdaq believes that this will help increase opportunities for Diverse candidates that otherwise may be overlooked due to the impediments of the traditional director recruitment process, which will thereby remove impediments to a free and open market and a national market system. Further, boards that choose to have at least two Diverse directors may experience other benefits from diversity that perfect the mechanism of a free and open market and national market system. As discussed above in Section II.A.1.II.b (Diversity and Investor Protection), and further discussed below in Section II.A.2.II.b (Prevent Fraudulent and Manipulative Acts and Practices), studies suggest that diversity is positively associated with reduced stock volatility,241 more transparent public disclosures,242 and less information asymmetry,243 leading to stock prices that better reflect public information, and further removing impediments to and perfecting a free and open market and a national market system. Importantly, Nasdaq believes that the disclosure-based framework proposed under Rule 5605(f) will not create additional impediments to a free and open market and a national market system because it will empower 239 See Lee, supra note 22. e.g., Hillman et al., supra note 105 (finding that African-American and white women directors were more likely to have specialized expertise in law, finance, banking, public relations or marketing, or community influence from positions in politics, academia or clergy). 241 See Bernile et al., supra note 28. 242 See Gul et al., supra note 66; Bravo and Alcaide-Ruiz, supra note 56. 243 See Abad et al., supra note 67. 240 See, E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 companies to maintain decision-making authority over the composition of their boards. To the extent a company chooses not to meet the diversity objectives of Rule 5605(f)(2) to have at least two Diverse directors, Nasdaq believes that proposed Rule 5605(f)(3) will provide analysts and investors with a better understanding about the company’s reasons for not doing so and its philosophy regarding diversity. Rule 5605(f) will thus remove impediments to a free and open market and a national market system by enabling the investment community to conduct more informed analyses of, and have more informed conversations with, companies. Nasdaq believes that such analyses and conversations will be better informed by consistent, comparable data across companies, which Nasdaq proposes to achieve by adopting a consistent definition of ‘‘Diverse’’ under Rule 5605(f)(1). Nasdaq further believes that providing such disclosure will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions, thereby promoting capital formation and efficiency and perfecting the mechanism of a free and open market and a national market system. b. Prevent Fraudulent and Manipulative Acts and Practices Nasdaq’s analysis discussed above in Section II.A.1.II raises the concern that the failure of homogenous boards to consider a broad range of viewpoints can result in suboptimal decisions that have adverse effects on company performance, board performance and stakeholders. Nasdaq believes that including diverse directors with a broader range of skills, perspectives and experiences may help detect and prevent fraudulent and manipulative acts and practices by mitigating ‘‘groupthink.’’ Increased board diversity also may reduce the likelihood of insider trading and other fraudulent and manipulative acts and practices. Nasdaq reached this conclusion by reviewing public statements by investors and organizations regarding the impact of groupthink on decision making processes, as well as academic studies on the relationship between diversity, groupthink and fraud. Nasdaq observed that groupthink can result in ‘‘self-censorship’’ 244 and failure to voice dissenting viewpoints in pursuit of ‘‘consensus without critical evaluation and without considering different 244 See Forbes and Milliken, supra note 74, at 496. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 possibilities.’’ 245 In contrast, ‘‘board members who possess a variety of viewpoints may raise different ideas and encourage a full airing of dissenting views. Such a broad pool of talent can be assembled when potential board candidates are not limited by gender, race, or ethnicity.’’ 246 Dhir (2015) concluded that gender diversity may ‘‘promote cognitive diversity and constructive conflict in the boardroom’’ and may be more effective at overseeing management.247 One respondent in Dhir’s survey of Norwegian directors observed that: I’ve seen situations where the women were more willing to dig into the difficult questions and really go to the bottom even if it was extremely painful for the rest of the board, but mostly for the CEO . . . when it comes to the really difficult situations, [where] you think that the CEO has . . . done something criminal . . . [o]r you think that he has done something negligent, something that makes it such that you . . . are unsure whether he’s the suitable person to be in the driving seat.248 Another director observed that ‘‘[i]f you have different experiences and a more diversified board, you will have different questions asked.’’ 249 Dhir concluded that ‘‘women directors may be particularly adept at critically questioning, guiding and advising management without disrupting the overall working relationship between the board and management.’’ 250 Pucheta-Martı´nez et al. (2016) reasoned that questioning management is a critical part of the audit committee’s oversight role, along with ensuring that management does not pressure the external auditor to issue a clean audit opinion notwithstanding the identification of any uncertainties or scope limitations.251 Otherwise, ‘‘[a]uditors may accept the demands of management for a clean audit report when the firm deserves a scope limitation and an uncertainty qualification.’’ 252 The authors found that ‘‘the percentage of female [directors] on [audit committees] reduces the probability of [audit] qualifications due to errors, noncompliance or the omission of information,’’ 253 and further found a positive association between gender245 See Dhir, supra note 78, at 124. Petition for Amendment of Proxy Rule, supra note 80, at 4. 247 See Dhir, supra note 78, at 150. 248 Id. at xiv. 249 Id. at 120. 250 Id. at 35. 251 See Pucheta-Martı ´nez et al., supra note 52, at 368. 252 Id. at 364. 253 Id. at 363. 246 See PO 00000 Frm 00027 Fmt 4701 Sfmt 4703 80497 diverse audit committees and disclosing audit reports with uncertainties and scope limitations. This suggests that gender-diverse audit committees better ‘‘ensure that managers do not seek to pressure auditors into issuing a clean opinion instead of a qualified opinion’’ when any uncertainties or scope limitations are identified.254 Nasdaq also reviewed other studies that found a positive association between board gender diversity and important investor protections regardless of whether women are on the audit committee, and considered the assessment of some academics that their findings may extend to other forms of diversity, including racial and ethnic diversity. Nasdaq therefore believes that such findings with respect to audit committees would be expected to be more broadly applicable to the quality of the broader board’s decision-making process, and to other forms of diversity, including diversity of race, ethnicity and sexual orientation. In examining the association between broader board gender diversity and fraud, Cumming, et al. observed that ‘‘[g]ender diversity in particular facilitates more effective monitoring by the board and protection of shareholder interests by broadening the board’s expertise, experience, interests, perspectives and creativity.’’ 255 They observed that the presence of women on boards is associated with a lower likelihood of securities fraud; indeed, they found ‘‘strong evidence of a negative and diminishing effect of women on boards and the probability of being in our fraud sample.’’ 256 The authors suggested that ‘‘other forms of board diversity, including but not limited to gender diversity, may likewise reduce fraud.’’ 257 Similarly, Wahid (2017) noted that board gender diversity may ‘‘lead to less biased and superior decision-making’’ because it ‘‘has a potential to alter group dynamics by affecting cognitive conflict and cohesion.’’ 258 Wahid (2017) concluded that ‘‘gender-diverse boards commit fewer financial reporting mistakes and engage in less fraud,’’ 259 finding that companies with female directors have ‘‘fewer irregularity-type [financial] restatements, which tend to be indicative of financial manipulation.’’ 260 Wahid also suggested that other forms of diversity, including 254 Id. at 368. Cumming et al., supra note 62, at 34. 256 Id. at 12–14. 257 Id. at 33. 258 See Wahid, supra note 59, at 6. 259 Id. at 1. 260 Id. at 23. 255 See E:\FR\FM\11DEN2.SGM 11DEN2 80498 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices racial diversity, could introduce additional perspectives to the boardroom,261 which Nasdaq believes could further mitigate groupthink. Abbott, Parker and Persley (2012) posited that ‘‘a female board presence contribut[es] to the board’s ability to maintain an attitude of mental independence, diminish[es] the extent of groupthink and enhance[es] the ability of the board to monitor financial reporting.’’ 262 They noted that ‘‘poorer [internal] controls and the lack of an independent and questioning boardlevel attitude toward accounting judgments can create an opportunity for fraud.’’ 263 They observed a lower likelihood of a material financial restatements stemming from fraud or error in companies with at least one woman on the board.264 Nasdaq believes that these studies provide substantial evidence suggesting an association between gender diverse boards or audit committees and a lower likelihood of fraud; a lower likelihood of receiving audit qualifications due to errors, non-compliance or omission of information; and a greater likelihood of disclosing audit reports with uncertainties and scope limitations. Moreover, academics have suggested that other forms of diversity, including racial and ethnic diversity, may reduce fraud and mitigate groupthink. Further, while homogenous boards may unwittingly fall into the trap of groupthink due to a lack of diverse perspectives, ‘‘heterogeneous groups share conflicting opinions, knowledge, and perspectives that result in a more thorough consideration of a wide range of interpretations, alternatives, and consequences.’’ 265 Nasdaq therefore believes that the proposed rule is designed to reduce groupthink, and otherwise to enhance the functioning of boards, and thereby to prevent jbell on DSKJLSW7X2PROD with NOTICES2 261 Id. at 24–25; see also Shecter, supra note 61 (quoting Wahid as saying that ‘‘[i]f you’re going to introduce perspectives, those perspectives might be coming not just from male versus female. They could be coming from people of different ages, from different racial backgrounds. . .. If we just focus on one, we could be essentially taking away from other dimensions of diversity and decreasing perspective.’’). 262 See Abbott et al., supra note 58, at 607. 263 Id. at 610. 264 Id. at 613 (‘‘The previously discussed lines of research lead us to form our hypothesis. In summary, restatements may stem from error or fraud. In either instance, the internal control system (to which the board of directors contributes by setting the overall tone at the top) has failed to detect or prevent a misstatement. Ineffective internal controls may stem from insufficient questioning of assumptions underlying financial reporting, inadequate attention to the internal control systems, or insufficient support for the audit committee’s activities.’’). 265 See Dallas, supra note 76, at 1391. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 fraudulent and manipulative acts and practices. Further, the Commission has suggested that in seeking board diversity, ‘‘[t]o the extent that boards branch out from the set of candidates they would ordinarily consider, they may nominate directors who have fewer existing ties to the board or management and are, consequently, more independent.’’ 266 Nasdaq believes that the benefits of the proposed rule are analogous to the benefits of Nasdaq’s rules governing and requiring director independence. In 2003, Nasdaq adopted listing rules requiring, among other things, that independent directors comprise a majority of listed companies’ boards, which were ‘‘intended to enhance investor confidence in the companies that list on Nasdaq.’’ 267 The Commission observed that selfregulatory organizations ‘‘play an important role in assuring that their listed issuers establish good governance practices,’’ and concluded that the proposed rule changes would secure an ‘‘objective oversight role’’ for issuers’ boards of directors, and ‘‘foster greater transparency, accountability, and objectivity’’ in that role.’’ 268 Along the same lines, in approving Nasdaq’s application for registration as a national securities exchange, the Commission found Nasdaq’s rules governing the independence of members of boards and certain committees to be consistent with Section 6(b)(5) of the Act because they advanced the ‘‘interests of shareholders’’ in ‘‘greater transparency, accountability, and objectivity’’ in oversight and decision-making by corporate boards.269 Nasdaq proposes to promote accountability in corporate decision-making by requiring companies who do not have at least two Diverse directors on their board to provide investors with a public explanation of the board’s reasons for not doing so under Rule 5605(f)(3). Nasdaq believes it is critical to the detection and prevention of fraudulent and manipulative acts and practices to have directors on the board who are willing to critically question 266 See Proxy Disclosure Enhancements, supra note 73, 74 FR at 68,355. 267 See Order Approving Proposed Rule Changes, 68 FR at 64,161. 268 Id. at 64, 175. 269 See In re Nasdaq Stock Market, 71 FR 3550, 3565 (Jan. 23, 2006). See also 68 FR 18,788, 18,815 (April 16, 2003) (in adopting Rule 10A–3, setting standards for the independence of audit committee members, the Commission concluded that such standards would ‘‘enhance the quality and accountability of the financial reporting process and may help increase investor confidence, which implies increased efficiency and competitiveness of the U.S. capital markets’’). PO 00000 Frm 00028 Fmt 4701 Sfmt 4703 management and air dissenting views. Nasdaq believes that boards comprised of directors from Diverse backgrounds enhance investor confidence by ensuring that board deliberations consider the perspectives of more than one demographic group, leading to robust dialogue and better decision making. However, Nasdaq recognizes that directors may bring diverse perspectives, skills and experiences to the board, notwithstanding that they have similar attributes. Nasdaq therefore believes it is in the public interest to permit a company that chooses not to meet the diversity objectives of Rule 5605(f)(2) to explain why it does not, in accordance with Rule 5605(f)(3)—for example, if it believes that defining diversity more broadly than Nasdaq, for example by considering national origin, veteran status and disabilities, brings a wide range of perspectives and experiences to the board. Nasdaq believes such disclosure will provide investors with a better understanding of the company’s philosophy regarding diversity. This would better inform the investment community and enable more informed analyses of, and conversations with, companies. Therefore, Nasdaq believes satisfying Rule 5605(f)(2) through disclosure pursuant to Rule 5605(f)(3) is consistent with Section 6(b)(5) of the Act because it advances the ‘‘interests of shareholders’’ in ‘‘greater transparency, accountability, and objectivity’’ of boards and their decision-making processes.270 In addition, as discussed further in Section II.A.2.II.c (Promotes Investor Protection and the Public Interest) below, Nasdaq believes that the proposed diversity requirement could help to reduce information asymmetry, and thereby reduce the risk of insider trading or other opportunistic insider behavior. c. Promotes Investor Protection and the Public Interest Nasdaq has found substantial evidence that board diversity is positively associated with more transparent public disclosures and higher quality financial reporting, thereby promoting investor protection. Specifically, studies have concluded that companies with gender-diverse boards are associated with more transparent public disclosures and less information asymmetry, leading to stock prices that better reflect public information. Gul, Srinidhi & Ng (2011) found that ‘‘gender diversity improves stock price informativeness by increasing voluntary public disclosures in large firms and increasing the 270 Id. E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices incentives for private information collection in small firms.’’ 271 Bravo and Alcaide-Ruiz (2019) found a positive association between women on the audit committee with financial or accounting expertise and the voluntary disclosure of forward-looking information.272 Abad et al. (2017) concluded that companies with genderdiverse boards are associated with lower levels of information asymmetry, suggesting that ‘‘the policies recently implemented in several European countries to increase the presence of female directors in company boards could have beneficial effects on stock markets by reducing the risk of informed trading and enhancing stock liquidity.’’ 273 Nasdaq believes that one consequence of information asymmetry is that insiders may engage in opportunistic behavior prior to a public announcement of financial results and before the market incorporates the new information into the company’s stock price. This can result in unfair gains or an avoidance of losses at the expense of shareholders who did not have access to the same information. This may exacerbate the principal-agent problem, in which the interests of a company’s board and shareholders are not aligned. Lucas-Perez et al. (2014) found that board gender diversity is positively associated with linking executive compensation plans to company performance,274 which may be an effective mechanism to deter opportunistic behavior by management and better align their interests with those of their company’s shareholders.275 Another concern is that ‘‘[w]hen information asymmetry is high, stakeholders do not have sufficient resources, incentives, or access to relevant information to monitor managers’ actions, which gives rise to the practice of earnings management.’’ 276 Earnings management ‘‘is generally defined as the practice of using discretionary accounting methods to attain desired levels of reported earnings.’’ 277 Manipulating earnings is particularly concerning to investors because ‘‘[i]f users of financial data are ‘misled’ by the level of reported income, jbell on DSKJLSW7X2PROD with NOTICES2 271 See Gul et al., supra note 66, at 2. 272 See Bravo and Alcaide-Ruiz, supra note 56, at 151. 273 See Abad et al., supra note 67, at 202. 274 See Lucas-Perez et al., supra note 69. 275 Id. 276 See Vernon J. Richardson, Information Asymmetry and Earnings Management: Some Evidence, 15 Rev. Quantitative Fin. and Acct. 325 (2000). 277 See Gull et al., supra note 55, at 2. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 then investors’ allocation of resources may be inappropriate when based on the financial statements provided by management,’’ 278 thereby undermining the efficacy of the capital formation process for investors who rely on such information to make informed investment and voting decisions. Gull et al. (2018) 279 observe that overseeing management is a crucial component of investor protection, particularly with regard to earnings management: The role of the board of directors and board characteristics (i.e. board independence and gender diversity) is usually associated with the protection of shareholder interests. . .. This role is particularly crucial with regard to the issue of earnings management, in that one of the responsibilities of boards is to monitor management.280 The authors of that study found that the presence of female audit committee members with business expertise is associated with a lower magnitude of earnings management. Srinidhi, Gul and Tsui (2011) observed that better oversight of management combined with lower information asymmetry leads to better earnings quality. They noted that ‘‘[e]arnings quality is an important outcome of good governance demanded by investors and therefore its improvement constitutes an important objective of the board.’’ 281 They found that companies with women on the board, specifically on the audit committee, exhibit ‘‘higher earnings quality’’ and ‘‘better reporting discipline by managers.’’ 282 They concluded that ‘‘including female directors on the board and the audit committee are plausible ways of improving the firm’s reporting discipline and increasing investor confidence in financial statements.’’ 283 Chen, Eshleman and Soileau (2016) suggested that the relationship between gender diversity and higher earnings quality observed by Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced internal control weaknesses, noting that ‘‘prior literature has established a negative relationship between internal control weaknesses and earnings quality.’’ 284 Internal control over financial reporting are procedures designed ‘‘to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for 278 Id. 279 See generally id. at 6 (citations omitted). 281 See Srinidhi et al., supra note 50, at 1638. 282 Id. at 1612. 283 Id. 280 Id. 284 See PO 00000 Chen et al., supra note 64, at 18. Frm 00029 Fmt 4701 Sfmt 4703 80499 external purposes in accordance with GAAP.’’ 285 Weaknesses in internal controls can ‘‘lead to poor financial reporting quality’’ and ‘‘more severe insider trading’’ 286 or failure to detect a material misstatement. According to the PCAOB: A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.287 A material misstatement can occur ‘‘as a result of some type of inherent risk, whether fraud or error (e.g., management’s aggressive accounting practices, erroneous application of GAAP).’’ 288 The failure to prevent or detect a material misstatement before financial statements are issued can require the company to reissue its financial statements and potentially face costly shareholder litigation. Chen et al. found that having at least one woman on the board (regardless of whether or not she is on the audit committee) ‘‘may lead [a] to reduced likelihood of material weaknesses [in internal control over financial reporting],’’ 289 and Abbott, Parker and Persley (2012) found ‘‘a significant association between the presence of at least one woman on the board and a lower likelihood of [a material financial] restatement.’’ 290 Notably, while the Sarbanes-Oxley Act (‘‘SOX’’) implemented additional measures to ensure that a company has robust internal controls, the findings of Abbott et al. were consistent among a sample of pre- and post-SOX restatements, suggesting that ‘‘an additional, beneficial layer of independence in group decision-making is associated with gender diversity.’’ 291 Nasdaq believes that the proposal to require listed companies to have at least two Diverse directors under Rule 5605(f) could help to lower information asymmetry and reduce the risk of insider trading or other opportunistic insider behavior, which would help to increase stock price informativeness and enhance stock liquidity, thereby protecting investors and promoting capital formation and efficiency. Nasdaq 285 See Public Company Accounting Oversight Board, Auditing Standard No. 5: Appendix A, A5 available at: https://pcaobus.org/oversight/ standards/archived-standards/details/Auditing_ Standard_5_Appendix_A. 286 See Chen et al., supra note 64, at 12. 287 See Public Company Accounting Oversight Board, supra note 285, at A7. 288 See Abbott et al., supra note 58, at 609–10. 289 See Chen et al., supra note 64, at 18. 290 See Abbott et al., supra note 58, at 607. 291 Id. at 609. E:\FR\FM\11DEN2.SGM 11DEN2 80500 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 believes that information asymmetry could also be reduced by permitting companies to satisfy Rule 5605(f)(2) by publicly disclosing their reasons for not meeting its diversity objectives in accordance with Rule 5605(f)(3), because the requirement will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions, which will further protect investors and promote capital formation and efficiency. Moreover, Nasdaq believes that proposed Rule 5605(f) could foster more transparent public disclosures, higher quality financial reporting, and stronger internal control over financial reporting and mechanisms to monitor management. This could be particularly beneficial for Smaller Reporting Companies that are not subject to the SOX 404(b) requirement to obtain an independent auditor’s attestation of management’s assessment of the effectiveness of internal control over financial reporting, thereby promoting investor protection. Nasdaq believes that the body of research on the relationship between economic performance and board diversity summarized under Section II.A.1.II.a above provides substantial evidence supporting the conclusion that board diversity does not have adverse effects on company financial performance, and therefore Nasdaq believes the proposal will not negatively impact capital formation, competition or efficiency among its public companies.292 Nasdaq considered that some studies on gender diversity alone have had mixed results,293 and that the U.S. GAO (2015) and Carter et al. (2010) concluded that the mixed results are due to differences in methodologies, data samples and time periods.294 This 292 See Alexandre Di Miceli and Angela Donaggio, Women in Business Leadership Boost ESG Performance: Existing Body of Evidence Makes Compelling Case, 42 International Finance Corporation World Bank Group, Private Sector Opinion at 11 n.15 (2018), available at: https:// www.ifc.org/wps/wcm/connect/topics_ext_content/ ifc_external_corporate_site/ifc+cg/resources/ private+sector+opinion/women+in+business+ leadership+boost+esg+performance (‘‘The overwhelming majority of empirical studies conclude that a higher ratio of women in business leadership does not impair corporate performance (virtually all studies find positive or nonstatistically significant results)’’). See also Wahid, supra note 59, at 6 (suggesting that ‘‘at a minimum, gender diversity on corporate boards has a neutral effect on governance quality, and at best, it has positive consequences for boards’ ability to monitor firm management’’). 293 See, e.g., Pletzer et al., supra note 38; Post and Byron, supra note 39; Adams and Ferreira, supra note 42. 294 See GAO Report, supra note 44, at 5 (‘‘Some research has found that gender diverse boards may VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 is not the first time Nasdaq has considered whether, on balance, various studies finding mixed results related to board composition and company performance are sufficient rationale to propose a listing rule. For example, in 2003, notwithstanding the mixed results of studies regarding the relationship between company performance and board independence,295 Nasdaq adopted listing rules requiring a majority independent board that were ‘‘intended to enhance investor confidence in the companies that list on Nasdaq.’’ 296 In its Approval Order, the SEC noted that ‘‘[t]he Commission has long encouraged exchanges to adopt and strengthen their corporate governance listing standards in order to, among other things, enhance investor confidence in the securities markets;’’ the Commission concluded that the independence rules would secure an ‘‘objective oversight role’’ for issuers’ boards, and ‘‘foster greater transparency, accountability, and objectivity’’ in that role.297 Nasdaq believes this reasoning applies to the current proposed rule as well. Even without clear consensus among studies related to board diversity and company performance, the heightened focus on corporate board diversity by investors demonstrates that investor confidence is undermined when data on board diversity is not readily available and when companies do not explain the reasons for the apparent absence of diversity on their boards.298 Legislators are increasingly taking action to encourage corporations to diversify their boards and improve diversity disclosures.299 Moreover, during its discussions with stakeholders, Nasdaq found consensus across every constituency that there is inherent value in board diversity. Lastly, it has been a longstanding principle that ‘‘Nasdaq stands for integrity and ethical business practices in order to enhance investor confidence, thereby contributing to the financial health of the economy and supporting the capital formation process.’’ 300 have a positive impact on a company’s financial performance, but other research has not. These mixed results depend, in part, on differences in how financial performance was defined and what methodologies were used’’); Carter (2010), supra note 40, at 400 (observing that the different ‘‘statistical methods, data, and time periods investigated vary greatly so that the results are not easily comparable.’’). 295 See supra note 45. 296 See Order Approving Proposed Rule Changes, 68 FR at 64,161. 297 Id. at 64,176. 298 See supra notes 4 and 8. 299 See supra note 112. 300 See Nasdaq Rulebook, Rule 5101. PO 00000 Frm 00030 Fmt 4701 Sfmt 4703 For all the foregoing reasons, Nasdaq believes that proposed Rule 5605(f) will promote investor protection and the public interest by enhancing investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two Diverse directors on their boards or by explaining their rationale for not meeting that objective. To the extent a company chooses not to meet the diversity objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will provide investors with additional disclosure about the company’s reasons for doing so under Rule 5605(f)(3). For example, the company may choose to disclose that it does not meet the diversity objectives of Rule 5605(f)(2) because it is subject to an alternative standard under state or foreign laws and has chosen to satisfy that diversity objective instead. On the other hand, many firms may strive to achieve even greater diversity than the objectives set forth in our proposed rule. Nasdaq believes that providing such flexibility and clear disclosure where the company determines to follow a different path will improve the quality of information available to investors who rely on this information to make informed investment and voting decisions, thereby promoting capital formation and efficiency, and further promoting the public interest. d. Not Designed to Permit Unfair Discrimination Between Customers, Issuers, Brokers, or Dealers Nasdaq believes that proposed Rule 5605(f) is not designed to permit unfair discrimination among companies because it requires all companies subject to the rule to have at least two Diverse directors or explain why they do not. Further, the proposal requires at least one of the two Diverse directors to be an individual who self-identifies as Female. While the proposal provides different requirements for the second Diverse director among Smaller Reporting Companies, Foreign Issuers and other companies, Nasdaq believes that the rule is not designed to permit unfair discrimination among companies. In all cases, a company can choose to meet the diversity objectives of the entire rule or to satisfy only certain elements of the rule. Further, the proposed rule does not limit board sizes—if a board chooses to nominate a Diverse individual to the board to meet the diversity objectives of the proposed rule, it is not precluded from also nominating a non-Diverse director for an additional board seat. E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 i. Rule 5605(f)(2)(B): Foreign Issuers Similar to all other companies subject to Rule 5605(f), the proposal requires all Foreign Issuers to have, or explain why they do not have, at least two Diverse directors, including one director who self-identifies as Female. However, Nasdaq proposes to provide Foreign Issuers with additional flexibility with regard to the second Diverse director. Foreign Issuers could satisfy the second director objective by including another Female director, or an individual who self-identifies as LGBTQ+ or as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction. While the proposal provides a different requirement for the second Diverse director for Foreign Issuers, Nasdaq believes it is not designed to permit unfair discrimination between Foreign Issuers and other companies because it recognizes that the unique demographic composition of the United States, and its historical marginalization of Underrepresented Minorities and the LGBTQ+ community, may not extend to all countries outside of the United States. Further, Nasdaq believes that it is challenging to apply a consistent definition of minorities to all countries globally because ‘‘[t]here is no internationally agreed definition as to which groups constitute minorities.’’ 301 Similarly, ‘‘there is no universally accepted international definition of indigenous peoples.’’ 302 Rather, the United Nations Declaration on the Rights of Indigenous Peoples recognizes ‘‘that the situation of indigenous peoples varies from region to region and from country to country and that the significance of national and regional particularities and various historical and cultural backgrounds should be taken into consideration.’’ 303 Accordingly, Nasdaq believes that it is not unfairly discriminatory to allow an alternative mechanism for Foreign 301 See United Nations, Minority Rights: International Standards and Guidance for Implementation 2 (2010), available at: https:// www.ohchr.org/Documents/Publications/ MinorityRights_en.pdf. See also G.A. Res. 47/135. art. 1.1 (Dec. 18, 1992) (‘‘States shall protect the existence and the national or ethnic, cultural, religious and linguistic identity of minorities within their respective territories and shall encourage conditions for the promotion of that identity.’’). The preamble to the Declaration also ‘‘[r]eaffirm[s] that one of the basic aims of the United Nations, as proclaimed in the Charter, is to promote and encourage respect for human rights and for fundamental freedoms for all, without distinction as to race, sex, language or religion.’’ 302 See United Nations, Minority Rights, supra note 301, at 3. 303 See G.A. Res. 61/295 (Sept. 13, 2007). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 Issuers to satisfy Rule 5605(f)(2) in recognition that the U.S.-based EEOC definition of Underrepresented Minorities is not appropriate for every Foreign Issuer. In addition, Foreign Issuers have the ability to satisfy Rule 5605(f)(2)(B) by explaining that they do not satisfy this alternative definition. Similarly, any company that is not a Foreign Issuer, but that prefers the alternative definition available for Foreign Issuers, could follow Rule 5605(f)(2)(B) and disclose its reasons for doing so. Under the proposal, Foreign Issuer means (a) a Foreign Private Issuer (as defined in Rule 5005(a)(19)) or (b) a company that (i) is considered a ‘‘foreign issuer’’ under Rule 3b–4(b) under the Act, and (ii) has its principal executive offices located outside of the United States. For example, a company that is considered a ‘‘foreign issuer’’ under Rule 3b–4(b) under the Act and has its principal executive offices located in Ireland would qualify as a Foreign Issuer for purposes of Rule 5605(f)(2), even if it is not considered a Foreign Private Issuer under Nasdaq or SEC rules. Nasdaq recognizes that Foreign Issuers may be located in jurisdictions that impose privacy laws limiting or prohibiting self-identification questionnaires, particularly as they relate to race or ethnicity. In such countries, a company may not be able to determine each director’s self-identified Diverse attributes due to restrictions on the collection of personal information. The company may instead publicly disclose pursuant to Rule 5605(f)(3) that ‘‘Due to privacy laws in the company’s home country jurisdiction limiting its ability to collect information regarding a director’s self-identified Diverse attributes, the company is not able to determine that it has two Diverse directors as set forth under Rule 5605(f)(2)(B)(ii).’’ ii. Rule 5605(f)(2)(C): Smaller Reporting Companies While the proposal provides a different requirement for the second Diverse director for Smaller Reporting Companies, Nasdaq believes that this distinction is not designed to permit unfair discrimination among companies. Nasdaq has designed the proposed rule to ensure it does not have a disproportionate economic impact on Smaller Reporting Companies by imposing undue costs or burdens. Nasdaq recognizes that Smaller Reporting Companies, especially prerevenue companies that depend on the capital markets to fund ground-breaking research and technological PO 00000 Frm 00031 Fmt 4701 Sfmt 4703 80501 advancements, may not have the resources to compensate an additional director or engage a search firm to find director candidates outside of the directors’ traditional networks. Nasdaq believes that this is a reasonable basis to distinguish Smaller Reporting Companies from other companies subject to the rule. Smaller Reporting Companies already are provided certain exemptions from Nasdaq’s listing rules. For example, under Rule 5605(d)(3), Smaller Reporting Companies must have a compensation committee comprised of at least two independent directors and a formal written compensation committee charter or board resolution that specifies the committee’s responsibilities and authority, but such companies are not required to grant authority to the committee to retain or compensate consultants or advisors or consider certain independence factors before selecting such advisors, consistent with Rule 10C–1 of the Act.304 In its approval order, the SEC concluded as follows: The Commission believes that these provisions are consistent with the Act and do not unfairly discriminate between issuers. The Commission believes that, for similar reasons to those for which Smaller Reporting Companies are exempted from the Rule 10C– 1 requirements, it makes sense for Nasdaq to provide some flexibility to Smaller Reporting Companies regarding whether the compensation committee’s responsibilities should be set forth in a formal charter or through board resolution. Further . . . in view of the potential additional costs of an annual review, it is reasonable not to require a Smaller Reporting Company to conduct an annual assessment of its charter or board resolution.305 The Commission also makes accommodations for Smaller Reporting Companies based on their more limited resources, allowing them to comply with scaled disclosure requirements in certain SEC reports rather than the more rigorous disclosure requirements for larger companies. For example, Smaller Reporting Companies are not required to include a compensation discussion and analysis in their proxy or Form 10–K describing the material elements of the compensation of its named executive officers.306 Eligible Smaller Reporting Companies also are relieved from the SOX 404(b) requirement to obtain an independent auditor’s attestation of management’s assessment of the effectiveness of internal control over 304 See Nasdaq Rulebook, Rule 5605(d)(3). Order Granting Accelerated Approval of Proposed Rule Change, 78 FR 4,554, 4,567 (Jan. 22, 2013). 306 See 17 CFR 229.402(l). 305 See E:\FR\FM\11DEN2.SGM 11DEN2 80502 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices financial reporting.307 In each case, companies may choose to comply with the more rigorous requirements in lieu of relying on the exemptions. Any company that is not a Smaller Reporting Company, but prefers the alternative rule available for Smaller Reporting Companies, could follow Rule 5605(f)(2)(C) and disclose their reasons for doing so. As such, Nasdaq believes that the proposed alternative rule for Smaller Reporting Companies is not designed to, and does not, unfairly discriminate among companies. Lastly, Nasdaq believes that Rule 5605(f)(2)(C) is not designed to permit unfair discrimination among companies because it requires Smaller Reporting Companies to have at least one director who self-identifies as Female, similar to other companies subject to Rule 5065(f). jbell on DSKJLSW7X2PROD with NOTICES2 iii. Rule 5605(f)(3): Public Disclosure of Non-Diverse Board Under proposed Rule 5605(f)(3), if a company determines not to meet the diversity objectives of Rule 5605(f) in its entirety, it must specify the applicable requirements of the Rule and explain its reasons for not having at least two Diverse directors. Nasdaq designed the proposal to avoid unduly burdening competition or efficiency, or conflicting with existing securities laws, by providing all companies subject to Rule 5605(f) with the option to make the public disclosure required under Rule 5605(f)(3) in the company’s proxy statement or information statement for its annual meeting of shareholders or, alternatively on the company’s website, provided that the company submits a URL link to such disclosure to Nasdaq through the Listing Center no later than 15 calendar days after the company’s annual shareholder meeting. Nasdaq believes Rule 5605(f)(3) is not designed to permit unfair discrimination among companies because the proposed rule provides all companies subject to Rule 5605(f) the option to disclose an explanation rather than meet the diversity objectives of Rule 5605(f)(2). Certain federal securities laws similarly permit companies to satisfy corporate governance requirements through disclosure of reasons for not meeting the applicable requirement. For example, under Regulation S–K, Item 407 requires a company to disclose whether or not its board of directors has determined that the company has at least one audit committee financial expert. If a company does not have a financial expert on the audit committee, 307 See Accelerated Filer and Large Accelerated Filer Definitions, 85 FR 17,178 (March 26, 2020). VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 it must provide an explanation.308 Item 406 requires a company to disclose whether it has adopted a written code of ethics that applies to the chief executive officer and senior financial or accounting officers. If a company has not adopted such a code of ethics, it must disclose the reasons why not.309 Item 402 regarding pay ratio disclosure defines how total compensation for employees should be calculated, but permits companies to use a different measure as long as they explain their approach.310 Furthermore, Nasdaq rules and SEC guidance already recognize that website disclosure can be a method of disseminating information to the public. For example, Nasdaq listing rules permit companies to provide website disclosures related to third party director compensation,311 foreign private issuer home country practices,312 and reliance on the exception relating to independent compensation committee members.313 The SEC has recognized that ‘‘[a] company’s website is an obvious place for investors to find information about the company’’ 314 and permits companies to make public disclosure of material information through website disclosures if, among other things, the company’s website is ‘‘a recognized channel of distribution of information.’’ 315 iv. Rule 5605(f)(4): Exempt Companies Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the following types of companies from the requirements of Rule 5605(f) (defined as ‘‘Exempt Companies’’): acquisition companies listed under IM–5101–2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non-voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 308 See 17 CFR 229.407(d)(5). § 229.406(a). 310 Id. § 229.402. 311 See Nasdaq Rulebook, Rule 5250(b)(3)(A). 312 Id., Rule 5615(a)(3)(B) and IM–5615–3. 313 Id., Rules 5605(d)(2)(B) (non-independent compensation committee member under exceptional and limited circumstances) and 5605(e)(3) (non-independent nominations committee member under exceptional and limited circumstances). 314 See Commission Guidance on the Use of Company websites, 73 FR 45,862, 45,864 (Aug. 7, 2008). 315 Id. at 45,867. 309 Id. PO 00000 Frm 00032 Fmt 4701 Sfmt 4703 Series. Each of the types of Exempt Companies either has no board of directors, lists only securities with no voting rights towards the election of directors, or is not an operating company, and the holders of the securities they issue do not expect to have a say in the composition of their boards. As such, Nasdaq believes the proposal is not designed to permit unfair discrimination by excluding Exempt Companies from the application of proposed Rule 5605(f). These companies already are exempt from certain of Nasdaq’s corporate governance standards related to board composition, as described in Rule 5615. v. Rule 5605(f)(5): Phase-in Period Proposed Rule 5605(f)(5)(A) will allow any newly listing company that was not previously subject to a substantially similar requirement of another national securities exchange one year from the date of listing to satisfy the requirements of Rule 5605(f). Proposed Rule 5605(f)(5)(B) also will allow any company that ceases to be a Foreign Issuer, a Smaller Reporting Company or an Exempt Company one year from the date that the company no longer qualifies as a Foreign Issuer, a Smaller Reporting Company or an Exempt Company, respectively, to satisfy the requirements of Rule 5605(f). This phase-in period will apply after the end of the transition period provided in Rule 5605(f)(7). Nasdaq believes this approach is not designed to permit unfair discrimination because it provides all companies that become newly subject to the rule the same time period within which to comply. In addition, this approach is similar to other phase-in periods granted to companies listing on or transferring to Nasdaq. For example, Rule 5615(b)(1) provides a company listing in connection with its initial public offering one year to fully comply with the compensation and nomination committee requirements of Rules 5605(d) and (e), and the majority independent board requirement of Rule 5605(b). Similarly, SEC Rule 10A– 3(b)(1)(iv)(A) allows a company up to one year from the date its registration statement is effective to fully comply with the applicable audit committee composition requirements. Nasdaq Rule 5615(b)(3) provides a one-year timeframe for compliance with the board composition requirements for companies transferring from other listed markets that do not have a substantially similar requirement. E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices vi. Rule 5605(f)(7): Effective Dates/ Transition Under proposed Rule 5605(f)(7), each company must have, or explain why it does not have, one Diverse director no later than two calendar years after the Approval Date,316 and two Diverse directors no later than (i) four calendar years after the Approval Date for companies listed on the NGS or NGM tiers, or (ii) five calendar years after the Approval Date for companies listed on the NCM tier. Nasdaq believes this approach is not designed to permit unfair discrimination because it recognizes that companies listed on the Nasdaq Capital Market may not have the resources necessary to compensate an additional director or engage a search firm to search for director candidates outside of the directors’ traditional networks. Therefore, Nasdaq believes it is in the public interest to provide such companies with one additional year to meet the diversity objectives of Rule 5605(f), should they choose to do so. Nasdaq notes that all companies may choose to follow a timeframe applicable to a different market tier, provided they publicly describe their explanation for doing so. They also may construct their own timeframe for meeting the diversity objectives of Rule 5605(f), provided they publicly disclose their reasons for not abiding by Nasdaq’s timeframe. jbell on DSKJLSW7X2PROD with NOTICES2 e. Not Designed to Regulate by Virtue of any Authority Conferred by the Act Matters Not Related to the Purposes of the Act or the Administration of the Exchange Nasdaq believes that the proposal is not designed to regulate by virtue of any authority conferred by the Act matters not related to the purposes of the Act or the administration of the Exchange.317 The proposal relates to the Exchange’s corporate governance standards for listed companies. As discussed above, ‘‘[t]he Commission has long encouraged exchanges to adopt and strengthen their corporate governance listing standards in order to, among other things, enhance investor confidence in the securities markets.’’ 318 And because ‘‘it is not always feasible to define . . . every practice which is inconsistent with the public interest or with the protection of investors,’’ the Act leaves to SROs ‘‘the 316 The ‘‘Approval Date’’ is the date that the SEC approves the proposed rule. 317 See 15 U.S.C. 78f(b)(5). 318 See Order Approving Proposed Rule Changes, 68 FR at 64,161. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 necessary work’’ of rulemaking pursuant to Section 6(b)(5).319 Nasdaq recognizes that U.S. states are increasingly proposing and adopting board diversity requirements, and because corporations are creatures of state law, some market participants may believe that such regulation is best left to states. However, Nasdaq considered that certain of its listing rules related to corporate governance currently relate to areas that are also regulated by states. For example, states impose standards related to quorums 320 and shareholder approval of certain transactions,321 which also are regulated under Nasdaq’s listing rules.322 Nasdaq has adopted rules relating to such matters to ensure uniformity of such rules among its listed companies. Similarly, Nasdaq believes that the proposed rule will create uniformity among listed companies by helping to assure investors that all nonexempt companies have at least two Diverse directors on their board or publicly describe why they do not. Further, Nasdaq believes the proposal will enhance investor confidence that listed companies that have two Diverse directors are considering the perspectives of more than one demographic group, leading to robust dialogue and better decision making, as well as the other corporate governance benefits of diverse boards discussed above in Section II.A.1.II. To the extent companies choose to disclose their reasons for not meeting the diversity objectives of Rule 5605(f)(2) pursuant to Rule 5605(f)(3), Nasdaq believes that such disclosure will improve the quality of information available to investors who rely on this information to make an informed voting decision, thereby promoting capital formation and efficiency. It has been the Exchange’s longstanding principle that ‘‘Nasdaq stands for integrity and ethical business practices in order to enhance investor confidence, thereby contributing to the financial health of the economy and supporting the capital formation process.’’ 323 In addition, as discussed in Section II.A.1.I, in passing Section 342 of the 319 See Heath v. SEC, 586 F.3d 122, 132 (2d Cir. 2009) (citing Avery v. Moffat, 55 N.Y.S.2d 215, 228 (Sup. Ct. 1945)). 320 See, e.g., 8 Del. Code § 216 (providing that a quorum at a shareholder’s meeting shall consist of no less than 1⁄3 of the shares entitled to vote at such meeting). 321 See, e.g., id. §§ 251, 271 (providing that shareholder approval by a majority of the outstanding voting shares entitled to vote is required for mergers and the sale of all or substantially all of a corporation’s assets). 322 See, e.g., Nasdaq Rulebook, Rules 5620(c) and 5635(a). 323 Id., Rule 5101. PO 00000 Frm 00033 Fmt 4701 Sfmt 4703 80503 Dodd-Frank Act, Congress recognized the need to respond to the lack of diversity in the financial services industry, and the Standards designed by the Commission and other financial regulators provide a framework for addressing that industry challenge. The Standards themselves identify several focus areas, including the importance of ‘‘Organizational Commitment,’’ which speaks to the critical role of senior leadership—including boards of directors—in promoting diversity and inclusion across an organization. In addition, like the proposed rule, the Standards also consider ‘‘Practice to Promote Transparency,’’ and recognize that transparency is a key component of any diversity initiative. Specifically, the Standards provide that the ‘‘transparency of an entity’s diversity and inclusion program promotes the objectives of Section 342,’’ and also is important because it provides the public with necessary information to assess an entity’s diversity policies and practices.324 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Nasdaq reviewed requirements related to board diversity in two dozen foreign jurisdictions, and almost every jurisdiction imposes diversity-focused requirements on listed companies, either through a securities exchange, financial regulator or the government. Nasdaq competes for listings globally, including in countries that have implemented a more robust regulatory reporting framework for diversity and ESG disclosures. Currently in the U.S., the Long Term Stock Exchange (‘‘LTSE’’), which includes a number of sponsors which have investment businesses, has communicated to institutional investors that it that it seeks to distinguish itself by focusing on corporate governance, including, for example, diversity and inclusion. Under Rule 14.425, companies listed on LTSE must adopt and publish a long-term stakeholder policy that explains, among other things, ‘‘the Company’s approach to diversity and inclusion.’’ 325 324 Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015). 325 See Long-Term Stock Exchange Rule Book, Rule 14.425. E:\FR\FM\11DEN2.SGM 11DEN2 jbell on DSKJLSW7X2PROD with NOTICES2 80504 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices I. Board Statistical Disclosure The Exchange does not believe that proposed Rule 5606 will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange believes that the adoption of Rule 5606 will not impose any undue burden on competition among listed companies for the reasons set forth below. With a few exceptions, all companies would be required to make the same disclosure of their board-level statistical information. The average board size of a company that is currently listed on the Exchange is eight directors. Although a company would be required to disclose its board-level statistical data, directors may choose to opt out rather than reveal their diversity characteristics to their company. A company would identify such directors in the ‘‘Undisclosed’’ category. For directors who voluntarily disclose their diversity characteristics, the company would collect their responses and disclose the information in either the company’s proxy statement, information statement of shareholder meeting or on the company’s website, using Nasdaq’s required format. While the time and economic burden may vary based on a company’s board size, Nasdaq does not believe there is any significant burden associated with gathering, preparing and reporting this data. Therefore, Nasdaq believes that there will be a de minimis time and economic burden on listed companies to collect and disclose the diversity statistical data. Some investors value demographic diversity, and list it as an important factor influencing their director voting decisions.326 Investors have stated that consistent data would make its collection and analysis easier and more equitable for investors that are not large enough to demand or otherwise access individualized disclosures.327 Therefore, Nasdaq believes that any burden placed on companies to gather and disclose their board-level diversity statistics is counterbalanced by the benefits that the information will provide to a company’s investors. Moreover, as discussed above, most listed companies are required to submit an annual EEO–1 Report, which provides statistical data related to race and gender data among employees similar to the data required under proposed Rule 5606(a). Because most companies are already collecting similar information annually to satisfy their 326 See 327 See Hunt et al., supra note 26. Petition for Rulemaking, supra note 123, at 2. VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 EEOC requirement, Nasdaq does not believe that adding directors to the collection will place a significant burden on these companies. Additionally, the information requested from Foreign Issuers is limited in scope and therefore does not impose a significant burden on them. Nasdaq faces competition in the market for listing services. Proposed Rule 5606 reflects that competition, but it does not impose any burden on competition with other exchanges. As discussed above, investors have made clear their desire for greater transparency into public companies’ board-level diversity as it relates to gender identity, race, and ethnicity. Nasdaq believes that the proposed rule will enhance the competition for listings. Other exchanges can set similar requirements for their listed companies, thereby increasing competition to the benefit of those companies and their shareholders. Accordingly, Nasdaq does not believe the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. II. Diverse Board Representation or Explanation Nasdaq believes that proposed Rule 5605(f) will not impose burdens on competition among listed companies because the Exchange has constructed a framework for similarly-situated companies to satisfy similar requirements (i.e., Foreign Issuers, Smaller Reporting Companies and other companies), and has provided all companies with the choice of satisfying the requirements of Rule 5605(f)(2) by having at least two Diverse directors, or by explaining why they do not. Nasdaq believes that this will avoid imposing undue costs or burdens on companies that, for example, cannot afford to compensate an additional director or believe it is not appropriate, feasible or desirable to meet the diversity objectives of Rule 5605(f) based on the company’s particular circumstances (for example, the company’s size, operations or current board composition). Rather than requiring a company to divert resources to compensate an additional director, and place the company at a competitive disadvantage with its peers, the rule provides the flexibility for such company to explain why it does not meet the diversity objective. The cost of identifying director candidates can range from nothing or a nominal fee (via personal, work or school-related networks, or board affinity organizations, as well as internal research by the corporate secretary’s team) to amounts that can vary widely PO 00000 Frm 00034 Fmt 4701 Sfmt 4703 depending on the specific search firm and the size of the company. Some industry observers estimate board searches for independent directors cost about one-third of a director’s annual compensation, while others estimate it costs between $75,000 and $150,000. The underlying figures vary; for example, one search firm generally charges $25,000 to $50,000. Nasdaq observes that total annual director compensation can range widely; median director pay is estimated at $134,000 for Russell 3000 companies and $232,000 for S&P 500 companies. Moreover, there is a wider range of underlying compensation amounts. For example, Russell 3000 directors may receive approximately $32,600 (10th percentile), or up to $250,000 (90th percentile) or more. S&P 500 directors may receive approximately $100,000 (10th percentile) or up to $310,000 (90th percentile) or more.328 Most, if not all, of these costs would be borne in any event in the search for new directors regardless of the proposed rule. While the proposed rule might lead some companies to search for director candidates outside of already established networks, the incremental costs of doing so would be tied directly to the benefit of a broader search. To reduce costs for companies that do not currently meet the diversity objectives of Rule 5605(f)(2), Nasdaq is proposing to provide listed companies that have not yet met their diversity objectives with free access to a network of board-ready diverse candidates and a tool to support board evaluation, benchmarking and refreshment. This offering is designed to ease the search for diverse nominees and reduce the costs on companies that choose to meet the diversity objectives of Rule 5605(f)(2). Nasdaq is contemporaneously submitting a rule filing to the Commission regarding the provision of such services. Nasdaq also plans to publish FAQs on its Listing Center to provide guidance to companies on the application of the proposed rules, and to establish a dedicated mailbox for companies and their counsel to email additional questions to Nasdaq regarding the application of the proposed rule. Nasdaq believes that these services will 328 Total annual director compensation varies by compensation elements and structure as well as amount, which is generally based on the size, sector, maturity of the company, and company specific situation. See Mark Emanuel et al., Semler Brossy and the Conference Board, Director Compensation Practices in the Russell 3000 and S&P 500 (2020 ed.), available at https:// conferenceboard.esgauge.org/ directorcompensation/report. E:\FR\FM\11DEN2.SGM 11DEN2 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES2 help to ease the compliance burden on companies whether they choose to meet the listing rule’s diversity objectives or provide an explanation for not doing so. Nasdaq also has structured the proposed rule to provide companies with at least four years from the Approval Date to satisfy Rule 5605(f)(2) so that companies do not incur immediate costs striving to meet the diversity objectives of Rule 5605(f)(2). Nasdaq also has reduced the compliance burden on Smaller Reporting Companies and Foreign Issuers by providing them with additional flexibility when satisfying the requirement related to the second Diverse director. Smaller Reporting Companies could satisfy the proposed diversity objective to have two Diverse directors under Rule 5605(f)(2)(C) with two Female directors. Like other companies, Smaller Reporting Companies also could satisfy the second director objective by including an individual who self-identifies as an Underrepresented Minority or a member of the LGBTQ+ community. Foreign Issuers could satisfy the second director objective by including another Female director, or an individual who selfidentifies as LGBTQ+ or an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the company’s home country jurisdiction. Nasdaq has further reduced the compliance burdens on companies listed on the Nasdaq Capital Market tier by providing them with five years from the Approval Date to satisfy Rule 5605(f)(2), recognizing that such companies may face additional challenges and resource constraints when identifying additional director nominees who self-identify as Diverse. For the foregoing reasons, Nasdaq does not believe that proposed Rule 5605(f) will impose any burden on competition among issuers that is not necessary or appropriate in furtherance of the purposes of the Act. Further, Nasdaq does not believe the proposed rule will impose any burden on competition among listing exchanges. As described above, Nasdaq competes with other exchanges globally for listings, including exchanges based in VerDate Sep<11>2014 01:33 Dec 11, 2020 Jkt 253001 jurisdictions that have implemented disclosure requirements related to diversity. Within the United States, LTSE requires listed companies to adopt and publish a long-term stakeholder policy that explains, among other things, ‘‘the Company’s approach to diversity and inclusion.’’ 329 Other listing venues within the United States may propose to adopt rules similar to LTSE’s requirements or the Exchange’s proposal if they believe companies would prefer to list on an exchange with diversity-related listing standards. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2020–081 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2020–081. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASDAQ–2020–081, and should be submitted on or before January 4, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.330 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–27091 Filed 12–10–20; 8:45 am] BILLING CODE 8011–01–P Long-Term Stock Exchange Rule Book, Rule 14.425. 329 See PO 00000 Frm 00035 Fmt 4701 Sfmt 9990 80505 330 17 E:\FR\FM\11DEN2.SGM CFR 200.30–3(a)(12). 11DEN2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 239 (Friday, December 11, 2020)]
[Notices]
[Pages 80472-80505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27091]

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Vol. 85

Friday,

No. 239

December 11, 2020

Part V

Securities and Exchange Commission

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Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of
Filing of Proposed Rule Change To Adopt Listing Rules Related to Board
Diversity; Notice

Federal Register / Vol. 85 , No. 239 / Friday, December 11, 2020 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90574; File No. SR-NASDAQ-2020-081]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related
to Board Diversity

December 4, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 1, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to adopt listing rules related to board
diversity, as described in more detail below:
(i) To adopt Rule 5605(f) (Diverse Board Representation), which
would require Nasdaq-listed companies, subject to certain exceptions,
(A) to have at least one director who self-identifies as a female, and
(B) to have at least one director who self-identifies as Black or
African American, Hispanic or Latinx, Asian, Native American or Alaska
Native, Native Hawaiian or Pacific Islander, two or more races or
ethnicities, or as LGBTQ+, or (C) to explain why the company does not
have at least two directors on its board who self-identify in the
categories listed above;
(ii) to adopt Rule 5606 (Board Diversity Disclosure), which would
require Nasdaq-listed companies, subject to certain exceptions, to
provide statistical information in a proposed uniform format on the
company's board of directors related to a director's self-identified
gender, race, and self-identification as LGBTQ+; and
(iii) to update Rule 5615 and IM-5615-3 (Foreign Private Issuers)
and Rule 5810(c) (Types of Deficiencies and Notifications) to
incorporate references to proposed Rule 5605(f) and Rule 5606; and
(iv) to make certain other non-substantive conforming changes.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
I. The Diversity Imperative for Corporate Boards
Over the past year, the social justice movement has brought
heightened attention to the commitment of public companies to diversity
and inclusion. Controversies arising from corporate culture and human
capital management challenges, as well as technology-driven changes to
the business landscape, already underscored the need for enhanced board
diversity--diversity in the boardroom is good corporate governance. The
benefits to stakeholders of increased diversity are becoming more
apparent and include an increased variety of fresh perspectives,
improved decision making and oversight, and strengthened internal
controls. Nasdaq believes that the heightened focus on corporate board
diversity by companies,\3\ investors,\4\ corporate governance
organizations,\5\ and legislators \6\ demonstrates that investor
confidence is enhanced when boardrooms are comprised of more than one
demographic group. Nasdaq has also observed recent calls from SEC
commissioners \7\ and investors \8\ for

[[Page 80473]]

companies to provide more transparency regarding board diversity.
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\3\ See Deloitte and the Society for Corporate Governance, Board
Practices Quarterly: Diversity, equity, and inclusion (Sept. 2020),
available at: https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/diversity-equity-and-inclusion.html
(finding, in a survey of over 200 companies, that ``most companies
and/or their boards have taken, or intend to take, actions in
response to recent events surrounding racial inequality and
inequity; 71% of public companies and 65% of private companies
answered this question affirmatively'').
\4\ See ISS Governance, 2020 Global Benchmark Policy Survey,
Summary of Results 6 (Sept. 24, 2020), available at: https://www.issgovernance.com/wp-content/uploads/publications/2020-iss-policy-survey-results-report-1.pdf (finding that ``a significant
majority of investors (61 percent) indicated that boards should aim
to reflect the company's customer base and the broader societies in
which they operate by including directors drawn from racial and
ethnic minority groups'').
\5\ See International Corporate Governance Network, ICGN
Guidance on Diversity on Boards 5 (2016), available at: https://www.icgn.org/sites/default/files/ICGN%20Guidance%20on%20Diversity%20on%20Boards%20-%20Final.pdf
(``The ICGN believes that diversity is a core attribute of a well-
functioning board which supports greater long-term value for
shareholders and companies.'').
\6\ See, e.g., John J. Cannon et al., Sherman & Sterling LLP,
Washington State Becomes Next to Mandate Gender Diversity on Boards
(May 28, 2020), available at: https://www.shearman.com/perspectives/2020/05/washington-state-becomes-next-to-mandate-gender-diversity-on-boards; Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30,
2020) (California legislation requiring companies headquartered in
the state to have at least one director who self-identifies as a
Female and one from an Underrepresented Community).
\7\ See Commissioner Allison Herren Lee, Regulation S-K and ESG
Disclosures: An Unsustainable Silence (Aug. 26, 2020), available at:
https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26#_ftnref15 (``There is ever-growing recognition of the
importance of diversity from all types of investors . . . [a]nd
large numbers of commenters on this [SEC] rule proposal emphasized
the need for specific diversity disclosure requirements.''); see
also Commissioner Caroline Crenshaw, Statement on the
``Modernization'' of Regulation S-K Items 101, 103, and 105 (August
26, 2020), available at: https://www.sec.gov/news/public-statement/crenshaw-statement-modernization-regulation-s-k (``As Commissioner
Lee noted in her statement, the final [SEC] rule is also silent on
diversity, an issue that is extremely important to investors and to
the national conversation. The failure to grapple with these issues
is, quite simply, a failure to modernize.''); Mary Jo White, Keynote
Address, International Corporate Governance Network Annual
Conference: Focusing the Lens of Disclosure to Set the Path Forward
on Board Diversity, Non-GAAP, and Sustainability (June 27, 2016),
available at: https://www.sec.gov/news/speech/chair-white-icgn-speech.html (``Companies' disclosures on board diversity in
reporting under our current requirements have generally been vague
and have changed little since the rule was adopted . . . Our lens of
board diversity disclosure needs to be re-focused in order to better
serve and inform investors.'').
\8\ See Vanguard, Investment Stewardship 2019 Annual Report
(2019), available at: https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2019_investment_stewardship_annual_report.pdf (``We want companies
to disclose the diversity makeup of their boards on dimensions such
as gender, age, race, ethnicity, and national origin, at least on an
aggregate basis.''); see also State Street Global Advisors,
Diversity Strategy, Goals & Disclosure: Our Expectations for Public
Companies (Aug. 27, 2020) https://www.ssga.com/us/en/individual/etfs/insights/diversity-strategy-goals-disclosure-our-expectations-for-public-companies (announcing expectation that State Street's
portfolio companies (including US companies ``and, to the greatest
extent possible, non-US companies'') provide board level
``[d]iversity characteristics, including racial and ethnic makeup,
of the board of directors'').
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Nasdaq conducted an internal study of the current state of board
diversity among Nasdaq-listed companies based on public disclosures,
and found that while some companies already have made laudable progress
in diversifying their boardrooms, the national market system and the
public interest would best be served by an additional regulatory
impetus for companies to embrace meaningful and multi-dimensional
diversification of their boards. It also found that current reporting
of board diversity data was not provided in a consistent manner or on a
sufficiently widespread basis. As such, investors are not able to
readily compare board diversity statistics across companies.
Accordingly, Nasdaq is proposing to require each of its listed
companies, subject to certain exceptions, to: (i) Provide statistical
information regarding diversity among the members of the company's
board of directors under proposed Rule 5606; and (ii) have, or explain
why it does not have, at least two ``Diverse'' directors on its board
under proposed rule 5605(f)(2). ``Diverse'' means a director who self-
identifies as: (i) Female, (ii) an Underrepresented Minority, or (iii)
LGBTQ+. Each listed company must have, or explain why it does not have,
at least one Female director and at least one director who is either an
Underrepresented Minority or LGBTQ+. Foreign Issuers (including Foreign
Private Issuers) and Smaller Reporting Companies, by contrast, have
more flexibility and may satisfy the requirement by having two Female
directors. ``Female'' means an individual who self-identifies her
gender as a woman, without regard to the individual's designated sex at
birth. ``Underrepresented Minority'' means, consistent with the
categories reported to the Equal Employment Opportunity Commission
(``EEOC'') through the Employer Information Report EEO-1 Form (``EEO-1
Report''), an individual who self-identifies as one or more of the
following: Black or African American, Hispanic or Latinx, Asian, Native
American or Alaska Native, Native Hawaiian or Pacific Islander, or Two
or More Races or Ethnicities. ``LGBTQ+'' means an individual who self-
identifies as any of the following: Lesbian, gay, bisexual, transgender
or a member of the queer community.
Under proposed Rule 5606, Nasdaq proposes to provide each company
with one calendar year from the date that the Commission approves this
proposal (the ``Approval Date'') to comply with the requirement for
statistical information regarding diversity. Under proposed Rule
5605(f)(2), no later than two calendar years after the Approval Date,
each company must have, or explain why it does not have, one Diverse
director. Further, each company must have, or explain why it does not
have, two Diverse directors no later than: (i) Four calendar years
after the Approval Date for companies listed on the Nasdaq Global
Select or Global Market tiers; or (ii) five calendar years after the
Approval Date for companies listed on the Nasdaq Capital Market tier.
Nasdaq undertook extensive research and analysis and has concluded
that the proposal will fulfill the objectives of the Act in that it is
designed to remove impediments to and perfect the mechanism of a free
and open market and a national market system, to prevent fraudulent and
manipulative acts and practices, and to protect investors and the
public interest. In addition to conducting its own internal analysis as
described above, Nasdaq reviewed a substantial body of third-party
research and interviewed leaders representing a broad spectrum of
market participants and other stakeholders to:
Determine whether empirical evidence demonstrates an
association between board diversity, shareholder value, investor
protection and board decision-making;
understand investors' interest in, and impediments to
obtaining, information regarding the state of board diversity at public
companies;
review the current state of board diversity and
disclosure, both among Nasdaq-listed companies and more broadly within
the U.S.;
gain a better understanding of the causes of
underrepresentation on boards;
obtain the views of leaders representing public companies,
investment banks, corporate governance organizations, investors,
regulators and civil rights groups on the value of more diverse
corporate boards, and on various approaches to encouraging more
diversity on corporate boards; and
evaluate the success of approaches taken by exchanges,
regulators, and governments in both the U.S. and foreign jurisdictions
to remedy underrepresentation on boards.
While gender diversity has improved among U.S. company boards in
recent years, the pace of change has been gradual, and the U.S. still
lags behind other jurisdictions that have imposed requirements related
to board diversity. Moreover, progress toward bringing underrepresented
racial and ethnic groups into the boardroom has been even slower.
Nasdaq is unable to provide definitive estimates regarding the number
of listed companies that will be affected by the proposal due to the
inconsistent disclosures and definitions of diversity across companies
and the extremely limited disclosure of race and ethnicity
information--an information gap the proposed rule addresses. Based on
the limited information that is available, Nasdaq believes a
supermajority of listed companies have made notable strides to improve
gender diversity in the boardroom and have at least one woman on the
board. Nasdaq also believes that listed companies are diligently
working to add directors with other diverse attributes, although
consistent with other studies of U.S. companies, Nasdaq believes the
pace of progress, in this regard, is happening more gradually. While
studies suggest that current candidate selection processes may result
in diverse candidates being overlooked, Nasdaq also believes that the
lack of reliable and consistent data creates a barrier to measuring and
improving diversity in the boardroom.
Nasdaq reviewed dozens of empirical studies and found that an
extensive body of academic research demonstrates that diverse boards
are positively associated with improved corporate governance and
financial performance. For example, as discussed in detail below in
Section II, Academic Research: The Relationship between Diversity and
Shareholder Value, Investor Protection and Decision Making, studies
have found that companies with gender-diverse boards or audit
committees are associated with: More transparent public disclosures and
less information asymmetry; better reporting discipline by management;
a lower likelihood of manipulated earnings through earnings management;
an increased likelihood of voluntarily disclosing forward-looking
information; a lower likelihood of receiving audit qualifications due
to errors, non-compliance or omission of information; and a lower
likelihood of securities fraud. In addition, studies found that having
at least one woman on the board is associated with a lower likelihood
of material weaknesses in internal control over financial reporting and
a lower likelihood of material financial restatements. Studies also
identified positive relationships between board diversity and commonly
used financial metrics, including higher returns on invested capital,
returns on equity, earnings per share, earnings before interest and
taxation margin, asset valuation multiples and credit ratings.

[[Page 80474]]

Nasdaq believes there are additional compelling reasons to support
the diversification of company boards beyond a link to improved
corporate governance and financial performance:
Investors are calling in greater numbers for
diversification of boardrooms. Vanguard, State Street Advisors,
BlackRock, and the NYC Comptroller's Office include board diversity
expectations in their engagement and proxy voting guidelines.\9\ The
heightened investor focus on corporate diversity and inclusion efforts
demonstrates that investor confidence is undermined when a company's
boardroom is homogenous and when transparency about such efforts is
lacking. Investors frequently lack access to information about
corporate board diversity that could be material to their decision
making, and they might divest from companies that fail to take into
consideration the demographics of their corporate stakeholders when
they refresh their boards. Nasdaq explores these investor sentiments in
Section III, Current State of Board Diversity and Causes of
Underrepresentation on Boards.
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\9\ Vanguard announced in 2020 it would begin asking companies
about the race and ethnicity of directors. See Vanguard, Investment
Stewardship 2020 Annual Report (2020), available at: https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2020_investment_stewardship_annual_report.pdf. Starting
in 2020, State Street Global Advisors will vote against the entire
nominating committee of companies that do not have at least one
woman on their boards and have not addressed questions on gender
diversity within the last three years. See State Street Global
Advisors, Summary of Material Changes to State Street Global
Advisors' 2020 Proxy Voting and Engagement Guidelines (2020),
available at: https://www.ssga.com/library-content/pdfs/global/proxy-voting-and-engagement-guidelines.pdf. Beginning in 2018,
BlackRock stated in proxy voting guidelines they ``would normally
expect to see at least 2 women directors on every board.'' See
BlackRock Investment Stewardship, Corporate governance and proxy
voting guidelines for U.S. securities (Jan. 2020), available at:
https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf. The NYC Comptroller's
Office in 2019 asked companies to adopt policies to ensure women and
people of color are on the initial list for every open board seat.
See Scott M. Stringer, Remarks at the Bureau of Asset Management
`Emerging Managers and MWBE Managers Conference (Oct. 11, 2019),
available at: https://comptroller.nyc.gov/wp-content/uploads/2019/10/10.11.19-SMS-BAM-remarks_distro.pdf.
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Nasdaq believes, consistent with SEC disclosure
requirements in other contexts,\10\ that management's vision on key
issues impacting the company should be communicated with investors in a
clear and straightforward manner. Indeed, transparency is the bedrock
of federal securities laws regarding disclosure, and this sentiment is
reflected in the broad-based support for uniform disclosure
requirements regarding board diversity that Nasdaq observed during the
course of its outreach to the industry. In addition, organizational
leaders representing every category of corporate stakeholders Nasdaq
spoke with (including business, investor, governance, regulatory and
civil rights communities) were overwhelmingly in favor of diversifying
boardrooms. Nasdaq summarizes the findings of its stakeholder outreach
in Section IV, Stakeholder Perspectives.
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\10\ See Commission Guidance Regarding Management's Discussion
and Analysis of Financial Condition and Results of Operations, 68 FR
75,056 (Dec. 29, 2003) (``We believe that management's most
important responsibilities include communicating with investors in a
clear and straightforward manner. MD&A is a critical component of
that communication. The Commission has long sought through its
rules, enforcement actions and interpretive processes to elicit MD&A
that not only meets technical disclosure requirements but generally
is informative and transparent.''); see also Management's Discussion
and Analysis, Selected Financial Data, and Supplementary Financial
Information, Release No. 33-10890 (Nov. 19, 2020) (citing the 2003
MD&A Interpretative Release and stating that the purpose of the MD&A
section is to enable investors to see a company ``through the eyes
of management'').
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Legislators at the federal and state level increasingly
are taking action to encourage or mandate corporations to diversify
their boards and improve diversity disclosures. Congress currently is
considering legislation requiring each SEC-registered company to
provide board diversity statistics and disclose whether it has a board
diversity policy. To date, eleven states have passed or proposed
legislation related to board diversity.\11\ SEC regulations require
companies to disclose whether diversity is considered when identifying
director nominees and, if so, how. Nasdaq explores various state and
federal initiatives in Section V, U.S. Regulatory Framework and Section
VI, Nasdaq Proposal.
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\11\ See Michael Hatcher and Weldon Latham, States are Leading
the Charge to Corporate Boards: Diversify!, Harv. L. Sch. Forum on
Corp. Governance (May 12, 2020), available at: https://corpgov.law.harvard.edu/2020/05/12/states-are-leading-the-charge-to-corporate-boards-diversify/.
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In considering the merits and shaping the substance of the proposed
listing rule, Nasdaq also sought and received valuable input from
corporate stakeholders. During those discussions, Nasdaq found
consensus across every constituency in the inherent value of board
diversity. Business leaders also expressed concern that companies--and
particularly smaller companies--would prefer an approach that allows
flexibility to comply in a manner that fits their unique circumstances
and stakeholders. Nasdaq recognizes that the operations, size, and
current board composition of each Nasdaq-listed company are unique, and
Nasdaq therefore endeavored to provide a regulatory impetus to enhance
board diversity that balances the need for flexibility with each
company's particular circumstances.
The Exchange also considered the experience of its parent company,
Nasdaq, Inc., as a public company.¹² In 2002, Nasdaq, Inc.
met the milestone of welcoming its first woman, Mary Jo White, who
later served as SEC Chair, to its board of directors. In her own words,
``I was the first and only woman to serve on the board when I started,
but, happily, I was joined by another woman during my tenure . . . And
then there were two. Not enough, but better than one.'' \13\ In 2019,
Nasdaq, Inc. also welcomed its first Black director. As a Charter
Pledge Partner of The Board Challenge, Nasdaq supports The Board
Challenge's goal of ``true and full representation on all boards of
directors.'' \14\
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\12\ While the Exchange recognizes that it is only one part of
an ecosystem in which multiple stakeholders are advocating for board
diversity, that part is meaningful: The United Nations Sustainable
Stock Exchanges Initiative, of which Nasdaq, Inc., is an official
supporter, recognized that ``[s]tock exchanges are uniquely
positioned to influence their market in a way few other actors
can.'' See United Nations Sustainable Stock Exchanges Initiative,
How Stock Exchanges Can Advance Gender Equality 2 (2017), available
at: https://sseinitiative.org/wp-content/uploads/2019/12/How-stock-exchanges-can-advance-gender-equality.pdf.
\13\ See Mary Jo White, Completing the Journey: Women as
Directors of Public Companies (Sept. 16, 2014), available at:
https://www.sec.gov/news/speech/2014-spch091614-mjw#.VBiLMhaaXDo.
\14\ See The Board Challenge, https://theboardchallenge.org/.
See also Nasdaq, Inc., Notice of 2020 Annual Meeting of Shareholders
and Proxy Statement 52 (Mar. 31, 2020), available at: https://ir.nasdaq.com/static-files/ce5519d4-3a0b-48ac-8441-5376ccbad4e5
(Nasdaq, Inc. believes that ``[d]iverse backgrounds lead to diverse
perspectives. We are committed to ensuring diverse backgrounds are
represented on our board and throughout our organization to further
the success of our business and best serve the diverse communities
in which we operate.'').
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As a self-regulatory organization, Nasdaq also is cognizant of its
role in advancing diversity within the financial industry, as outlined
in the Commission's diversity standards issued pursuant to Section 342
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (``Standards'').¹⁵ Authored jointly by the Commission
and five other financial regulators, the Standards seek to provide a
framework for exchanges and financial services organizations ``to
create and strengthen

[[Page 80475]]

[their] diversity policies and practices.'' Through these voluntary
Standards, the Commission and other regulators ``encourage each entity
to use the[ ] Standards in a manner appropriate to its unique
characteristics.'' \16\ To that end, the proposed rule leverages the
Exchange's unique ability to influence corporate governance in
furtherance of the goal of Section 342, which is to address the lack of
diversity in the financial services industry.\17\ Finally, while the
Exchange recognizes the importance of maximizing shareholder value, its
role as a listing venue is to establish and enforce substantive
standards that promote investor protection. As a self-regulatory
organization, the Exchange must demonstrate to the Commission that any
proposed rule is consistent with Section 6(b) of the Act because, among
other things, it is designed to protect investors, promote the public
interest, prevent fraudulent and manipulative acts and practices, and
remove impediments to the mechanism of a free and open market. The
Exchange must also balance promoting capital formation, efficiency, and
competition, among other things, alongside enhancing investor
confidence.
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\15\ See Final Interagency Policy Statement Establishing Joint
Standards for Assessing the Diversity Policies and Practices of
Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015).
\16\ Id. at 33,023.
\17\ 156 Cong. Rec. H5233-61 (June 30, 2010).
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With these objectives in mind, Nasdaq believes that a listing rule
designed to enhance transparency related to board diversity will
increase consistency and comparability of information across Nasdaq-
listed companies, thereby increasing transparency and decreasing
information collection costs. Nasdaq further believes that a listing
rule designed to encourage listed companies to increase diverse
representation on their boards will result in improved corporate
governance, thus strengthening the integrity of the market, enhancing
capital formation, efficiency, and competition, and building investor
confidence. To the extent a company chooses not to meet the diversity
objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will
provide investors with additional transparency through disclosure
explaining the company's reasons for not doing so. For example, the
company may choose to disclose that it does not meet the diversity
objectives of Rule 5605(f)(2) because it is subject to an alternative
standard under state or foreign laws and has chosen to meet that
standard instead, or has a board philosophy regarding diversity that
differs from the diversity objectives set forth in Rule 5605(f)(2).
Nasdaq believes that such disclosure will improve the quality of
information available to investors who rely on this information to make
informed investment and voting decisions, thereby promoting capital
formation and efficiency.
Nasdaq observed that studies suggest that certain groups may be
underrepresented on boards because the traditional director nomination
process is limited by directors looking within their own social
networks for candidates with previous C-suite experience.¹⁸
Leaders from across the spectrum of stakeholders with whom Nasdaq spoke
reinforced the notion that if companies recruit by skill set and
expertise rather than title, they will find there is more than enough
diverse talent to satisfy demand. In order to assist companies that
strive to meet the diversity objectives of Rule 5605(f)(2), Nasdaq is
proposing to provide listed companies that have not yet met its
diversity objectives with free access to a network of board-ready
diverse candidates and a tool to support board evaluation, benchmarking
and refreshment. Nasdaq is contemporaneously submitting a rule filing
to the Commission regarding the provision of such services. Nasdaq also
plans to publish FAQs on its Listing Center to provide guidance to
companies on the application of the proposed rules, and to establish a
dedicated mailbox for companies and their counsel to email additional
questions to Nasdaq regarding the application of the proposed rule.
Nasdaq believes that these services will help to ease the compliance
burden on companies whether they choose to meet the listing rule's
diversity objectives or provide an explanation for not doing so.
---------------------------------------------------------------------------

\18\ See infra Section III.
---------------------------------------------------------------------------

II. Academic Research: The Relationship Between Diversity and
Shareholder Value, Investor Protection and Decision Making

A company's board of directors plays a critical role in formulating
company strategy; appointing, advising and overseeing management; and
protecting investors. Nasdaq has recognized the importance of varied
perspectives on boards since 2003, when the Exchange adopted a listing
rule intended to enhance investor confidence by requiring listed
companies, subject to certain exceptions and cure periods, to have a
majority independent board.\19\ Accompanying the rule are interpretive
materials recognizing that independent directors ``play an important
role in assuring investor confidence. Through the exercise of
independent judgment, they act on behalf of investors to maximize
shareholder value in the Companies they oversee and guard against
conflicts of interest.'' \20\
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\19\ See Nasdaq Stock Market Rulebook, Rules 5605(b), 5615(a),
and 5605(b)(1)(A).
\20\ Id., IM-5605-1 (emphasis added).
---------------------------------------------------------------------------

a. Diversity and Shareholder Value
There is a significant body of research suggesting a positive
association between diversity and shareholder value.\21\ In the words
of SEC Commissioner Allison Herren Lee: ``to the extent one seeks
economic support for diversity and inclusion (instead of requiring
economic support for the lack of diversity and exclusion), the evidence
is in.'' \22\
---------------------------------------------------------------------------

\21\ Some companies recently have expressed the belief that a
company must consider the impact of its activities on a broader
group of stakeholders beyond shareholders. See Business Roundtable,
Statement on the Purpose of a Corporation (Aug. 19, 2019), available
at: https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf. Commentators
articulated this view as early as 1932. See E. Merrick Dodd, Jr.,
For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145,
1153 (1932).
\22\ See Commissioner Allison Herren Lee, Diversity Matters,
Disclosure Works, and the SEC Can Do More: Remarks at the Council of
Institutional Investors Fall 2020 Conference (September 22, 2020),
available at: https://www.sec.gov/news/speech/lee-cii-2020-conference-20200922.
---------------------------------------------------------------------------

The Carlyle Group (2020) found that its portfolio companies with
two or more diverse directors had average earnings growth of 12.3% over
the previous three years, compared to 0.5% among portfolio companies
with no diverse directors, where diverse directors were defined as
female, Black, Hispanic or Asian.\23\ ``After controlling for industry,
fund, and vintage year, companies with diverse boards generate earnings
growth that's five times faster, on average, with each diverse board
member associated with a 5% increase in annualized earnings growth.''
\24\
---------------------------------------------------------------------------

\23\ See Jason M. Thomas and Megan Starr, The Carlyle Group,
Global Insights: From Impact Investing to Investing for Impact 5
(Feb. 24, 2020), available at: https://www.carlyle.com/sites/default/files2020-02/From%20Impact%20Investing%20to%20Investing%20for%20Impact_022420.pdf
(analyzing Carlyle U.S. portfolio company data, February 2020).
\24\ Id.
---------------------------------------------------------------------------

Several other studies also found a positive association between
diverse boards and company performance. FCLTGlobal (2019) found that
``the most diverse boards (top 20 percent) added 3.3 percentage points
to [return on invested capital], as compared to their least diverse
peers (bottom 20 percent).'' \25\ McKinsey (2015) found

[[Page 80476]]

that ``companies in the top quartile for racial/ethnic diversity were
35 percent more likely to have financial returns above their national
industry median.'' \26\ Carter, Simkins and Simpson (2003) found among
Fortune 1000 companies ``statistically significant positive
relationships between the presence of women or minorities on the board
and firm value.'' \27\ Bernile, Bhagwat and Yonker (2017) found that
greater diversity on boards--including gender, ethnicity, educational
background, age, financial expertise and board experience--is
associated with increased operating performance, higher asset valuation
multiples, lower stock return volatility, reduced financial leverage,
increased dividend payouts to shareholders, higher investment in R&D
and better innovation.\28\ The authors observed that ``[t]his is in
line with the results in Carter, Simkins, and Simpson (2003), which
show a positive association between local demographic diversity and
firm value.'' \29\
---------------------------------------------------------------------------

\25\ See FCLTGlobal, The Long-term Habits of a Highly Effective
Corporate Board 11 (March 2019), available at: https://www.fcltglobal.org/wp-content/uploads/long-term-habits-of-highly-effective-corporate-boards.pdf (analyzing 2017 MSCI ACWI
constituents from 2010 to 2017 using Bloomberg data).
\26\ See Vivian Hunt et al., McKinsey & Company, Diversity
Matters (February 2, 2015), available at: https://www.mckinsey.com/
~/media/mckinsey/business%20functions/organization/our%20insights/
why%20diversity%20matters/diversity%20matters.pdf (analyzing 366
public companies in the United Kingdom, Canada, the United States,
and Latin America in industries for the years 2010 to 2013, using
the ethnic and racial categories African ancestry, European
ancestry, Near Eastern, East Asian, South Asian, Latino, Native
American, and other).
\27\ See David A. Carter et al., Corporate Governance, Board
Diversity, and Firm Value. 38(1) Fin. Rev. 33 (analyzing 638 Fortune
1000 firms in 1997, measuring firm value by Tobin's Q, with board
diversity defined as the percentage of women, African Americans,
Asians and Hispanics on the board of directors).
\28\ See Gennaro Bernile et al., Board Diversity, Firm Risk, and
Corporate Policies (March 6, 2017), available at: https://ssrn.com/abstract=2733394 (analyzing 21,572 firm-year observations across
non-financial, non-utility firms for the years 1996 to 2014, based
on the ExecuComp, RiskMetrics, Compustat and CRSP databases).
\29\ Id. at 32.
---------------------------------------------------------------------------

Several studies have found a positive association between gender
diversity and financial performance. Credit Suisse (2014) found
companies with at least one woman on the board had an average sector-
adjusted return on equity (``ROE'') of 12.2%, compared to 10.1% for
companies with no female directors, and average sector-adjusted ROEs of
14.1% and 11.2%, respectively, for the previous nine years.\30\ MSCI
(2016) found that U.S. companies with at least three women on the board
in 2011 experienced median gains in ROE of 10% and earnings per share
(``EPS'') of 37% over a five year period, whereas companies that had no
female directors in 2011 showed median changes of -1% in ROE and -8% in
EPS over the same five-year period.\31\ Catalyst (2011) found that the
ROE of Fortune 500 companies with at least three women on the board (in
at least four of five years) was 46% higher than companies with no
women on the board, and return on sales and return on invested capital
was 84% and 60% higher, respectively.\32\
---------------------------------------------------------------------------

\30\ See Credit Suisse, The CS Gender 3000: Women in Senior
Management 16 (Sept. 2014), available at: https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/the-cs-gender-3000-women-in-senior-management.pdf
(analyzing 3,000 companies across 40 countries from the period from
2005 to 2013).
\31\ See Meggin Thwing Eastman et al., MSCI, The tipping point:
Women on boards and financial performance 3 (December 2016),
available at: https://www.msci.com/documents/10199/fd1f8228-cc07-4789-acee-3f9ed97ee8bb (analyzing of U.S. companies that were
constituents of the MSCI World Index for the entire period from July
1, 2011 to June 30, 2016).
\32\ See Harvey M. Wagner, Catalyst, The Bottom Line: Corporate
Performance and Women's Representation on Boards (2004-2008) (March
1, 2011), available at: https://www.catalyst.org/research/the-bottom-line-corporate-performance-and-womens-representation-on-boards-2004-2008/ (analyzing gender diversity data from Catalyst's
annual Fortune 500 Census of Women Board Directors report series for
the years 2005 to 2009, and corresponding financial data from S&P's
Compustat database for the years 2004 to 2008).
---------------------------------------------------------------------------

Credit Suisse (2016) found an association between LGBTQ+ diversity
and stock performance, finding that a basket of 270 companies
``supporting and embracing LGBT employees'' outperformed the MSCI ACWI
index by an average of 3.0% per year over the past 6 years.\33\
Further, ``[a]gainst a custom basket of companies in North America,
Europe and Australia, the LGBT 270 has outperformed by 140 bps
annually.'' \34\ Nasdaq acknowledges that this study focused on LGBTQ+
employees as opposed to directors, and that there is a lack of
published research on the issue of LGBTQ+ representation on boards.
However, Out Leadership (2019) suggests that the relationship between
board gender diversity and corporate performance may extend to LGBTQ+
diversity:
---------------------------------------------------------------------------

\33\ See Credit Suisse ESG Research, LGBT: The value of
diversity 1 (April 15, 2016), available at: https://research-doc.credit-suisse.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=807075590&extdocid=807075590_1_eng_pdf&serialid=evu4wXNcHexx7kusNLaZQphUkT9naxi1PvptZQvPjr1k%3d.
\34\ Id.

While the precise reason for the positive correlation between
gender diversity and better corporate performance is unknown, many
of the reasons that gender diversity is considered beneficial are
also applicable to LGBT+ diversity. LGBT+ diversity in the boardroom
may create a dynamic that enables better decisionmaking, and it
brings to the boardroom the perspective of a community that is a
critical component of the company's consumer population and
organizational talent.\35\
---------------------------------------------------------------------------

\35\ See Quorum, Out Leadership's LGBT+ Board Diversity and
Disclosure Guidelines 3 (2019), available at: https://outleadership.com/content/uploads/2019/01/OL-LGBT-Board-Diversity-Guidelines.pdf.

McKinsey (2020) found ``a positive, statistically significant
correlation between company financial outperformance and [board]
diversity, on the dimensions of both gender and ethnicity,'' with
companies in the top quartile for board gender diversity ``28 percent
more likely than their peers to outperform financially,'' and a
statistically significant correlation between board gender diversity
and outperformance on earnings before interest and taxation margin.\36\
Moody's (2019) found that greater board gender diversity is associated
with higher credit ratings, with women accounting for an average of 28%
of board seats at Aaa-rated companies but less than 5% of board seats
at Ca-rated companies.\37\
---------------------------------------------------------------------------

\36\ See McKinsey & Company, Diversity wins: How inclusion
matters 13 (May 2020), available at: https://www.mckinsey.com/~/
media/McKinsey/Featured%20Insights/Diversity%20and%20Inclusion/
Diversity%20wins%20How%20inclusion%20matters/Diversity-wins-How-
inclusion-matters-vF.pdf (analyzing 1,039 companies across 15
countries for the period from December 2018 to November 2019).
\37\ See Moody's Investors Service, Gender diversity is
correlated with higher ratings, but mandates pose short-term risk 2
(Sept. 11, 2019), available at: https://www.moodys.com/research/Moodys-Corporate-board-gender-diversity-associated-with-higher-credit-ratingsPBC_1193768 (analyzing 1,109 publicly traded North
American companies rated by Moody's).
---------------------------------------------------------------------------

While the overwhelming majority of studies on the association
between economic performance and board diversity, including gender
diversity, present a compelling case that board diversity is positively
associated with financial performance, the results of some other
studies on gender diversity are mixed. For example, Pletzer et al.
(2015) found that board gender diversity alone has a ``small and non-
significant'' relationship with a company's financial performance.\38\
Post and Byron (2014) found a ``near zero'' relationship with a
company's market performance, but a positive relationship with a
company's

[[Page 80477]]

accounting returns.\39\ Carter, D'Souza, Simkins and Simpson (2010)
found that ``[w]hen Tobin's Q is used as the measure of financial
performance, we find no relationship to gender diversity or ethnic
minority diversity, neither positive nor negative.'' \40\ A study
conducted by Campbell and Minguez-Vera (2007) ``suggests, at a minimum,
that increased gender diversity can be achieved without destroying
shareholder value.'' \41\ Adams and Ferreira (2009) found that ``gender
diversity has beneficial effects in companies with weak shareholder
rights, where additional board monitoring could enhance firm value, but
detrimental effects in companies with strong shareholder rights.'' \42\
Carter et al. (2010) \43\ and the U.S. Government Accountability Office
(``GAO'') (2015) \44\ concluded that the mixed nature of various
academic studies may be due to differences in methodologies, data
samples and time periods.
---------------------------------------------------------------------------

\38\ See Jan Luca Pletzer et al., Does Gender Matter? Female
Representation on Corporate Boards and Firm Financial Performance--A
Meta-Analysis 1, PLOS One (June 18, 2015); see also Alice H. Eagly
(2016), When Passionate Advocates Meet Research on Diversity, Does
the Honest Broker Stand a Chance?, 72 J. Social Issues 199 (2016),
available at https://doi.org/10.1111/josi.12163 (concluding that the
``research findings are mixed, and repeated meta[hyphen]analyses
have yielded average correlational findings that are null or
extremely small'' with respect to board gender diversity and company
performance).
\39\ See Corinne Post and Kris Byron, Women on Boards and Firm
Financial Performance: A Meta-Analysis 1 (2014). In 2016, the same
authors, based on a review of the results for 87 studies, ``found
that board gender diversity is weakly but significantly positively
correlated with [corporate social responsibility],'' although they
noted that ``a significant correlational relationship does not prove
causality.'' See Corinne Post and Kris Byron, Women on Boards of
Directors and Corporate Social Performance: A Meta[hyphen]Analysis,
24(4) Corp. Governance: An Int'l Rev. 428 (July 2016), available at
https://dx.doi.org/10.1111/corg.12165.
\40\ See David A. Carter et al., The Gender and Ethnic Diversity
of US Boards and Board Committees and Firm Financial Performance,
18(5) Corp. Governance 396, 410 (2010) (analysis of 541 S&P 500
companies for the years 1998-2002).
\41\ See Kevin Campbell and Antonio Minguez-Vera, Gender
Diversity in the Boardroom and Firm Financial Performance, 83(3) J.
Bus. Ethics 13 (Feb. 2008) (analyzing 68 non-financial companies
listed on the continuous market in Madrid during the period from
January 1995 to December 2000, measuring firm value by an
approximation of Tobin's Q defined as the sum of the market value of
stock and the book value of debt divided by the book value of total
assets).
\42\ See Renee B. Adams and Daniel Ferreira, Women in the
boardroom and their impact on governance and performance, 94 J. Fin.
Econ. 291 (2009) (analyzing 1,939 S&P 500, S&P MidCaps, and S&P
SmallCap companies for the period 1996 to 2003, measuring company
performance by a proxy for Tobin's Q (the ratio of market value to
book value) and return on assets).
\43\ See Carter et al., supra note 40, at 400 (observing that
the different ``statistical methods, data, and time periods
investigated vary greatly so that the results are not easily
comparable.'').
\44\ See United States Government Accountability Office, Report
to the Ranking Member, Subcommittee on Capital Markets and
Government Sponsored Enterprises, Committee on Financial Services,
House of Representatives, Corporate Boards: Strategies to Address
Representation of Women Include Federal Disclosure Requirements 5
(Dec. 2015) (the ``GAO Report''), available at: https://www.gao.gov/assets/680/674008.pdf (``Some research has found that gender diverse
boards may have a positive impact on a company's financial
performance, but other research has not. These mixed results depend,
in part, on differences in how financial performance was defined and
what methodologies were used'').
---------------------------------------------------------------------------

While there are studies drawing different conclusions, Nasdaq
believes that there is a compelling body of credible research on the
association between economic performance and board diversity. At a
minimum, Nasdaq believes that the academic studies support the
conclusion that board diversity does not have adverse effects on
company financial performance. This is not the first time Nasdaq has
considered whether, on balance, various studies finding mixed results
related to board composition and company performance are a sufficient
rationale to propose a listing rule. For example, in 2003,
notwithstanding the varying findings of studies at the time regarding
the relationship between company performance and board
independence,\45\ Nasdaq adopted listing rules requiring a majority
independent board that were ``intended to enhance investor confidence
in the companies that list on Nasdaq.'' \46\ In its Approval Order, the
SEC stated that ``[t]he Commission has long encouraged exchanges to
adopt and strengthen their corporate governance listing standards in
order to, among other things, enhance investor confidence in the
securities markets.'' \47\
---------------------------------------------------------------------------

\45\ See, e.g., Benjamin E. Hermalin and Michael S. Weisbach,
The Effects of Board Composition and Direct Incentives on Firm
Performance, 20 Fin. Mgmt. 101, 111 (1991) (finding that ``there
appears to be no relation between board composition and
performance''); Sanjai Bhagat and Bernard Black, The Uncertain
Relationship Between Board Composition and Firm Performance, 54(3)
Bus. Law. 921, 950 (1999) (``At the very least, there is no
convincing evidence that increasing board independence, relative to
the norms that currently prevail among large American firms, will
improve firm performance. And there is some evidence suggesting the
opposite--that firms with supermajority-independent boards perform
worse than other firms, and that firms with more inside than
independent directors perform about as well as firms with majority-
(but not supermajority-) independent boards.'').
\46\ See Order Approving Proposed Rule Changes, 68 FR 64,154,
64,161 (Nov. 12, 2003) (approving SR-NASD-2002-77, SR-NASD-2002-80,
SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141).
\47\ Id. at 64,176.
---------------------------------------------------------------------------

Along the same lines, even without clear consensus among studies
related to board diversity and company performance, the heightened
focus on corporate board diversity by investors demonstrates that
investor confidence is undermined when data on board diversity is not
readily available and when companies do not explain the reasons for the
apparent absence of diversity on their boards. Therefore, Nasdaq
believes that the proposal will enhance investor confidence that all
listed companies are considering diversity in the context of selecting
directors, either by including at least two Diverse directors on their
boards or by explaining their rationale for not meeting that objective.
Further, Nasdaq believes that the proposal is consistent with the Act
because it will not negatively impact capital formation, competition or
efficiency among its public companies, and will promote investor
protection and the public interest.\48\
---------------------------------------------------------------------------

\48\ See also Lee, supra note 22 (``I could never quite buy in
to the view that some 40 percent of the population in our country
(if we're talking about minorities) or over half the country (if
we're talking about women) must rationalize their inclusion in
corporate boardrooms and elsewhere in economic terms instead of the
reverse. How can one possibly justify--in economic terms--the
systematic exclusion of a major portion of our talent base from the
corporate pool?'').
---------------------------------------------------------------------------

b. Diversity and Investor Protection
There is substantial evidence that board diversity enhances the
quality of a company's financial reporting, internal controls, public
disclosures and management oversight. In reaching this conclusion,
Nasdaq evaluated the results of more than a dozen studies spanning more
than two decades that found a positive association between gender
diversity and important investor protections, and the assertions by
some academics that such findings may extend to other forms of
diversity, including racial and ethnic diversity. The findings of the
studies reviewed by Nasdaq are summarized below.
Adams and Ferreira (2009) found that women are ``more likely to sit
on'' the audit committee,\49\ and a subsequent study by Srinidhi, Gul
and Tsui (2011) found that companies with women on the audit committee
are associated with ``higher earnings quality'' and ``better reporting
discipline by managers,'' \50\ leading the authors to conclude that
``including female directors on the board and the audit committee are
plausible ways of improving the firm's reporting discipline and
increasing

[[Page 80478]]

investor confidence in financial statements.'' \51\
---------------------------------------------------------------------------

\49\ See Adams and Ferreira, supra note 42, at 292.
\50\ See Bin Srinidhi et al., Female Directors and Earnings
Quality, 28(5) Contemporary Accounting Research 1610, 1612-16
(Winter 2011) (analyzing 3,132 firm years during the period from
2001 to 2007 based on S&P COMPUSTAT, Corporate Library's Board
Analyst, and IRRC databases; ``choos[ing] the accruals quality as
the metric that best reflects the ability of current earnings to
reflect future cash flows'' (noting that it ``best predicts the
incidence and magnitude of fraud relative to other commonly used
measures of earnings quality'') and analyzing surprise earnings
results that exceeded previous earnings or analyst forecasts,
because ``managers of firms whose unmanaged earnings fall marginally
below the benchmarks have [an] incentive to manage earnings upwards
so as to meet or beat previous earnings'').
\51\ Id. at 1612.
---------------------------------------------------------------------------

A study conducted in 2016 by Pucheta[hyphen]Mart[iacute]nez et al.
concluded that gender diversity on the audit committee ``improves the
quality of financial information.'' \52\ They found that ``the
percentage of females on [audit committees] reduces the probability of
[audit] qualifications due to errors, non-compliance or the omission of
information,'' \53\ and found a positive association between gender
diverse audit committees and disclosing audit reports with
uncertainties and scope limitations. This suggests that gender diverse
audit committees ``ensure that managers do not seek to pressure
auditors into issuing a clean opinion instead of a qualified opinion''
when any uncertainties or scope limitations are identified.\54\
---------------------------------------------------------------------------

\52\ See Maria Consuelo Pucheta[hyphen]Mart[iacute]nez et al.,
Corporate governance, female directors and quality of financial
information. 25(4) Bus. Ethics: A European Rev. 363, 378 (2016)
(analyzing a sample of non-financial companies listed on the Madrid
Stock Exchange during 2004-2011).
\53\ Id. at 363.
\54\ Id. at 368.
---------------------------------------------------------------------------

More recently, a study by Gull in 2018 found that the presence of
female audit committee members with business expertise is associated
with a lower magnitude of earnings management,\55\ and a study
conducted in 2019 by Bravo and Alcaide-Ruiz found a positive
association between women on the audit committee with financial or
accounting expertise and the voluntary disclosure of forward-looking
information.\56\ Bravo and Alcaide-Ruiz concluded that ``female [audit
committee] members with financial expertise play an important role in
influencing disclosure strategies that provide forward-looking
information containing projections and financial data useful for
investors.'' \57\
---------------------------------------------------------------------------

\55\ See Ammar Gull et al., Beyond gender diversity: How
specific attributes of female directors affect earnings management,
50(3) British Acct. Rev. 255 (Sept. 2017), available at: https://ideas.repec.org/a/eee/bracre/v50y2018i3p255-274.html (analyzing 394
French companies belonging to the CAC All-Shares index listed on
Euronext Paris from 2001 to 2010, prior to the implementation of
France's gender mandate law that required women to comprise 20% of a
company's board of directors by 2014 and 40% by 2016).
\56\ See Francisco Bravo and Maria Dolores Alcaide-Ruiz, The
disclosure of financial forward-looking information, 34(2) Gender in
Mgmt. 140, 142-44 (2019) (analyzing companies included in the S&P
100 Index in 2016, ``focus[ing] on the disclosure of financial
forward-looking information (which is likely to require financial
expertise), such as earnings forecasts, expected revenues,
anticipated cash flows or any other financial indicator'').
\57\ Id. at 150.
---------------------------------------------------------------------------

While the above studies demonstrate a positive association between
gender diverse audit committees and the quality of a company's
earnings, financial information and public disclosures, other studies
found a positive association between board gender diversity and
important investor protections regardless of whether or not women are
on the audit committee.
Abbott, Parker & Persley (2012) found, within a sample of non-
Fortune 1000 companies, ``a significant association between the
presence of at least one woman on the board and a lower likelihood of
[a material financial] restatement.'' \58\ Their findings are
consistent with a subsequent study by Wahid (2017), which concluded
that ``gender-diverse boards commit fewer financial reporting mistakes
and engage in less fraud.'' \59\ Specifically, companies with female
directors have ``fewer irregularity-type [financial] restatements,
which tend to be indicative of financial manipulation.'' \60\ Wahid
suggested that the implications of her study extend beyond gender
diversity:
---------------------------------------------------------------------------

\58\ See Lawrence J. Abbott et al., Female Board Presence and
the Likelihood of Financial Restatement, 26(4) Accounting Horizons
607, 626 (2012) (analyzing a sample of 278 pre-SOX annual financial
restatements and 187 pre-SOX quarterly financial restatements of
U.S. companies from January 1, 1997 through June 30, 2002 identified
by the U.S. General Accounting Office restatement report 03-138
(which only included ``material misstatements of financial
results''), and 75 post-SOX annual financial restatements from July
1, 2002, to September 30, 2005 identified by U.S. General Accounting
Office restatement report 06-678 (which only included ``restatements
that were being made to correct material misstatements of previously
reported financial information''), consisting almost exclusively of
non-Fortune 1000 companies).
\59\ See Aida Sijamic Wahid, The Effects and the Mechanisms of
Board Gender Diversity: Evidence from Financial Manipulation, J.
Bus. Ethics (forthcoming) (Dec. 2017) Rotman School of Management
Working Paper No. 2930132 at 1, available at: https://ssrn.com/abstract=2930132 (analyzing 6,132 U.S. public companies during the
period from 2000 to 2010, for a total of 38,273 firm-year
observations).
\60\ Id. at 23.

If you're going to introduce perspectives, those perspectives
might be coming not just from male versus female. They could be
coming from people of different ages, from different racial
backgrounds . . . [and] [i]f we just focus on one, we could be
essentially taking away from other dimensions of diversity and
decreasing perspective.\61\
---------------------------------------------------------------------------

\61\ See Barbara Shecter, Diverse boards tied to fewer financial
`irregularities,' Canadian study finds. Financial Post (Feb. 5,
2020), https://business.financialpost.com/news/fp-street/diverse-boards-tied-to-fewer-financial-irregularities-canadian-study-finds
(last accessed Nov. 27, 2020).

Cumming, Leung and Rui (2015) also examined the relationship
between gender diversity and fraud, and found that the presence of
women on boards is associated with a lower likelihood of securities
fraud; indeed, they found ``strong evidence of a negative and
diminishing effect of women on boards and the probability of being in
our fraud sample.'' \62\ The authors suggested that ``other forms of
board diversity, including but not limited to gender diversity, may
likewise reduce fraud.'' \63\
---------------------------------------------------------------------------

\62\ See Douglas J. Cumming et al., Gender Diversity and
Securities Fraud, Academy of Management Journal 34 (forthcoming)
(Feb. 2, 2015), available at https://ssrn.com/abstract=2562399
(analyzing China Securities Regulatory Commission data from 2001 to
2010, including 742 companies with enforcement actions for fraud,
and 742 non-fraudulent companies for a control group).
\63\ Id. at 33.
---------------------------------------------------------------------------

Chen, Eshleman and Soileau (2016) suggested that the relationship
between gender diversity and higher earnings quality observed by
Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced
weaknesses in internal control over financial reporting, noting that
``prior literature has established a negative relationship between
internal control weaknesses and earnings quality.'' \64\ The authors
found that having at least one woman on the board (regardless of
whether or not she is on the audit committee) ``may lead to [a] reduced
likelihood of material weaknesses [in internal control over financial
reporting].'' \65\
---------------------------------------------------------------------------

\64\ See Yu Chen et al., Board Gender Diversity and Internal
Control Weaknesses, 33 Advances in Acct. 11 (2016) (analyzing a
sample of 4267 [filig]rm-year observations during the period from
2004 to 2013, beginning ``the first year internal control weaknesses
were required to be disclosed under section 404 of SOX'').
\65\ Id. at 18.
---------------------------------------------------------------------------

Board gender diversity also was found to be positively associated
with more transparent public disclosures. Gul, Srinidhi & Ng (2011)
concluded that ``gender diversity improves stock price informativeness
by increasing voluntary public disclosures in large firms and
increasing the incentives for private information collection in small
firms.'' \66\ Abad et al. (2017) concluded that companies with gender
diverse boards are associated with lower levels of information
asymmetry, suggesting that increasing board gender diversity is
associated with ``reducing the risk of

[[Page 80479]]

informed trading and enhancing stock liquidity.'' \67\
---------------------------------------------------------------------------

\66\ See Ferdinand A. Gul et al., Does board gender diversity
improve the informativeness of stock prices?, 51(3) J. Acct. & Econ.
314 (April 2011) (analyzing 4,084 firm years during the period from
2002 to 2007, excluding companies in the utilities and financial
industries, measuring public information disclosure using
``voluntary continuous disclosure of `other' events in 8K reports''
and measuring stock price informativeness by ``idiosyncratic
volatility,'' or volatility that cannot be explained to systematic
factors and can be diversified away).
\67\ See David Abad et al., Does Gender Diversity on Corporate
Boards Reduce Information Asymmetry in Equity Markets? 20(3) BRQ
Business Research Quarterly 192, 202 (July 2017) (analyzing 531
company-year observations from 2004 to 2009 of non-financial
companies traded on the electronic trading platform of the Spanish
Stock Exchange (SIBE)).
---------------------------------------------------------------------------

Other studies have found that diverse boards are better at
overseeing management. Adams and Ferreira (2009) found ``direct
evidence that more diverse boards are more likely to hold CEOs
accountable for poor stock price performance; CEO turnover is more
sensitive to stock return performance in firms with relatively more
women on boards.'' \68\ Lucas-Perez et al. (2014) found that board
gender diversity is positively associated with linking executive
compensation plans to company performance,\69\ which may be an
effective mechanism to deter opportunistic behavior by management and
align their interests with shareholders.\70\ A lack of diversity has
been found to have the opposite effect. Westphal and Zajac (1995) found
that ``increased demographic similarity between CEOs and the board is
likely to result in more generous CEO compensation contracts.'' \71\
---------------------------------------------------------------------------

\68\ See Adams and Ferreira, supra note 42, at 292.
\69\ See Maria Encarnacion Lucas-Perez et al., Women on the
Board and Managers' Pay: Evidence from Spain, 129 J. Bus. Ethics 285
(April 2014).
\70\ Id.
\71\ See James D. Westphal and Edward J. Zajac, Who Shall
Govern? CEO/Board Power, Demographic Similarity, and New Director
Selection, 40(1) Admin. Sci. Q. 60, 77 (March 1995).
---------------------------------------------------------------------------

c. Diversity and Decision Making
Wahid (2017) suggests that ``at a minimum, gender diversity on
corporate boards has a neutral effect on governance quality, and at
best, it has positive consequences for boards' ability to monitor firm
management.'' \72\ Nasdaq reviewed studies suggesting that board
diversity can indeed enhance a company's ability to monitor management
by reducing ``groupthink'' and improving decision making.
---------------------------------------------------------------------------

\72\ See Wahid, supra note 59, at 5.
---------------------------------------------------------------------------

In 2009, the Commission, in adopting rules requiring proxy
disclosure describing whether a company considers diversity in
identifying director nominees, recognized the impact of diversity on
decision making and corporate governance:

A board may determine, in connection with preparing its
disclosure, that it is beneficial to disclose and follow a policy of
seeking diversity. Such a policy may encourage boards to conduct
broader director searches, evaluating a wider range of candidates
and potentially improving board quality. To the extent that boards
branch out from the set of candidates they would ordinarily
consider, they may nominate directors who have fewer existing ties
to the board or management and are, consequently, more independent.
To the extent that a more independent board is desirable at a
particular company, the resulting increase in board independence
could potentially improve governance. In addition, in some companies
a policy of increasing board diversity may also improve the board's
decision making process by encouraging consideration of a broader
range of views.\73\
---------------------------------------------------------------------------

\73\ See Proxy Disclosure Enhancements, 74 FR 68,334, 68,355
(Dec. 23, 2009).

Nasdaq agrees with the Commission's suggestion that board diversity
improves board quality, governance and decision making. Nasdaq is
concerned that boards lacking diversity can inadvertently suffer from
``groupthink,'' which is ``a dysfunctional mode of group decision
making characterized by a reduction in independent critical thinking
and a relentless striving for unanimity among members.'' \74\ The
catastrophic financial consequences of groupthink became evident in the
2008 global financial crisis, after which the IMF's Independent
Evaluation Office concluded that ``[t]he IMF's ability to correctly
identify the mounting risks [as the crisis developed] was hindered by a
high degree of groupthink.'' \75\
---------------------------------------------------------------------------

\74\ See Daniel P. Forbes and Frances J. Milliken, Cognition and
Corporate Governance: Understanding Boards of Directors as Strategic
Decision-Making Groups, 24(3) Acad. Mgmt. Rev. 489, 496 (Jul. 1999).
\75\ See International Monetary Fund, IMF Performance in the
Run-Up to the Financial and Economic Crisis (August 2011), available
at: https://www.elibrary.imf.org/view/IMF017/11570-9781616350789/11570-9781616350789/ch04.xml?language=en&redirect=true (``The
evaluation found that incentives were not well aligned to foster the
candid exchange of ideas that is needed for good surveillance--many
staff reported concerns about the consequences of expressing views
contrary to those of supervisors, [m]anagement, and country
authorities.'').
---------------------------------------------------------------------------

Other studies suggest that increased diversity reduces groupthink
and leads to robust dialogue and better decision making. Dallas (2002)
observed that ``heterogeneous groups share conflicting opinions,
knowledge, and perspectives that result in a more thorough
consideration of a wide range of interpretations, alternatives, and
consequences.'' \76\ Bernile et al. (2017) found that ``diversity in
the board of directors reduces stock return volatility, which is
consistent with diverse backgrounds working as a governance mechanism,
moderating decisions, and alleviating problems associated with
`groupthink.''' \77\ Dhir (2015) concluded that gender diversity may
``promote cognitive diversity and constructive conflict in the
boardroom.'' \78\ After interviewing 23 directors about their
experience with Norway's board gender mandate, he observed:
---------------------------------------------------------------------------

\76\ See Lynne L. Dallas, Does Corporate Law Protect the
Interests of Shareholders and Other Stakeholders?: The New
Managerialism and Diversity on Corporate Boards of Directors, 76
Tul. L. Rev. 1363, 1391 (June 2002).
\77\ See Bernile et al., supra note 28, at 38.
\78\ See Aaron A. Dhir, Challenging Boardroom Diversity:
Corporate Law, Governance, and Diversity 150 (2015) (emphasis
removed) (sample included 23 directors of Norwegian corporate
boards, representing an aggregate of 95 board appointments at more
than 70 corporations).

First, many respondents contended that gender diversity promotes
enhanced dialogue. Interviewees frequently spoke of their belief
that heterogeneity has resulted in: (1) Higher quality boardroom
discussions; (2) broader discussions that consider a wide range of
angles or viewpoints; (3) deeper or more thorough discussions; (4)
more frequent and lengthier discussions; (5) better informed
discussions; (6) discussions that are more frequently brought inside
the boardroom (as opposed to being held in spaces outside the
boardroom, either exclusively or in addition to inside the
boardroom); or (7) discussions in which items that directors
previously took for granted are drawn out and addressed--where the
implicit becomes explicit. Second, and intimately related, many
interviewees indicated that diversification has led to (or has the
potential to lead to) better decision making processes and/or final
decisions.\79\
---------------------------------------------------------------------------

\79\ Id. at 124 (emphasis removed).

Investors also have emphasized the importance of diversity in
decision making. A group of institutional investors charged with
overseeing state investments and the retirement savings of public
employees asserted that ``board members who possess a variety of
viewpoints may raise different ideas and encourage a full airing of
dissenting views. Such a broad pool of talent can be assembled when
potential board candidates are not limited by gender, race, or
ethnicity.'' \80\
---------------------------------------------------------------------------

\80\ See Petition for Amendment of Proxy Rule (March 31, 2015),
available at: https://www.sec.gov/rules/petitions/2015/petn4-682.pdf.
---------------------------------------------------------------------------

Nasdaq believes that cognitive diversity is particularly important
on boards because in their advisory role, especially related to
corporate strategy, ``the `output' that boards produce is entirely
cognitive in nature.'' \81\ While in 1999, Forbes and Milliken
characterized boards as ``large, elite, and episodic decision making
groups that face complex tasks pertaining to strategic-issue
processing,'' \82\ over the past two decades, their role has evolved;
boards are now more active, frequent advisors on areas such as
cybersecurity, social media, and environmental, social and governance
(``ESG'') issues such as climate change and racial and gender

[[Page 80480]]

inequality. Nasdaq believes that boards comprised of directors from
diverse backgrounds enhance investor confidence by ensuring that board
deliberations include the perspectives of more than one demographic
group, leading to more robust dialogue and better decision making.
---------------------------------------------------------------------------

\81\ See Forbes and Milliken, supra note 74, at 492.
\82\ Id.
---------------------------------------------------------------------------

III. Current State of Board Diversity and Causes of Underrepresentation
on Boards

While the above studies suggest a positive association between
board diversity, company performance, investor protections, and
decision making, there is a noticeable lack of diversity among U.S.
public companies. Nasdaq is a global organization and operates in many
countries around the world that already have implemented diversity-
focused directives. In fact, Nasdaq-listed companies in Europe already
are subject to diversity requirements.\83\ This first-hand experience
provides Nasdaq with a unique perspective to incorporate global best
practices into its proposal to advance diversity on U.S. corporate
boards. Given that the U.S. ranks 53rd in board gender diversity,
according to the World Economic Forum in its 2020 Global Gender Gap
Report, Nasdaq believes advancing board diversity in the U.S. is a
critical business and market imperative. This same report also found
that ``American women still struggle to enter the very top business
positions: only 21.7% of corporate managing board members are women.''
\84\ As of 2019, women directors held 19% of Russell 3000 seats (up
from 16% in 2018).\85\ In comparison, women hold more than 30% of board
seats in Norway, France, Sweden and Finland.\86\ At the current pace,
the U.S. GAO estimates that it could take up to 34 years for U.S.
companies to achieve gender parity on their boards.\87\
---------------------------------------------------------------------------

\83\ On Nasdaq's Nordic and Baltic exchanges, large companies
must comply with EU Directive 2014/95/EU (the ``EU Directive''), as
implemented by each member state, which requires companies to
disclose a board diversity policy with measurable objectives
(including gender), or explain why they do not have such a policy.
On Nasdaq Vilnius, companies are also required to comply with the
Nasdaq Corporate Governance Code for Listed Companies or explain why
they do not, which requires companies to consider diversity and seek
gender equality on the board. Similarly, on Nasdaq Copenhagen,
companies are required to comply with the Danish Corporate
Governance Recommendations or explain why they do not, which
requires companies to adopt and disclose a diversity policy that
considers gender, age and international experience. On Nasdaq
Iceland, listed companies must have at least 40% women on their
board (a government requirement) and comply with the EU Directive.
\84\ See World Economic Forum, Global Gender Gap Report 2020 33
(2019), available at: https://www3.weforum.org/docs/WEF_GGGR_2020.pdf.
\85\ See Kosmas Papadopoulos, ISS Analytics, U.S. Board
Diversity Trends in 2019 4-5 (May 31, 2019), available at: https://www.issgovernance.com/file/publications/ISS_US-Board-Diversity-Trends-2019.pdf.
\86\ See Deloitte, Women in the Boardroom: A global perspective
(6th ed. 2019), available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/gx-risk-women-in-the-boardroom-sixth-edition.pdf.
\87\ See GAO Report, supra note 44.
---------------------------------------------------------------------------

Progress toward greater racial and ethnic diversity in U.S. company
boardrooms has been even slower. Over the past ten years, the
percentage of African American/Black directors at Fortune 500 companies
has remained between 7 and 9%, while the percentage of women directors
has grown from 16 to 23%.\88\ In 2019, only 10% of board seats at
Russell 3000 companies were held by racial minorities, reflecting an
incremental increase from 8% in 2008.\89\ Among Fortune 500 companies
in 2018, there were fewer than 20 directors who publicly self-
identified as LGBT+, and only nine companies reported considering
sexual orientation and/or gender identity when identifying director
nominees.\90\
---------------------------------------------------------------------------

\88\ See Russell Reynolds, Ethnic & Gender Diversity on US
Public Company Boards 6 (September 8, 2020).
\89\ See Papadopoulous, supra note 85, at 5.
\90\ See Out Leadership, supra note 35.
---------------------------------------------------------------------------

Women and minority directors combined accounted for 34% of Fortune
500 board seats in 2018.\91\ While women of color represent 18% of the
U.S. population, they held only 4.6% of Fortune 500 board seats in
2018.\92\ Male underrepresented minorities held 11.5% of board seats at
Fortune 500 companies in 2018, compared to 66% of board seats held by
Caucasian/White men. Overall in 2018, 83.9% of board seats among
Fortune 500 companies were held by Caucasian/White individuals (who
represent 60.1% of the U.S. population), 8.6% by African American/Black
individuals (who represent 13% of the U.S. population), 3.8% by
Hispanic/Latino(a) individuals (who represent 19% of the U.S.
population) and 3.7% by Asian/Pacific Islander individuals (who
represent 6% of the U.S. population).\93\ In its analysis of Russell
3000 companies, 2020 Women on Boards concluded that ``larger companies
do better with their diversity efforts than smaller companies.'' \94\
---------------------------------------------------------------------------

\91\ See Deloitte, Missing Pieces Report: The 2018 Board
Diversity Census of Women and Minorities on Fortune 500 Boards 9
(2018), available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-cbe-missing-pieces-report-2018-board-diversity-census.pdf.
\92\ See Catalyst, Too Few Women of Color on Boards: Statistics
and Solutions (Jan. 31, 2020), https://www.catalyst.org/research/women-minorities-corporate-boards/.
\93\ See Deloitte, Missing Pieces Report, supra note 91; United
States Census Bureau, QuickFacts, available at: https://www.census.gov/quickfacts/fact/table/US/PST045219.
\94\ See 2020 Women On Boards Gender Diversity Index 4 (2019),
available at: https://2020wob.com/wp-content/uploads/2019/10/2020WOB_Gender_Diversity_Index_Report_Oct2019.pdf.
---------------------------------------------------------------------------

Based on the limited information that is available, Nasdaq believes
a supermajority of listed companies have made notable strides to
improve gender diversity in the boardroom and have at least one woman
on the board. Nasdaq also believes that listed companies are diligently
working to add directors with other diverse attributes, although
consistent with other studies of U.S. companies, Nasdaq believes the
pace of progress, in this regard, is happening more gradually. Thus,
and for the reasons discussed in this Section II.A.1.III, Nasdaq has
concluded that a regulatory approach to encouraging greater diversity
and data transparency would be beneficial.
Nasdaq reviewed academic studies on the causes of
underrepresentation on boards and the approaches taken by other
jurisdictions to remedy underrepresentation. Those studies suggest that
the traditional director candidate selection process may create
barriers to considering qualified diverse candidates for board
positions. Dhir (2015) explains that ``[t]he presence of unconscious
bias in the board appointment process, coupled with closed social
networks, generates a complex set of barriers for diverse directors;
these are the `phantoms' that prevent entry.'' \95\ In 2011, the Davies
Review found that ``informal networks influential in board
appointments'' contribute to the underrepresentation of women in the
boardrooms of U.K. listed companies.\96\ In 2017, the Parker Review
acknowledged that ``as is the case with gender, people of colour within
the UK have historically not had the same opportunities as many
mainstream candidates to develop the skills, networks and senior
leadership experience desired in a FTSE Boardroom.'' \97\ In 2020, the
United Kingdom Financial Reporting Council commissioned a report to
analyze barriers to LGBTQ+ inclusion and promotion in the workplace.
Leaders who self-identified as LGBTQ+ expressed concerns about the
current

[[Page 80481]]

board nomination process, which includes ``relying on personal
recommendations without transparent competition or due process [and]
informal `interviewing' outside the selection process.'' \98\
---------------------------------------------------------------------------

\95\ See Dhir, supra note 78, at 47.
\96\ See Women on Boards 17 (Feb. 2011), available at: https://ftsewomenleaders.com/wp-content/uploads/2015/08/women-on-boards-review.pdf.
\97\ See Sir John Parker, A Report into the Ethnic Diversity of
UK Boards 38 (Oct. 12, 2017), available at: https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2017-report-final.pdf.
\98\ See Catriona Hay et al., The Financial Reporting Council,
Building more open business 25 (2020), available at: https://www.frc.org.uk/getattachment/19f3b216-bd45-4d46-af2f-f191f5bf4a07/The-Good-Side-x-Financial-Reporting-Council-1811-AMENDED.pdf.
---------------------------------------------------------------------------

These concerns are not unique to the United Kingdom. The U.S. GAO
(2015) found that women's representation on corporate boards may be
hindered by directors' tendencies to ``rely on their personal networks
to identify new board candidates.'' \99\ Vell (2017) found that ``92%
of board seats [of public U.S. and Canadian technology companies] are
filled through networking, and women have less access to these
networks.'' \100\ Deloitte and the Society for Corporate Governance
(2019) found that this is also common in other industries including
media, communications, energy, consumer products, financial services
and life sciences.\101\ They observed that although 94% of companies
surveyed were looking to increase diversity among their boards, 77% of
those boards looked to referrals from current directors when
identifying diverse director candidates, suggesting that ``networking
is still key to board succession.'' \102\ Dhir (2015), in a qualitative
study of Norwegian directors, observed that ``[b]oard seats tend to be
filled by directors engaging their networks, and the resulting
appointees tend to be of the same socio-demographic background.'' \103\
---------------------------------------------------------------------------

\99\ See GAO Report, supra note 44, at 15.
\100\ See Vell Executive Search, Women Board Members in Tech
Companies: Strategies for Building High Performing Diverse Boards 6
(2017), available at: https://www.vell.com/images/pdf/VELL%20Report%20Women%20Board%20Members%20on%20Tech%20Boards%202017%203%2029.pdf.
\101\ See Deloitte and the Society of Corporate Governance,
Board Practices Report: Common threads across boardrooms 5 (2019),
available at: https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/1202241_2018_Board_Practices_Report_FINAL.pdf.
\102\ Id. at 6.
\103\ See Dhir, supra note 78, at 52.
---------------------------------------------------------------------------

Another contributing factor may be the traditional experience
sought in director nominees. Rhode & Packel (2014) observed that:

One of the most common reasons for the underrepresentation of
women and minorities on corporate boards is their
underrepresentation in the traditional pipeline to board service.
The primary route to board directorship has long been through
experience as a CEO of a public corporation. . . . Given the low
representation of women and minorities in top executive positions,
their talents are likely to be underutilized if selection criteria
are not broadened.\104\
---------------------------------------------------------------------------

\104\ See Deborah Rhode and Amanda K. Packel, Diversity on
Corporate Boards: How Much Difference Does Difference Make?, 39(2)
Del. J. Corp. L. 377, 402-403 (2014); see also Dhir, supra note 78,
at 39 (``[T]here is an apparent preference for either CEOs (whether
current or retired) or senior management who have experience at the
helm of a particular business stream or unit. . . . The fact that
far fewer women than men have been CEOs has a potentially
devastating effect on access to the boardroom, which in turn can
have an effect on the number of women who rise to the level of CEO
and to the executive suite.'').

Hillman et al. (2002) found that while white male directors of
public companies were more likely to have current or former experience
as a CEO, senior manager or director, African-American and white women
directors were more likely to have specialized expertise in law,
finance, banking, public relations or marketing, or community influence
from positions in politics, academia or clergy.\105\ Dhir (2015)
suggests that ``[c]onsidering persons from other, non-management pools,
such as academia, legal and accounting practice, the not-for-profit
sector and politics, may help create a broader pool of diverse
candidates.'' \106\ Directors surveyed by the U.S. GAO also
``suggested, for example, that boards recruit high performing women in
other senior executive level positions, or look for qualified female
candidates in academia or the nonprofit and government sectors. . . .
[I]f boards were to expand their director searches beyond CEOs more
women might be included in the candidate pool.'' \107\
---------------------------------------------------------------------------

\105\ See Amy J. Hillman et al., Women and Racial Minorities in
the Boardroom: How Do Directors Differ?, 28(6) J. Mgmt. 747, 749,
754 (2002).
\106\ See Dhir, supra note 78, at 42.
\107\ See GAO Report supra note 44, at 18.
---------------------------------------------------------------------------

Investors have begun calling for greater transparency surrounding
ethnic diversity on company boards, and in the past several months as
the U.S. has seen an uprising in the racial justice movement, there has
been an increase in the number of African Americans appointed to
Russell 3000 corporate boards.\108\ In a five-month span, 130 directors
appointed were African American, in comparison to the 38 African
American directors who were appointed in the preceding five
months.\109\ Although tracking the acceleration in board diversity is
feasible for some Russell 3000 companies, many of the companies do not
disclose the racial makeup of the board, making it impossible to more
broadly assess the impact of recent events on board diversity.
---------------------------------------------------------------------------

\108\ See Leslie P. Norton, The Number of Black Board Members
Surged After George Floyd's Death, Barron's, Oct. 27, 2020,
available at: https://www.barrons.com/articles/after-george-floyds-death-the-number-of-black-board-members-surges-51603809011.
\109\ Id.
---------------------------------------------------------------------------

IV. Stakeholder Perspectives

To gain a better understanding of the current state of board
diversity, benefits of diversity, causes of underrepresentation on
boards and potential remedies to address underrepresentation, Nasdaq
spoke with leaders representing a broad spectrum of market participants
and other stakeholders. Nasdaq sought their perspectives to inform its
analysis of whether the proposed rule changes would promote the public
interest and protection of investors without unduly burdening
competition or conflicting with existing securities laws. The group
included representatives from the investor, regulatory, investment
banking, venture capital and legal communities. Nasdaq also spoke with
leaders of civil rights and corporate governance organizations, and
organizations representing the interests of private and public
companies, including Nasdaq-listed companies. Specifically, Nasdaq
obtained their views on:
The current state of board diversity in the U.S.;
the inherent value of board diversity;
increasing pressure from legislators and investors to
improve diverse representation on boards and board diversity
disclosure;
whether a listing rule related to board diversity is in
the public interest;
how to define a ``diverse'' director; and
the benefits and challenges of various approaches to
improving board diversity disclosures and increasing diverse
representation on boards, including mandates and disclosure-based
models.
The discussions revealed strong support for disclosure requirements
that would standardize the reporting of board diversity statistics. The
majority of organizations also were in agreement that companies would
benefit from a regulatory impetus to drive meaningful and systemic
change in board diversity, and that a disclosure-based approach would
be more palatable to the U.S. business community than a mandate. While
many organizations recognized that mandates can accelerate the rate of
change, they expressed that a disclosure-based approach is less
controversial and would spur companies to take action and achieve the
same results. Business leaders also

[[Page 80482]]

expressed concern that smaller companies would require flexibility and
support to comply with any time-sensitive requirements to add diverse
directors. Some stakeholders highlighted additional challenges that
smaller companies, and companies in certain industries, may face
finding diverse board members. Leaders from across the spectrum of
stakeholders that Nasdaq surveyed reinforced the notion that if
companies recruit by skill set and expertise rather than title, then
they will find there is more than enough diverse talent to satisfy
demand. Leaders from the legal community emphasized that any proposed
rule that imposed additional burdens beyond, or is inconsistent with,
existing securities laws--by, for example, requiring companies to adopt
a diversity policy or include disclosure solely in their proxy
statements--would present an additional burden and potentially more
legal liability for listed companies.

V. U.S. Regulatory Framework

As detailed above, diversity has been the topic of a growing number
of studies over the past decade and, in recent years, some investors
have been increasingly advocating for greater diversity among directors
of public companies.\110\ Over the past year, the social justice
movement has underscored the importance of having diverse perspectives
and representation at all levels of decision-making, including on
public company boards. In recent years, diversity has become
increasingly important to the public, including institutional
investors, pension funds and other stakeholders who believe that board
diversity enhances board performance and is an important factor in the
voting decisions of some investors.\111\ Legislators increasingly are
taking action to encourage corporations to diversify their boards and
improve diversity disclosures.\112\
---------------------------------------------------------------------------

\110\ In 2009, when the Commission proposed enhancements to
proxy disclosures, including addressing board diversity disclosures,
the Commission received over 130 comment letters related to its
proposal, including from corporations, pension funds, professional
associations, trade unions, accounting firms, law firms,
consultants, academics, individual investors and other interested
parties. See Proxy Disclosure Enhancements, 74 FR at 68,335; see
also David A. Katz and Laura McIntosh, Raising the Stakes for Board
Diversity, Law.com (July 22, 2020), available at: https://www.law.com/newyorklawjournal/2020/07/22/raising-the-stakes-for-board-diversity/?slreturn=20201017021522; Office of the Illinois
State Treasurer, The Investment Case For Board Diversity: A Review
of the Academic and Practitioner Research on the Value of Gender and
Racial/Ethnic Board Diversity for Investors 7 (Oct. 2020), available
at: https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/il%20treasurer%20white%20paper%20-%20the%20investment%20case%20for%20board%20diversity%20(oct%202020).p
df.
\111\ See Comments on Proposed Rule: Proxy Disclosure and
Solicitation Enhancements, available at: https://www.sec.gov/comments/s7-13-09/s71309.shtml. See also CGLytics, Diversity on the
Board? Metrics Used by Fortune 100 Companies (June 29, 2020),
available at: https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/; Office of the Illinois State
Treasurer, supra note 110.
\112\ For example, California requires companies headquartered
in the state to have at least one director who self-identifies as a
Female and one director from an Underrepresented Community. See Cal.
S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020).
Washington requires companies headquartered in the state to have at
least 25% women on the board by 2022 or provide certain disclosures.
See Wash. Subst. S.B. 6037 (June 11, 2020). At least eleven states
have proposed diversity-related requirements. See Hatcher and
Latham, supra note 11.
---------------------------------------------------------------------------

a. SEC Diversity Disclosure Requirements--Background

In 2009, the Commission sought comment on whether to amend Item
407(c)(2)(vi) of Regulation S-K to require disclosure of whether a
nominating committee considers diversity when selecting a director for
a position on the board.\113\ The Commission received more than 130
comment letters on its proposal. According to a University of Dayton
Law Review analysis of those comment letters, most were submitted by
groups with a specific interest in diversity, or by institutional
investors, including mutual funds, pension funds, and socially
responsible investment funds.\114\ Further, the analysis showed that 56
commenters addressed the issue of diversity disclosures, and only 5 of
those 56 commenters did not favor such disclosure.\115\ Twenty-seven of
the 56 mentioned gender diversity, 18 mentioned racial diversity, and
13 mentioned ethnic diversity. However, neither the proposed rule nor
the final rule defined diversity.\116\
---------------------------------------------------------------------------

\113\ See Proxy Disclosure and Solicitation Enhancements, 74 FR
35,076, 35,084 (July 17, 2009) (proposed rule).
\114\ See Thomas Lee Hazen and Lissa Lamkin Broome, Board
Diversity and Proxy Disclosure, 37:1 Univ. Dayton L. Review 41, 51,
n. 82 (citing the comment letters).
\115\ In the five comments that opposed diversity disclosure,
three stated that diversity was an important value. See Comments on
Proposed Rule, supra note 111; see also Hazen and Broome, supra note
114, at 54 n.88 (citing the 56 comment letters).
\116\ See Hazen and Broome, supra note 114, at 53 n. 84-86.
---------------------------------------------------------------------------

Ten years after its adoption of board diversity disclosure rules,
the Commission revisited the rules by establishing new Compliance and
Disclosure Interpretations (``C&DI''). However, the Commission did not
provide a definition of diversity, and therefore issuers currently are
not required to disclose the race, ethnicity or gender of their
directors or nominees.
Currently, Item 401(e)(1) of Regulation S-K requires a company to
``briefly discuss the specific experience, qualifications, attributes
or skills that led to the conclusion that the person should serve as a
director.'' \117\ The C&DI clarifies that if a board considered a
director's self-identified diversity characteristics (e.g., race,
gender, ethnicity, religion, nationality, disability, sexual
orientation or cultural background) during the nomination process, and
the individual consents to disclose those diverse characteristics, the
Commission ``would expect that the company's discussion required by
Item 401 would include, but not necessarily be limited to, identifying
those characteristics and how they were considered.'' \118\
---------------------------------------------------------------------------

\117\ See 17 CFR 229.401(e)(1).
\118\ See Securities and Exchange Commission, Regulation S-K
Compliance & Disclosure Interpretations (Sept. 21, 2020), available
at: https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
---------------------------------------------------------------------------

Rather than providing a specific definition of diversity, the C&DI
provides a non-exhaustive list of examples of diverse characteristics
that a company could consider for purposes of Item 401(e)(1), including
``race, gender, ethnicity, religion, nationality, disability, sexual
orientation, or cultural background.'' \119\ Additionally, the
Commission stated that any description of a company's diversity policy
would be expected to include ``a discussion of how the company
considers the self-identified diversity attributes of nominees as well
as any other qualifications its diversity policy takes into account,
such as diverse work experiences, military service, or socio-economic
or demographic characteristics.'' \120\
---------------------------------------------------------------------------

\119\ Id.
\120\ Id.
---------------------------------------------------------------------------

Item 407(c)(2)(vi) of Regulation S-K requires proxy disclosure
regarding whether diversity is considered when identifying director
nominees and, if so, how. In addition, if the board or nominations
committee has adopted a diversity policy, the company must describe how
the policy is implemented and its effectiveness is assessed.\121\ When
adopting Item 407(c)(2)(vi), the Commission explained:
---------------------------------------------------------------------------

\121\ See 17 CFR 229.407(c)(2)(vi).

We recognize that companies may define diversity in various
ways, reflecting different perspectives. For instance, some
companies may conceptualize diversity expansively to

[[Page 80483]]

include differences of viewpoint, professional experience,
education, skill and other individual qualities and attributes that
contribute to board heterogeneity, while others may focus on
diversity concepts such as race, gender and national origin. We
believe that for purposes of this disclosure requirement, companies
should be allowed to define diversity in ways that they consider
appropriate. As a result we have not defined diversity in the
amendments.\122\
---------------------------------------------------------------------------

\122\ See Proxy Disclosure Enhancements, 74 FR at 68,344.
---------------------------------------------------------------------------

Moreover, Item 407(c)(2)(vi) does not require companies to adopt a
formal policy and does not require them to explain why they have not.
It also does not require public disclosure of board-level diversity
statistics.

b. Complaints Surrounding Current Diversity Disclosure Requirements

Given the broad latitude afforded to companies by the Commission's
rules related to board diversity and proxy disclosure, current
reporting of board-level diversity statistics has been significantly
unreliable and unusable to investors. This has been due to myriad data
collection challenges, including the scarcity of reported information,
the lack of uniformity in the information that is disclosed and
inconsistencies in the definitions of diversity characteristics across
companies.\123\ The heightened national discourse around diversity and
mounting grievances from investors surrounding transparency on board
diversity prompted Nasdaq to examine the state of board diversity among
its listed companies. While conducting that research, Nasdaq identified
a number of key challenges, such as: (1) Inconsistent disclosure and
definitions of diversity across companies; (2) limited data on diverse
characteristics outside of gender; (3) inconsistent or no disclosure of
a director's race, ethnicity, or other diversity attributes (e.g.,
nationality); (4) difficult-to-extract data because statistics are
often embedded in graphics; and (5) aggregation of information, making
it difficult to separate gender from other categories of diversity.
Investors and data analysts have raised similar criticisms.
---------------------------------------------------------------------------

\123\ See Petition for Rulemaking (July 6, 2017), available at:
https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.
---------------------------------------------------------------------------

As the Illinois Treasurer observed, the paucity of data on race and
ethnicity creates barriers to investment analysis, due diligence and
academic study.\124\ For example, the scarcity of such data is an
impediment to academics who want to study the performance impact of
racially diverse boards.\125\ Nasdaq is concerned that investors also
face the many data collection challenges Nasdaq encountered, rendering
current diversity disclosures unreliable, unusable, and insufficient to
inform investment and voting decisions. Commissioner Allison Herren Lee
expressed similar concerns, stating that the current SEC disclosure
requirements have ``led to spotty information that is not standardized,
not consistent period to period, not comparable across companies, and
not necessarily reliable. . . . And the current state of disclosure
reveals the shortcomings of a principles-based materiality regime in
this area.'' \126\
---------------------------------------------------------------------------

\124\ See Press Release, Illinois State Treasurer Frerichs Calls
on Russell 3000 Companies to Disclose Diversity Data (Oct. 28,
2020), available at https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/october2020_russell3000.pdf.
\125\ See Office of Illinois State Treasurer, supra note 110, at
3-4.
\126\ See Lee, supra note 22.
---------------------------------------------------------------------------

Some stakeholders believe there is a correlation between companies
that disclose the gender, racial and ethnic composition of their board
and the number of diverse directors on those companies' boards.\127\
Currently, the lack of reliable and consistent data makes it difficult
to measure diversity in the boardroom, and a common set of standards
for diversity definitions and disclosure format is greatly needed. At
present, U.S. companies must navigate a complex patchwork of federal
and state regulations and disclosure requirements. The limited
disclosure currently provided voluntarily, which is primarily focused
on gender (due in part to that data being the most readily available),
fails to provide the full scope of a board's diverse
characteristics.\128\ It is difficult to improve what one cannot
accurately measure. This lack of transparency is impacting investors
who are increasingly basing public advocacy, proxy voting and direct
shareholder-company engagement decisions on board diversity
considerations.\129\
---------------------------------------------------------------------------

\127\ See Proxy Disclosure Enhancements, 74 FR at 68,355
(``Although the[se] amendments are not intended to steer behavior,
diversity policy disclosure may also induce beneficial changes in
board composition. A board may determine, in connection with
preparing its disclosure, that it is beneficial to disclose and
follow a policy of seeking diversity.''); see also Office of
Illinois State Treasurer, supra note 110, at 3.
\128\ See, e.g., CGLytics, supra note 111, at https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/; Petition for Amendment of Proxy Rule, supra note 80;
Office of Illinois State Treasurer, supra note 110.
\129\ See Office of the Illinois State Treasurer, Russell 3000
Board Diversity Disclosure Initiative, https://www.illinoistreasurer.gov/Financial_Institutions/Equity,_Diversity__Inclusion/Russell_3000_Board_Diversity_Disclosure_Initiative (last accessed
Nov. 25, 2020).
---------------------------------------------------------------------------

c. Support for Updating Diversity Disclosure Requirements

Nasdaq's surveys of investors and reviews of their disclosed
policies and actions show that board diversity is a priority when
assessing companies, and investors report, in some cases, relying on
intuition when there is a lack of empirical, evidenced-based data.
Furthermore, the continued growth of ESG investing raises the
importance of quality data, given the data-driven nature of investment
products such as diversity-specific indices and broader ESG funds.
Investors have a unique platform from which to engage and influence
a company's position on important topics like diversity. Similarly,
Nasdaq, like other self-regulatory organizations, is uniquely
positioned to establish practices that will assist in carrying out
Nasdaq's mandate to protect investors and remove impediments from the
market. Various stakeholders, including Nasdaq, believe that clear and
concise annual disclosure of board diversity information that
disaggregates the data by race, ethnicity, gender identity and sexual
orientation will provide the public, including key stakeholders, with a
better sense of a company's approach to improving corporate diversity
and the support needed to effectuate any changes. Required disclosures
also would eliminate the number of shareholder proposals asking for
these key metrics and the need for companies to respond to multiple
investor requests for information.\130\ Moreover, companies manage
issues more closely and demonstrate greater progress when data is
available.\131\
---------------------------------------------------------------------------

\130\ See Petition for Rulemaking, supra note 123, at 2.
\131\ See, e.g., Gwen Le Berre, Parametric, Investors Need Data
to Make Diversity a Reality (Aug. 24, 2020), https://www.parametricportfolio.com/blog/investors-need-data-to-make-diversity-a-reality.
---------------------------------------------------------------------------

In 2015, nine large public pension funds who collectively
supervised $1.12 trillion in assets at the time petitioned the
Commission to require registrants to disclose information related to,
among other things, the gender, racial, and ethnic diversity of the
registrant's board nominees.\132\ In 2017, Human Capital Management
Coalition, which described itself as a group of institutional investors
with $2.8 trillion in assets at the time, made a similar petition to
the Commission.\133\ More recently, in October 2020, the Illinois
Treasurer spearheaded an initiative along with twenty other investor
organizations, asking for all companies in the Russell

[[Page 80484]]

3000 Index to disclose the composition of their board, including each
board member's gender, race and ethnicity.\134\
---------------------------------------------------------------------------

\132\ See Petition for Amendment of Proxy Rule, supra note 80.
\133\ See Petition for Rulemaking, supra note 123.
\134\ See Press Release, supra note 124.
---------------------------------------------------------------------------

The largest proxy advisory firms have aligned their voting policies
to encourage increased board diversity disclosure. Institutional
Shareholder Services (``ISS''), recently adopted a new voting policy
under which it will identify boards of companies in the Russell 3000 or
S&P 1500 that ``lack racial and ethnic diversity (or lack disclosure of
such)'' in 2021 and, beginning in 2022, will recommend voting against
the chair of the nominating committee of such companies. The stated
goal of the policy is ``helping investors identify companies with which
they may wish to engage and to foster dialogue between investors and
companies on this topic.'' \135\ In 2017, proxy advisory firm Glass
Lewis announced a policy regarding board gender diversity that took
effect in 2019. Glass Lewis generally recommends voting against the
nominating committee chair of a board that has no female members, and
when making such a recommendation, the firm closely examines the
company's disclosure of its board diversity considerations and other
relevant contextual factors.\136\ On November 24, 2020, Glass Lewis
announced the publication of its 2021 Proxy Voting Policy Guidelines,
which expand its board gender diversity policy to vote against
nominating chairs if there are fewer than two female directors,
beginning in 2022.\137\ Most notably, beginning with the 2021 proxy
season, the company will include an assessment report of company proxy
disclosures relating to board diversity, skills and the director
nomination process for companies in the S&P 500 index. According to
Glass Lewis, it ``will reflect how a company's proxy statement
presents: (i) The board's current percentage of racial/ethnic
diversity; (ii) whether the board's definition of diversity explicitly
includes gender and/or race/ethnicity; (iii) whether the board has
adopted a policy requiring women and minorities to be included in the
initial pool of candidates when selecting new director nominees (aka
`Rooney Rule'); and (iv) board skills disclosure.'' \138\
---------------------------------------------------------------------------

\135\ See ISS Governance, ISS Announces 2021 Benchmark Policy
Updates (November 12, 2020), available at: https://www.issgovernance.com/iss-announces-2021-benchmark-policy-updates/.
\136\ See Glass Lewis, 2019 Policy Guideline Updates (Oct. 24,
2018), available at: https://www.glasslewis.com/2019-policy-guideline-updates-united-states-canada-shareholder-initiatives-israel/.
\137\ See Glass Lewis, 2021 Proxy Paper Guidelines: An Overview
of the Glass Lewis Approach to Proxy Advice--United States (2020),
available at: https://www.glasslewis.com/wp-content/uploads/2020/11/US-Voting-Guidelines-GL.pdf?hsCtaTracking=7c712e31-24fb-4a3a-b396-9e8568fa0685%7C86255695-f1f4-47cb-8dc0-e919a9a5cf5b.
\138\ Id.
---------------------------------------------------------------------------

Congress and members of the Commission also have weighed in on the
importance of improving board transparency. In 2017, Representative
Carolyn Maloney introduced the ``Gender Diversity in Corporate
Leadership Act of 2017,'' which proposed requiring public companies to
provide proxy disclosure regarding the gender diversity of the board of
directors and nominees.\139\ In November 2019, the U.S. House of
Representatives, with bipartisan support, passed the ``Corporate
Governance Through Diversity Act of 2019,'' which requires certain
registrants annually to disclose the racial, ethnic, and gender
composition of their boards and executive officers, as well as the
veteran status of any of those directors and officers, in their proxy
statements.\140\ The bill also requires the disclosure of any policy,
plan or strategy to promote racial, ethnic, and gender diversity among
these groups. Legislators have proposed a companion bill in the U.S.
Senate.\141\
---------------------------------------------------------------------------

\139\ Gender Diversity in Corporate Leadership Act of 2017, H.R.
1611, 115th Cong. (2017).
\140\ Improving Corporate Governance Through Diversity Act of
2019, H.R. 5084, 116th Cong. (2019).
\141\ Improving Corporate Governance Through Diversity Act of
2019, S. 360, 116th Cong. (2019).
---------------------------------------------------------------------------

The Council of Institutional Investors (``CII''), U.S. Chamber of
Commerce,\142\ National Urban League, Office of New York State
Comptroller and the National Association for the Advancement of Colored
People praised the House of Representatives' for passing the 2019
legislation. According to the U.S. Chamber of Commerce's members and
associations, it has become increasingly important to see improvements
in board diversity.\143\ Additionally, CII's General Counsel stated
that the proxy statement disclosure requirement in the legislation
``could contribute to enhancing U.S. public company board consideration
of diversity.'' \144\
---------------------------------------------------------------------------

\142\ See Letter from Various U.S. Chamber of Commerce
Associations and Members to Chairman Mike Crapo and Ranking Member
Sherrod Brown, U.S. House Committee on Banking, Housing, and Urban
Affairs (July 27, 2020), available at: https://www.uschamber.com/sites/default/files/200727_coalition_h.r._5084_senatesmallbusiness.pdf.
\143\ Id.
\144\ See Joe Mont, SEC, Congress seek better diversity
disclosures, Compliance Week (Feb. 20, 2019), https://www.complianceweek.com/sec-congress-seek-better-diversity-disclosures/24802.article.
---------------------------------------------------------------------------

More recently, SEC Commissioners have called for greater
transparency surrounding ethnic diversity on company boards. In a
September 2020 speech titled ``Diversity Matters, Disclosure Works, and
the SEC Can Do More'' given at the CII Fall Conference, Commissioner
Lee advocated advancing corporate diversity and for various approaches
by which the Commission could promote diversity, including among other
things, strengthening the C&DI's guidance related to disclosure of
board candidate diversity characteristics.\145\ Commissioner Lee
stated:
---------------------------------------------------------------------------

\145\ See Lee, supra note 22.

[The SEC has] largely declined to require diversity-related
disclosure. In 2009, we adopted a requirement for companies to
disclose if and how diversity is considered as a factor in the
process for considering candidates for board positions, including
any policies related to the consideration of diversity. In 2018, we
issued guidance encouraging the disclosure of self-identified
characteristics of board candidates. While I appreciate these
measures, given that women of color hold just 4.6% of Fortune 500
board seats and less than one percent of Fortune 500 CEOs are Black,
it's time to consider how to get investors the diversity information
they need to allocate their capital wisely.\146\
---------------------------------------------------------------------------

\146\ Id. Commissioner Crenshaw also expressed disappointment
with the Commission's silence on diversity. See Crenshaw, supra note
7.

VI. Nasdaq Proposal

a. Overview of Disclosure Requirements

Disclosure of information material to an investor's voting and
investment decision is the bedrock of federal securities laws. The
Exchange's listing rules require companies to comply with federal
securities laws, including the registration requirements under the
Securities Act of 1933. Once listed, companies are obligated to solicit
proxies and file all annual and periodic reports with the Commission
under the Act at the prescribed times.\147\ In discharging its
obligation to protect investors, Nasdaq monitors listed companies for
compliance with those disclosure obligations, and the failure to do so
results in a notice of deficiency or delisting.
---------------------------------------------------------------------------

\147\ See Nasdaq Stock Market Rulebook, Rules 5250(c) and (d).
---------------------------------------------------------------------------

Nasdaq believes it is well within the Exchange's delegated
regulatory authority to propose listing rules designed to enhance
transparency so long as they do not conflict with existing federal
securities laws. For example, Nasdaq requires listed companies to
publicly disclose compensation or other payments by third parties to a
company's directors or

[[Page 80485]]

nominees, notwithstanding that such disclosure is not required by
federal securities laws. In approving that proposed rule, the
---------------------------------------------------------------------------
Commission noted:

To the extent there are certain factual scenarios that would
require disclosure not otherwise required under Commission rules, we
believe that it is within the purview of a national securities
exchange to impose heightened governance requirements, consistent
with the Act, that are designed to improve transparency and
accountability into corporate decision making and promote investor
confidence in the integrity of the securities markets.\148\
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\148\ See Order Granting Accelerated Approval of a Proposed Rule
Change, 81 FR 44,400, 44,403 (July 7, 2016).

Nasdaq is concerned that while investors have increasingly
emphasized that they consider board diversity information to be
material, the current lack of transparency and consistency makes it
difficult for Nasdaq and investors to determine the state of diversity
among listed companies as well as each board's philosophy regarding
diversity. Investors also have voiced dissatisfaction about having to
independently collect board-level data about race, ethnicity and gender
identity because such investigations can be time consuming, expensive,
and fraught with inaccuracies.\149\ Moreover, in some instances, based
on Nasdaq's own investigation, such information is either unavailable,
or, if available, not comparable across companies. To the extent
investors must obtain this information on their own through an
imperfect process, Nasdaq is concerned that it increases information
asymmetries between larger stakeholders, who are able to collect this
data directly from companies, and smaller investors, who must rely on
incomplete public disclosures. For all investors who take on the burden
of independently obtaining the current information, there is a cost and
time burden related to the data collection.
---------------------------------------------------------------------------

\149\ See Petition for Amendment of Proxy Rule, supra note 80,
at 2.
---------------------------------------------------------------------------

Nasdaq believes that additional disclosure regarding a board's
composition and philosophy related to board diversity will improve
transparency and accountability into corporate decision making. Nasdaq
proposes to improve transparency regarding board diversity by requiring
all listed companies to publicly disclose unbundled, consistent data
utilizing a uniform, transparent framework on their website or in their
proxy statement under Rule 5606. Similarly, Nasdaq proposes to promote
accountability in corporate decision-making by requiring companies who
do not have at least two Diverse directors on their board to provide
investors with a public explanation of the board's reasons for not
doing so under Rule 5605(f)(3). Nasdaq designed the proposal to avoid a
conflict with existing disclosure requirements under Regulation S-K and
to mitigate additional burdens for companies by providing them with
flexibility to provide such disclosure on their website or in their
proxy statement, and not requiring them to adopt a formal diversity
policy.
Nasdaq proposes to foster consistency in board diversity data
disclosure by defining ``Diverse'' under Rule 5605(f)(1) as ``an
individual who self-identifies in one or more of the following
categories: Female, Underrepresented Minority or LGBTQ+,'' and by
adopting the following definitions under Rule 5605(f)(1):
``Female'' means an individual who self-identifies her
gender as a woman, without regard to the individual's designated sex at
birth.
``LGBTQ+'' means an individual who self-identifies as any
of the following: lesbian, gay, bisexual, transgender or a member of
the queer community.
``Underrepresented Minority'' means an individual who
self-identifies as one or more of the following: Black or African
American, Hispanic or Latinx, Asian, Native American or Alaska Native,
Native Hawaiian or Pacific Islander, or Two or More Races or
Ethnicities.
The terms in the proposed definition of ``Underrepresented
Minority'' reflect the EEOC's categories and are construed in
accordance with the EEOC's definitions.\150\ The terms in the proposed
definition of LGBTQ+ are similar to the identities defined in
California's A.B. 979, described below, but have been expanded to
include the queer community based on Nasdaq's consultation with
stakeholders, including human rights organizations.\151\
---------------------------------------------------------------------------

\150\ While the EEO-1 report refers to ``Hispanic or Latino''
rather than Latinx, Nasdaq proposes to use the term Latinx to apply
broadly to all gendered and gender-neutral forms that may be used by
individuals of Latin American heritage, including individuals who
self-identify as Latino/a/e.
\151\ Further, Nasdaq agrees with the United Kingdom Financial
Reporting Council that the acronym LGBTQ+ ``does not attempt to
exclude other groups, nor does it imply that the experiences of
people under its umbrella are the same.'' See Hay et al., supra note
98, at 14.
---------------------------------------------------------------------------

In constructing its proposed definition of ``Diverse,'' Nasdaq
considered various state and federal legislation, stakeholder
sentiments and academic studies. For example, California requires
public companies headquartered in the state to have at least one
individual who self-identifies as a female on the board by 2019 under
S.B. 826 \152\ and at least one director who is a member of an
``underrepresented community'' by 2021 under A.B. 979.\153\ S.B. 826
defines ``Female'' as ``an individual who self-identifies her gender as
a woman, without regard to the individual's designated sex at birth,''
consistent with legislation proposed by New Jersey, Michigan and Hawaii
related to board gender diversity.\154\ A.B. 979 considers directors
from underrepresented communities to be individuals who self-identify
as Black, African American, Hispanic, Latino, Asian, Pacific Islander,
Native American, Native Hawaiian or Alaska Native, or as gay, lesbian,
bisexual or transgender. Since S.B. 826 was passed, 669 women have
joined public company boards in the state and the number of public
companies with all male boards has declined from 30% in 2018 to 3% in
2020.\155\
---------------------------------------------------------------------------

\152\ See Cal. S.B. 826, supra note 112.
\153\ See Cal. A.B. 979, supra note 112.
\154\ See Cal. S.B. 826, supra note 112. See also N.J. Senate
No. 3469, Sec. 3(b)(2) (2019); Mich. S.B. 115, Sec. 505a(2)(b)
(2019); Haw. H.B. 2720, Sec. 414-1(b)(2) (2020).
\155\ See California Partners Project, Claim Your Seat: A
Progress Report on Women's Representation on California Corporate
Boards 4 (2020), available at: https://www.calpartnersproject.org/claimyourseat.
---------------------------------------------------------------------------

The state of Washington requires public companies whose boards are
not comprised of at least 25% directors who self-identify as women by
January 1, 2022 to provide public disclosures related to the board's
consideration of ``diverse groups'' during the director nomination
process. The state considers ``diverse groups'' to include ``women,
racial minorities, and historically underrepresented groups.'' \156\
---------------------------------------------------------------------------

\156\ See Wash. Subst. S.B. 6037, supra note 112. At least 11
states have proposed diversity-related requirements. See Hatcher and
Latham, supra note 11.
---------------------------------------------------------------------------

As discussed above, Congress has proposed legislation relating to
disclosure of racial, ethnic, gender and veteran status among the
company's directors. Section 342 of the Dodd-Frank Act defines
``minority'' as ``Black American, Native American, Hispanic American,
and Asian American,'' \157\ and the Diversity Assessment Report for
Entities Regulated by the SEC requires the Exchange to report workforce
composition data to the SEC based on

[[Page 80486]]

the EEOC's categories.\158\ Most companies are required by law to
provide similar workforce data to the EEOC through the EEO-1 Report,
which requires employers to report statistical data related to race,
ethnicity and gender to the EEOC.\159\
---------------------------------------------------------------------------

\157\ See 12 U.S.C. 5452(g)(3) and Public Law 101-73 Sec.
1204(c)(3).
\158\ See Securities and Exchange Commission, Diversity
Assessment Report for Entities Regulated by the SEC, available at:
https://www.sec.gov/files/OMWI-DAR-FORM.pdf.
\159\ All companies with 100 or more employees are required to
complete the EEO-1 Report. See U.S. Equal Employment Opportunity
Commission, EEO-1: Who Must File, https://www.eeoc.gov/employers/eeo-1-survey/eeo-1-who-must-file (last accessed Nov. 27, 2020).
---------------------------------------------------------------------------

Nasdaq has designed the proposed rule to require all companies to
provide consistent, comparable data under Rule 5606 by utilizing the
existing EEO-1 reporting categories that companies are already familiar
with, and by requiring companies to have, or publicly explain why they
do not have, at least two directors who are diverse in terms of race,
ethnicity, sexual orientation or gender identity under Rule 5605(f)(2).
While the EEO-1 report does not currently include sexual orientation or
gender identity, Nasdaq believes it is reasonable and in the public
interest to include a reporting category for LGBTQ+ status in
recognition of the U.S. Supreme Court's recent decision in Bostock v.
Clayton County that sexual orientation and gender identity are
``inextricably'' intertwined with sex.\160\
---------------------------------------------------------------------------

\160\ See Bostock v. Clayton Cty., 140 S. Ct. 1731, 1742 (2020)
(``But unlike any of these other traits or actions, homosexuality
and transgender status are inextricably bound up with sex. Not
because homosexuality or transgender status are related to sex in
some vague sense or because discrimination on these bases has some
disparate impact on one sex or another, but because to discriminate
on these grounds requires an employer to intentionally treat
individual employees differently because of their sex.'').
---------------------------------------------------------------------------

The proposal does not preclude companies from considering
additional diverse attributes, such as nationality, disability, or
veteran status in selecting board members; however, the company would
still have to provide the required disclosure under Rule 5605(f)(3) if
the company does not also have at least two directors who are otherwise
considered Diverse under Rule 5605(f)(1). Nor would the proposal
prevent companies from disclosing information related to other diverse
attributes of board members beyond those highlighted in the rule if
they felt such disclosure would benefit investors. Nasdaq believes such
disclosure would provide investors with additional information about
the company's philosophy regarding broader diversity characteristics.
Overall, Nasdaq believes the proposal will enhance investor
confidence that all listed companies are considering diversity of race,
ethnicity, sexual orientation and gender identity in the context of
selecting directors. Investors will be confident that board discussions
at listed companies with at least two Diverse directors include the
perspectives of more than one demographic group. They will also be
confident that boardrooms without at least two Diverse directors are
having a thoughtful discussion about their reasons for not doing so and
publicly explaining those reasons. On balance, the proposal will
advance the public interest and enhance investor confidence in the
integrity of the securities markets by ensuring investors that Nasdaq
is monitoring all listed companies to verify that they have at least
two Diverse directors or explain why they do not, and by requiring all
listed companies to provide consistent, comparable diversity
disclosures.

b. Board Statistical Disclosure

Given the increased interest in, and advocacy for, improvements in
board transparency related to diversity disclosure information, the
Exchange is proposing to adopt new Rule 5606(a), which would require
each company to publicly disclose, to the extent permitted by
applicable law, information on each director's voluntary self-
identified gender and racial characteristics and LGBTQ+ status.
All Nasdaq-listed companies that are subject to proposed Rule
5605(f), whether they choose to meet the diversity objectives of
proposed Rule 5605(f)(2) or to explain why they do not, would be
required to make the proposed Rule 5606 disclosure. This proposed rule
also will assist the Exchange in assessing whether companies meet the
diversity objectives of proposed Rule 5605(f). Under Rule 5606(e),
Nasdaq proposes to make proposed Rule 5606 operative for listed
companies one year after the SEC Approval Date of this proposal.
Pursuant to proposed Rule 5606(a), each company would be instructed
to annually provide its board-level diversity data in a format
substantially similar to the Board Diversity Matrix in proposed Rule
5606(a) and attached [sic] as Exhibit 3. The company would be required
to provide the total number of directors on its board. If a director
voluntarily self-identifies, each company, other than a Foreign Issuer
(as defined under Rule 5605(f)(1)), would include the following in a
table titled ``Board Diversity Matrix,'' in accordance with the
instructions accompanying the proposed disclosure format: (1) the
number of directors based on gender identity (male, female or non-
binary \161\); (2) the number of directors based on race and ethnicity
(African American or Black, Alaskan Native or American Indian, Asian,
Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two
or More Races or Ethnicities); and (3) the number of directors who
self-identify as LGBTQ+.
---------------------------------------------------------------------------

\161\ Although non-binary is included as a category in the
proposed Board Diversity Matrix, a company would not satisfy the
diversity requirement proposed by Rule 5605(f)(2) if a director
self-identifies solely as non-binary.
---------------------------------------------------------------------------

Any director who chooses not to disclose a gender would be included
under ``Gender Undisclosed'' and any director who chooses not to
identify as any race or not to identify as LGBTQ+ would be included in
the ``Undisclosed'' category at the bottom of the table. The defined
terms for the race and ethnicity categories in the instructions to the
Board Diversity Matrix disclosure format are substantially similar to
the terms and definitions used in the EEO-1 Report.\162\ LGTBQ+ is
defined similarly to proposed Rule 5605(f)(1) as a person who
identifies as any of the following: lesbian, gay, bisexual, transgender
or a member of the queer community.
---------------------------------------------------------------------------

\162\ See supra note 159. Additionally, the EEOC does not
categorize LGBTQ+ or any other sexual orientation identifier on its
EEO-1 Report. The definitions of the EEO-1 race and ethnicity
categories may be found in the appendix to the EEO-1 Report
instructional booklet, available at https://www.eeoc.gov/employers/eeo-1-survey/eeo-1-instruction-booklet.
---------------------------------------------------------------------------

Below is an example of a Board Diversity Matrix that companies may
use, which is also attached [sic] as Exhibit 3:

[[Page 80487]]

Board Diversity Matrix
[As of [DATE]]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Board Size:
----------------------------------------------------------------------------------------------------------------
Total Number of Directors............... #
----------------------------------------------------------------------------------------------------------------
Gender: Male Female Non-Binary Gender
undisclosed
Number of directors based on gender # # # #
identity...............................
Number of directors who identify in any of
the categories below:
African American or Black............... # # # #
Alaskan Native or American Indian....... # # # #
Asian................................... # # # #
Hispanic or Latinx...................... # # # #
Native Hawaiian or Pacific Islander..... # # # #
White................................... # # # #
Two or More Races or Ethnicities........ # # # #
----------------------------------------------------------------------------------------------------------------
LGBTQ+.................................. #
----------------------------------------------------------------------------------------------------------------
Undisclosed................................. #
----------------------------------------------------------------------------------------------------------------

Nasdaq recognizes that some Foreign Issuers, including Foreign
Private Issuers as defined by the Act,\163\ may have their principal
executive offices located outside of the United States and in
jurisdictions that may impose laws limiting or prohibiting self-
identification questionnaires, particularly as they relate to race,
ethnicity or LGBTQ+ status. In such countries, a Foreign Issuer may be
precluded by law from requesting diversity data from its directors.
Moreover, Nasdaq's definition of Underrepresented Minority proposed in
Rule 5606(f)(1) may be inapplicable to a Foreign Issuer, making this
Board Matrix data less relevant for such companies and not useful for
investors.
---------------------------------------------------------------------------

\163\ See 17 CFR 240.3b-4.
---------------------------------------------------------------------------

As a result of these limitations, Nasdaq is proposing the option of
a separate Board Diversity Matrix for Foreign Issuers. Similar to other
companies, a Foreign Issuer would be required to provide the total
number of directors on its board. If a director voluntarily self-
identifies, the company would include the following in a table titled
``Board Diversity Matrix'': (1) The number of directors based on gender
identity (male, female or non-binary \164\); (2) the number of
directors who are considered underrepresented in the company's home
country jurisdiction;\165\ and (3) the number of directors who self-
identify as LGBTQ+. An ``Underrepresented Individual in Home Country
Jurisdiction'' is defined in the instructions to the Board Diversity
Matrix as a person who self-identifies as an underrepresented
individual based on national, racial, ethnic, indigenous, cultural,
religious or linguistic identity in a Foreign Issuer's home country
jurisdiction. Rule 5605(f)(2)(B)(i) also proposes the same definition
for Diverse directors of Foreign Issuers.
---------------------------------------------------------------------------

\164\ Although non-binary is included as a category in the
proposed Board Diversity Matrix, a company would not satisfy any
aspect of the diversity requirement proposed by Rule 5605(f)(2) if a
director self-identifies solely as non-binary.
\165\ To clarify, although a Foreign Issuer may disclose
directors that meet the requirement of Underrepresented Minority
pursuant to new Rule 5605(f)(1), such disclosure may not meet the
diversity objectives of new Rule 5605(f)(2)(B)(ii).
---------------------------------------------------------------------------

Nasdaq is also proposing new Rule 5606(b), which would require each
company to provide the disclosure required under Rule 5606(a) in either
the company's proxy statement or information statement for its annual
meeting for shareholders, or on the company's website. If the company
elects to disclose the information on its website, the company must
also submit such disclosure along with a URL link to the information
through the Nasdaq Listing Center within 15 calendar days of the
company's annual shareholder meeting. The proposed time period to
submit the information to the Nasdaq Listing Center is aligned with the
time period provided in proposed Rule 5605(f)(3) for a company to
submit its explanation for why it does not have at least two Diverse
directors. Disclosure of the statistical data is not in lieu of any SEC
requirements for a company to disclose any required information
pursuant to Regulation S-K or any other federal, state or foreign laws
or regulations. As described in the instructions to the Board Diversity
Matrix and Rule 5606(a), each year following the first year that a
company publishes its annual Board Diversity Matrix, the company would
be required to publish its data for the current and immediately prior
years.
Additionally, Nasdaq is proposing Rule 5606(c), which exempts the
following types of companies from proposed Rule 5606(a): acquisition
companies listed under IM-5101-2; asset-backed issuers and other
passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set
forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule
5615(a)(4)); management investment companies (as set forth in Rule
5615(a)(5)); issuers of non-voting preferred securities, debt
securities and Derivative Securities (as set forth in Rule 5615(a)(6));
and issuers of securities listed under the Rule 5700 Series. The
exemption of these companies is consistent with the approach taken by
Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate
governance standards for board composition.
Nasdaq is also proposing Rule 5606(d) to allow for a company newly
listing on Nasdaq, including a company listing in connection with a
business combination under IM-5101-2, to satisfy the requirement of
Rule 5606 within one year of listing on Nasdaq. The disclosure required
by proposed Rule 5606(d) would be required to be included in the
company's annual proxy statement or information statement for its
annual meeting of shareholders or on the company's website. If the
company provides such disclosure on its website, the company must also
submit the disclosure and a URL link to the disclosure through the
Nasdaq Listing Center no later than 15 calendar days after the
company's annual shareholder meeting.
When a company does not timely provide the required disclosure,
Nasdaq will notify the company that it is not in compliance with a
listing requirement

[[Page 80488]]

and allow the company to provide a plan to regain compliance.
Consistent with deficiencies from most other rules that allow a company
to submit a plan to regain compliance,\166\ Nasdaq proposes to allow
companies deficient under proposed Rule 5606 45 calendar days to submit
a plan in accordance with Rule 5810(c)(2) to regain compliance and,
based on that plan, Nasdaq can provide the company with up to 180 days
to regain compliance. If the company does not do so, it would be issued
a Staff Delisting Determination, which the company could appeal to a
Hearings Panel pursuant to Rule 5815. Although proposed Rule 5606 is
not identical to the current Commission requirements, it is similar to,
and does not deviate from, the Commission's CD&I related to Items
401(e)(1) and 407(c)(2)(vi) of Regulation S-K. Moreover, the proposed
rule strengthens the Commission's requirements by providing clarity to
the definition of diversity and streamlining investors' desire for
clear, complete and consistent disclosures. Nasdaq believes that the
format of the Board Diversity Matrix and the information that it will
provide offers greater transparency into a company's board composition
and will enable the data to be easily aggregated across issuers.\167\
Nasdaq also believes that requiring annual disclosure of the data will
ensure that the information remains current and easy for investors,
data analysts and other parties to track.
---------------------------------------------------------------------------

\166\ Pursuant to Nasdaq Rule 5810(c)(2)(A)(iii), a company is
provided 45 days to submit a plan to regain compliance with Rules
5620(a) (Meetings of Shareholders), 5620(c) (Quorum), 5630 (Review
of Related Party Transactions), 5635 (Shareholder Approval),
5250(c)(3) (Auditor Registration), 5255(a) (Direct Registration
Program), 5610 (Code of Conduct), 5615(a)(4)(D) (Partner Meetings of
Limited Partnerships), 5615(a)(4)(E) (Quorum of Limited
Partnerships), 5615(a)(4)(G) (Related Party Transactions of Limited
Partnerships), and 5640 (Voting Rights). Pursuant to Nasdaq Rule
5810(c)(2)(A)(iv), a company is also provided 45 days to submit a
plan to regain compliance with Rule 5250(b)(3)(Disclosure of Third
Party Director and Nominee Compensation). A company is generally
provided 60 days to submit a plan to regain compliance with the
requirement to timely file periodic reports contained in Rule
5250(c)(1).
\167\ Various stakeholders have requested easier aggregation.
See Petition for Amendment of Proxy Rule, supra note 80, at 1.
---------------------------------------------------------------------------

c. Diverse Board Representation or Explanation

Nasdaq is proposing to adopt new Rule 5605(f)(2) to require each
listed company to have, or explain why it does not have, at least two
members of its board of directors who are Diverse, including at least
one who self-identifies as Female and one who self-identifies as an
Underrepresented Minority or LGBTQ+.\168\ A company does not need to
provide additional public disclosures if the company discloses under
Rule 5606 that it has at least two Diverse directors satisfying this
requirement. The terms in the proposed definition of ``Underrepresented
Minority'' reflect the EEOC's categories and are construed in
accordance with the EEOC's definitions. Nasdaq has provided additional
flexibility for Smaller Reporting Companies and Foreign Issuers
(including Foreign Private Issuers).
---------------------------------------------------------------------------

\168\ Nasdaq plans to publish an FAQ on the Listing Center
clarifying that ``two members of its board of directors who are
Diverse'' would exclude emeritus directors, retired directors and
members of an advisory board.
---------------------------------------------------------------------------

Under proposed Rule 5605(f)(3), if a company satisfies the
requirements of Rule 5605(f)(2) by explaining why it does not have two
Diverse directors, the company must: (i) Specify the requirements of
Rule 5605(f)(2) that are applicable (e.g., the applicable subparagraph,
the applicable diversity objectives, and the timeframe applicable to
the company's market tier); and (ii) explain the reasons why it does
not have two Diverse directors. Such disclosure must be provided: (i)
In the company's proxy statement or information statement for its
annual meeting of shareholders; or (ii) on the company's website. If
the company provides such disclosure on its website, the company must
also notify Nasdaq of the location where the information is available
by submitting the URL link through the Nasdaq Listing Center no later
than 15 calendar days after the company's annual shareholder meeting.
Nasdaq would not assess the substance of the company's explanation,
but would verify that the company has provided one. If the company has
not provided any explanation, or has provided an explanation that does
not satisfy subparagraphs (i) and (ii) of Rule 5605(f)(3), the
explanation will not satisfy the requirements of Rule 5605(f)(3). For
example, it would not satisfy Rule 5605(f)(3) merely to state that
``the Company does not comply with Nasdaq's diversity rule.'' As
described above, the company must specify the requirements of Rule
5605(f)(2) that are applicable and explain the reasons why it does not
have two Diverse directors. For example, a company could disclose the
following to satisfy subparagraph (i) of Rule 5605(f)(3): ``As a
Smaller Reporting Company listed on the Nasdaq Capital Market tier, the
Company is subject to Nasdaq Rule 5605(f)(2)(C), which requires the
company to have, or explain why it does not have, at least two Diverse
directors, including at least one director who self-identifies as
Female. Under Rule 5605(f)(7), the Company is required to have at least
one Diverse director by March 10, 2023, and a second Diverse director
by March 10, 2026. The Company has chosen to satisfy Rule 5605(f)(2)(C)
by explaining its reasons for not meeting the diversity objectives of
Rule 5605(f)(2)(C), which the Company has set forth below.''
i. Effective Dates and Phase-in Period
Proposed Rule 5605(f)(7) provides a transition period before
companies must fully satisfy the requirement to have two Diverse
directors or explain why they do not upon the initial implementation of
the rule. Under this transition rule, each company must have, or
explain why it does not have, one Diverse director no later than two
calendar years after SEC approval of the proposed rule (the ``Approval
Date''), and two Diverse directors no later than (i) four calendar
years after the Approval Date for companies listed on the Nasdaq Global
Select (``NGS'') or Global Market (``NGM'') tiers, or (ii) five
calendar years after the Approval Date for companies listed on the
Nasdaq Capital Market (``NCM'') tier. For example, if the Approval Date
is March 10, 2021, all companies would be required to have, or explain
why they do not have, one Diverse director by March 10, 2023 and two
Diverse directors by March 10, 2025 (for NGS/NGM companies) or March
10, 2026 (for NCM companies).
Under proposed Rule 5605(f)(5)(A), a newly listed company that was
not previously subject to a substantially similar requirement of
another national securities exchange will be allowed one year from the
date of listing to satisfy the requirement described above. This
``phase-in'' period applies to companies listing in connection with an
initial public offering, a direct listing, a transfer from another
exchange or the over-the-counter market, or through a business
combination with an acquisition company listed under IM-5101-2, such
that the company is no longer subject to IM-5101-2 after the
combination. This phase-in period will apply after the end of the
transition period provided in Rule 5605(f)(7). As a result, companies
listing after the expiration of the phase-in periods provided by Rule
5605(f)(7) would be provided with one year from the date of listing to
satisfy the applicable requirement of Rule 5605(f)(2) to have, or
explain why they do not have, at least two Diverse directors. Companies
listing after the Approval Date, but prior to the expiration of the
phase-in periods provided by Rule 5605(f)(7), would be

[[Page 80489]]

provided with the latter of the periods set forth in Rule5605(f)(7) or
one year from the date of listing.
Nasdaq believes this proposed period is consistent with the phase-
in periods granted to companies for Nasdaq's other board composition
requirements. For example, Rule 5615(b)(1) provides a company listing
in connection with its initial public offering one year to fully comply
with the compensation and nomination committee requirements of Rules
5605(d) and (e), and with the majority independent board requirement of
Rule 5605(b). Similarly, SEC Rule 10A-3(b)(1)(iv)(A) allows a company
up to one year from the date its registration statement is effective to
fully comply with the applicable audit committee composition
requirements. Nasdaq Rule 5615(b)(3) provides a one-year timeframe for
compliance with the board composition requirements for companies
transferring from other listed markets that do not have a substantially
similar requirement.
ii. Foreign Issuers
Nasdaq recognizes that the EEOC categories of race and ethnicity
may not extend to all countries globally because each country has its
own unique demographic composition. However, Nasdaq observed that on
average, women tend to be underrepresented in boardrooms across the
globe, holding an estimated 16.9% of board seats in 2018.\169\ As an
official supporter of the United Nations Sustainable Stock Exchanges
Initiative, Nasdaq recognizes that ensuring women have equal
opportunities for leadership in economic decision making is one of the
United Nations Sustainable Development Goals to be accomplished by
2030.\170\ However, studies estimate that at current rates, it could
take 18 \171\ to 34 years \172\ for U.S. companies to achieve gender
parity on their boards.
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\169\ See Deloitte, Women in the Boardroom, supra note 86.
\170\ See United Nations Sustainable Stock Exchanges Initiative,
Gender Equality, https://www.un.org/sustainabledevelopment/gender-equality/ (last accessed Nov. 24, 2020).
\171\ See McKinsey & Company, supra note 36, at 17.
\172\ See GAO Report, supra note 44, at 9 (estimating ``it could
take about 10 years from 2014 for women to comprise 30 percent of
board directors and more than 40 years for the representation of
women on boards to match that of men'').
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Accordingly, under proposed Rule 5605(f)(2)(B), each Foreign Issuer
must have, or explain why it does not have, at least two Diverse
directors on its board, including at least one Female. Nasdaq proposes
to provide Foreign Issuers with additional flexibility in that Foreign
Issuers may satisfy the diversity requirement by having two Female
directors. In addition, Foreign Issuers may also satisfy the diversity
requirement by having one Female director, and an individual who self
identifies as (i) LGBTQ+ or (ii) an underrepresented individual based
on national, racial, ethnic, indigenous, cultural, religious or
linguistic identity in the company's home country jurisdiction.
Alternatively, a company could satisfy Rule 5605(f)(2)(B) by publicly
explaining the company's reasons for not meeting the diversity
objectives of the rule.
Nasdaq proposes to define a Foreign Issuer under Rule 5605(f)(1) as
(a) a Foreign Private Issuer (as defined in Rule 5005(a)(19)) or (b) a
company that: (i) Is considered a ``foreign issuer'' under Rule 3b-4(b)
under the Act; \173\ and (ii) has its principal executive offices
located outside of the United States. This definition will include all
Foreign Private Issuers (as defined in Rule 5005(a)(19)),\174\ and any
foreign issuers that are not foreign private issuers so long as they
are also headquartered outside of the United States. This is designed
to recognize that companies that are not Foreign Private Issuers but
are headquartered outside of the United States are foreign companies
notwithstanding the fact that they file domestic SEC reports. It is
also designed to exclude companies that are domiciled in a foreign
jurisdiction without having a physical presence in that country.
Proposed Rule 5605(f)(5)(B) will allow any company that ceases to be a
Foreign Issuer one year from the date that the company no longer
qualifies as a Foreign Issuer to satisfy the requirements of Rule
5605(f).
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\173\ See 17 CFR 240.3b-4(b) (``The term foreign issuer means
any issuer which is a foreign government, a national of any foreign
country or a corporation or other organization incorporated or
organized under the laws of any foreign country.'').
\174\ Under Nasdaq Rule 5005(a)(19), the term Foreign Private
Issuer has ``the same meaning as under Rule 3b-4 under the Act.''
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Nasdaq also proposes to revise Rule 5615 and IM-5615-3, which
currently permit a Foreign Private Issuer to follow home country
practices in lieu of the requirements set forth in the Rule 5600
Series, subject to several exclusions. Nasdaq proposes to revise Rule
5615 and IM-5615-3 to add Rules 5605(f) and 5606 to the list of
excluded corporate governance rules. As a result, Foreign Private
Issuers must satisfy the requirements of Rule 5605(f) and 5606 and may
not follow home country practices in lieu of such requirements.
However, Foreign Private Issuers that elect to follow an alternative
diversity objective in accordance with home country practices, or are
located in jurisdictions that restrict the collection of personal data,
may satisfy the requirements of Rule 5605(f) by explaining their
reasons for doing so instead of meeting the diversity objectives of the
rule.
iii. Smaller Reporting Companies
Nasdaq also recognizes that smaller companies, especially pre-
revenue companies that depend on the capital markets to fund ground-
breaking research and technological advancements, may not have the
resources necessary to compensate an additional director or engage a
search firm to search outside of directors' networks. In recognition of
the resource constraints faced by smaller companies, Nasdaq proposes to
provide each Smaller Reporting Company with additional flexibility.
Specifically, these companies could satisfy the two Diverse directors
objective under Rule 5605(f)(2)(C) by having two Female directors.
Like other companies, Smaller Reporting Companies could also
satisfy the two Diverse directors by having one Female director and one
director who self-identifies as either (i) an Underrepresented
Minority, or (ii) a member of the LGBTQ+ community. Alternatively, a
company could satisfy Rule 5605(f)(2)(C) by publicly explaining the
company's reasons for not meeting the diversity objectives of the rule.
Under Rule 5605(f)(1), Nasdaq proposes to define a Smaller Reporting
Company as set forth in Rule 12b-2 under the Act.\175\ Proposed Rule
5605(f)(5)(B) will allow any company that ceases to be a Smaller
Reporting Company one year from the date that the company no longer
qualifies as a Smaller Reporting Company to satisfy the requirements of
Rule 5605(f).
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\175\ Under 12b-2 of the Act, a Smaller Reporting Company
``means an issuer that is not an investment company, an asset-backed
issuer (as defined in Sec. 229.1101 of this chapter), or a
majority-owned subsidiary of a parent that is not a smaller
reporting company and that: (1) Had a public float of less than $250
million; or (2) Had annual revenues of less than $100 million and
either: (i) No public float; or (ii) A public float of less than
$700 million.'' See 17 CFR 240.12b-2.
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iv. Cure Period
Nasdaq proposes to adopt Rule 5605(f)(6) and a new Rule
5810(c)(3)(F) to specify what happens if a company does not have at
least two Diverse directors as set forth under Rule 5605(f)(2) and
fails to provide the disclosure required by Rule

[[Page 80490]]

5605(f)(3).\176\ Under those provisions, the Listing Qualifications
Department will promptly notify the company that it has until the
latter of its next annual shareholders meeting, or 180 days from the
event that caused the deficiency, to cure the deficiency. The company
can cure the deficiency either by nominating additional directors so
that it satisfies the Diversity requirement of Rule 5605(f)(2) or by
providing the disclosure required by Rule 5605(f)(3). If a company does
not regain compliance within the applicable cure period, the Listings
Qualifications Department would issue a Staff Delisting Determination
Letter. A company that receives a Staff Delisting Determination can
appeal the determination to the Hearings Panel through the process set
forth in Rule 5815. Nasdaq also proposes revising Rule
5810(c)(2)(A)(iv) to make a non-substantive change clarifying that Rule
5250(b)(3) is related to ``Disclosure of Third Party Director and
Nominee Compensation.''
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\176\ Nasdaq proposes that existing Rules 5810(c)(3)(F) and (G)
be renumbered as Rules 5810(c)(3)(G) and (H) respectively.
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v. Exempt Companies
Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the
following types of companies from the requirements of Rule 5605(f)
(``Exempt Companies''): acquisition companies listed under IM-5101-2;
asset-backed issuers and other passive issuers (as set forth in Rule
5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited
partnerships (as set forth in Rule 5615(a)(4)); management investment
companies (as set forth in Rule 5615(a)(5)); issuers of non-voting
preferred securities, debt securities and Derivative Securities (as set
forth in Rule 5615(a)(6)); and issuers of securities listed under the
Rule 5700 Series. Proposed Rule 5605(f)(5)(B) will allow any company
that ceases to be an Exempt Company one year from the date that the
company no longer qualifies as an Exempt Company to satisfy the
requirements of Rule 5605(f).
Nasdaq believes it is appropriate to exempt these types of
companies from the proposed rule because such companies do not have
boards, do not list equity securities, or are not operating companies.
These companies are already exempt from certain of Nasdaq's corporate
governance standards related to board composition, as described in Rule
5615.
d. Alternatives Considered
Nasdaq considered whether requiring listed companies to have, or
explain why they do not have, two Diverse directors would better
promote the public interest than an alternative threshold or approach.
Nasdaq's reasoned decision-making process included considering: (i)
Mandate and disclosure-based approaches; (ii) higher and lower
diversity objectives; (iii) longer and shorter timeframes; and (iv)
broader and narrower definitions of ``Diverse.''
i. Mandate vs. Disclosure Based Approach
Globally, gender mandates range from requiring at least one woman
on the board,\177\ requiring two or more women based on board
size,\178\ or requiring 30 to 50% women on the board.\179\ Some
mandates vary by board size--for example, Norway imposes different
standards for boards of two to three directors, four to five directors,
six to eight directors, nine directors and ten or more directors.\180\
California imposes a higher standard for gender diversity that boards
with five directors or six or more directors must satisfy by the end of
2021 under S.B. 826, and a higher standard for underrepresented
communities that boards with five to eight directors and nine or more
directors must satisfy by the end of 2022 under A.B. 979. Nasdaq did
not observe a common denominator among the mandates applicable to
varying board sizes. However, Nasdaq considered criticism that a model
based on various board sizes could subject companies to a higher
threshold by virtue of adding directors.\181\ Based on Nasdaq data, the
average board size of its listed companies is eight directors.
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\177\ For example, the Securities and Exchange Board of India
requires public companies to have at least one woman on the board.
See Securities and Exchange Board of India (Listing Obligations and
Disclosure Requirements) Regulations, Regulation 17(1)(a) (2015),
available at: https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-january-10-2020-_37269.html. Similarly, the Israeli Companies Law requires
public companies to have at least one woman on the board. See Paul
Hastings, Breaking the Glass Ceiling: Women in the Boardroom 139
(2018), available at: https://www.paulhastings.com/genderparity/. In
the United States, California's S.B. 826 requires public companies
headquartered in California to have at least one woman on the board.
See Cal. S.B. 826, supra note 112, at Sec. 301.3(b)(3).
\178\ For example, California's S.B. 826 requires public
companies headquartered in California to have at least two women on
the board if their board is comprised of five directors, and at
least three women on the board if their board is comprised of six or
more directors. See Cal. S.B. 826, supra note 112, at Sec.
301.3(b)(1) and (2). Similar legislation has been proposed in New
Jersey, Michigan and Hawaii. See N.J. Senate No. 3469, Sec. 3(b)(2)
(2019); Mich. S.B. 115, Sec. 505a(2)(b) (2019); Haw. H.B. 2720,
Sec. 414-1(b)(2) (2020).
\179\ For example, Norway imposes a gender quota ranging from
33%-50% depending on board size. See Paul Hastings, supra note 177,
at 103. Portugal requires listed companies to have at least 33.3%
women on boards by 2020. See Deloitte, Women in the Boardroom, supra
note 86, at 143. Germany requires public companies with co-
determined boards (at least 50% employee representation) to have at
least 30% women, and all other listed companies to establish a
company-defined target. See Ulrike Binder and Guido Zeppenfeld,
Mayer Brown, Germany Introduces Rules on Female Quota for
Supervisory Boards and Leadership Positions (March 13, 2015),
available at https://www.mayerbrown.com/en/perspectives-events/publications/2015/03/germany-introduces-rules-on-female-quota-for-super. Belgium requires listed companies to have at least 33% women
on the board. See Deloitte, Women in the Boardroom, supra note 86,
at 85. Austria requires listed companies with more than 1,000
employees to have at least 30% women on the board. See id. at 81.
Iceland requires public companies with more than 50 employees to
have at least 40% women on the board. See Act respecting Public
Limited Companies No. 2/199, Article 63, available at: https://www.government.is/publications/legislation/lex/2018/02/06/TRANSLATION-OF-RECENT-AMENDMENTS-OF-ICELANDIC-PUBLIC-AND-PRIVATE-LIMITED-COMPANIES-LEGISLATION-2008-2010-including-Acts-13-2010-sex-ratios-and-68-2010-minority-protection-remuneration/. France and
Italy both require public companies to have at least 40% women on
their boards. See Paul Hastings, supra note 177, at 91; White &
Case, Italy increases gender quotas in corporate boards of listed
companies (Jan. 29, 2020), available at: https://www.whitecase.com/publications/alert/italy-increases-gender-quotas-corporate-boards-listed-companies).
\180\ See Paul Hastings, supra note 177, at 103.
\181\ See David A. Katz and Laura A. McIntosh, Wachtell, Lipton,
Rosen & Katz, Gender Diversity and Board Quotas, New York Law
Journal (July 25, 2018), available at: https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.26150.18.pdf (``California legislators
dispute that the bill requires men to be displaced by women, noting
that boards can simply increase their size. This may be easier said
than done, however: Because the required quota increases with board
size, a company with a four-man board that did not wish to force out
a current director would need to add three women to accommodate the
requirements of the law by 2021.'').
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Soft targets ranging from 25% to 40% women on boards have been
suggested by various corporate governance codes and corporate
governance organizations. For example, Rule 4.1 of the Swedish
Corporate Governance Code (the ``Code'') provides that listed companies
are to ``strive for gender balance on the board.'' \182\ Each company's
nominations committee is to publish a statement on its website at the
time it issues notice of its shareholders meeting ``with regard to the
requirement in rule 4.1, that the proposed composition of the board is
appropriate according to the criteria set out in the Code and that the
company is to strive for gender balance.'' \183\ Companies are not

[[Page 80491]]

required to comply with the Code, ``but are allowed the freedom to
choose alternative solutions which they feel are better suited to their
particular circumstances, as long as they openly report every
deviation, describe the alternative solution they have chosen and
explain their reasons for doing so.'' \184\ Signifying progress, in
2019, 7% of nominations committees did not issue a statement on board
gender balance, compared to 58% in 2013.\185\
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\182\ See Swedish Corporate Governance Board, The Swedish
Corporate Governance Code Sec. 4.1 17 (eff. Jan. 1, 2020),
available at: https://www.bolagsstyrning.se/UserFiles/Koden/The_Swedish_Corporate_Governance_Code_1_January_2020.pdf.
\183\ See Swedish Corporate Governance Board, Annual Report 2020
22 (August 2020), available at: https://www.bolagsstyrning.se/userfiles/archive/3930/kodkoll_arsrapport-2020_eng.pdf.
\184\ See Swedish Corporate Governance Board, Gender balance on
boards of listed companies: The Swedish Corporate Governance Board
assesses the situation ahead of this year's AGMs (February 3, 2015),
available at: https://www.bolagsstyrning.se/userfiles/archive/3856/pressrelease_gender_2014-02-03.pdf.
\185\ See Swedish Corporate Governance Board, Annual Report
2020, supra note 183, at 22.
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In 2015, the Swedish Corporate Governance Board, which is
responsible for administering the Code, established a goal to achieve
representation of women on boards of small/mid cap (and Swedish
companies listed on NGM Equity) and large cap companies of 30% and 35%,
respectively, by 2017. Further, the Board aimed to achieve 40%
representation of women on boards of all listed Swedish companies by
2020.\186\ Based on data as of June 30, 2020, among listed companies,
women accounted for 32.7% of board seats on small/mid cap companies and
NGM Equity, 38.6% of large cap companies and 34.7% of all listed
companies.\187\
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\186\ See Swedish Corporate Governance Board, Gender balance,
supra note 184.
\187\ See Swedish Corporate Governance Board, Statistics
regarding gender balance (July 15, 2020), available at: https://www.bolagsstyrning.se/userfiles/archive/3922/200715_gender_balance_on_boards.pdf; see also Sammanfattning,
available at https://www.bolagsstyrning.se/userfiles/archive/3922/statistik_konsfordelning_2020.pdf.
---------------------------------------------------------------------------

In the United Kingdom, the Financial Conduct Authority requires
companies with a premium listing on the London Stock Exchange to
publicly disclose whether or not they comply with the Financial
Reporting Council's U.K. Corporate Governance Code (the ``U.K. Code''),
and if not, to explain their reasons for non-compliance.\188\ Provision
23 of the U.K. Code requires each company to publicly describe ``the
work of the nomination committee, including . . . the policy on
diversity and inclusion, its objectives and linkage to company
strategy, how it has been implemented and progress on achieving the
objectives,'' \189\ and Principle J states that board appointments and
succession planning should, among other things, ``promote diversity of
gender, social and ethnic backgrounds.'' \190\ In addition, the
Companies Act requires companies to disclose gender diversity
statistics among the board, management and employees.\191\ In 2018, the
Financial Reporting Council reported that 83% of FTSE 100 and 74% of
FTSE 250 companies had established a board diversity policy specifying
gender, with approximately \1/3\ specifying ethnicity.\192\ More
recently, a report commissioned by the Financial Reporting Council
concluded that there is a lack of public disclosure regarding the
LGBTQ+ status among directors and executives of public companies. While
the report did not recommend amending Principle J of the U.K. Code to
consider sexual orientation or gender identity, it emphasized that the
U.K. Code ``seeks to promote diversity and inclusion of all minority
groups within business'' \193\ and suggested that the government
``update corporate reporting requirements to require companies to
demonstrate how they intend to capture data on the sexual orientation
and gender identity of staff.'' \194\
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\188\ See Financial Conduct Authority, LR 9.8.6(6), available
at: https://www.handbook.fca.org.uk/handbook/LR/9/8.html; see also
Financial Reporting Council, The UK Corporate Governance Code 3
(July 2018), available at https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF. In addition, ``[i]n 2016, the [UK] Government also
implemented the relevant provision of the EU Non-Financial Reporting
Directive with a new reporting requirement in the FCA's Disclosure
and Transparency Rules. This requires issuers (excluding [small and
medium-sized enterprises]) admitted to trading on an EU regulated
market to disclose their diversity policy in the corporate
governance statement.'' See Financial Reporting Council, Board
Diversity Reporting 5 (September 2018), available at: https://www.frc.org.uk/getattachment/62202e7d-064c-4026-bd19-f9ac9591fe19/Board-Diversity-Reporting-September-2018.pdf.
\189\ See Financial Reporting Council, The UK Corporate
Governance Code, supra note 188, at 9.
\190\ Id. at 8.
\191\ See UK Companies Act 2006, Sec. 414C.
\192\ See Financial Reporting Council, Board Diversity
Reporting, supra note 188, at 9.
\193\ See Hay et al., supra note 98, at 37.
\194\ Id.
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In 2011, the Davies Review called on FTSE 100 boards to achieve 25%
women on boards by 2015.\195\ After that milestone was achieved, the
Hampton Alexander Review encouraged FTSE 350 boards to have \1/3\ women
by 2020, and it has been achieved by FTSE 100 companies.\196\ In 2017,
the Parker Review called on FTSE 100 and 250 companies to have at least
one director of color by 2021 and 2024, respectively.\197\ As of
February 2020, approximately 37% of FTSE 100 companies surveyed and 59%
of FTSE 350 companies surveyed did not have one director of color on
their board.\198\
---------------------------------------------------------------------------

\195\ See Women on boards, supra note 96.
\196\ See Hampton-Alexander Review: FTSE Women Leaders (November
2016), available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/613085/ftse-women-leaders-hampton-alexander-review.pdf.
\197\ See Parker, supra note 97.
\198\ See Sir John Parker, Ethnic Diversity Enriching Business
Leadership 19 (Feb. 5, 2020), available at: https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2020-report-final.pdf.
---------------------------------------------------------------------------

Australian Securities Exchange (``ASX'')-listed companies must
comply with the ASX Corporate Governance Council's Corporate Governance
Principles and Recommendations (the ``ASX Recommendations'') or explain
why they do not. The ASX Recommendations require companies to have and
disclose a diversity policy with measurable objectives and report on
progress towards meeting those objectives. If the company is in the
ASX/S&P 300, its objective for achieving gender diversity should be at
least 30%.\199\ The Australian government also requires companies with
100 or more employees to provide an annual report about gender equality
indicators, including the gender composition of the board and the rest
of the workforce.\200\ In 2015, the ASX and KPMG found that 99% of S&P/
ASX 200 companies and 88% of ASX 201-500 companies disclosed
establishing a diversity policy rather than explaining why they do not
have one.\201\ As of July 2020, women account for 28.4% and 31.8% of
board seats among ASX 300 and ASX 100 companies, respectively.\202\
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\199\ See ASX Corporate Governance Council, Corporate Governance
Principles and Recommendations 9 (4th ed. Feb. 2019), available at:
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf.
\200\ Workplace Gender Equality Act 2012, Part IV Sec. 13
(March 25, 2015), available at: https://www.legislation.gov.au/Details/C2015C00088.
\201\ See KPMG and ASX, ASX Corporate Governance Council
Principles and Recommendations on Diversity: Analysis of disclosures
for financial years ended 1 January 2015 and 31 December 2015 4
(2016) available at: https://www.asx.com.au/documents/asx-compliance/asx-corp-governance-kpmg-diversity-report.pdf.
\202\ See KPMG and 30% Club, Building Gender Diversity on ASX
300 Boards: Seven Learnings from the ASX 200 4 (July 2020),
available at: https://assets.kpmg/content/dam/kpmg/au/pdf/2020/building-gender-diversity-asx-300-boards.pdf. The report also noted
that diversity counteracts groupthink and that ASX 201-299 companies
with at least 30% female directors ``are more likely than not to
[have seen] market capitalisation increases over the past 12
months.'' Id. at 6.
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Nasdaq observed that women account for at least 30% of the boards
of the largest companies in Australia, Sweden and the United Kingdom,
and in three other countries that have implemented disclosure
requirements or suggested milestones on a comply-or-explain

[[Page 80492]]

basis: Finland, New Zealand, and Canada.\203\ Nasdaq considered that
countries that have implemented mandates have also seen progress in
women's representation on boards, including, for example, Austria,
Iceland, Belgium, France, Germany, Italy and Portugal.\204\ On average,
women account for 31% of board seats in countries with gender
mandates.\205\
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\203\ See The Conference Board of Canada, Data Dashboard (Sept.
23, 2020), available at: https://www.conferenceboard.ca/focus-areas/inclusion/2020/aob-comparisons-around-the-world-table?AspxAutoDetectCookieSupport=1; Andrew MacDougall et al.,
Osler, Diversity Disclosure Practices 4 (2020), available at https://www.osler.com/osler/media/Osler/reports/corporate-governance/Diversity-and-Leadership-in-Corporate-Canada-2020.pdf. But see Heike
Mensi-Klarbach et al., The Carrot or the Stick: Self-Regulation for
Gender-Diverse Boards via Codes of Good Governance, J. Bus. Ethics
11 (2019), available at: https://doi.org/10.1007/s10551-019-04336-z
(reviewing longitudinal data from 2006 to 2016 on listed and state-
owned companies in Austria and concluding that ``self-regulation of
gender diversity on boards is ineffective if merely based on
recommendations in codes of good governance''). Mensi-Klarbach
recommends setting concrete targets and providing public monitoring
to improve the effectiveness of comply-or-explain frameworks.
\204\ See Paul Hastings, supra note 177; see also Deloitte,
Women in the Boardroom, supra note 86.
\205\ See Paul Hastings, supra note 177; The Conference Board of
Canada, supra note 203.
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Nasdaq discussed the benefits and challenges of mandate and comply-
or-explain models with over a dozen stakeholders, and while the
majority of organizations were in agreement that companies would
benefit from a regulatory impetus to drive meaningful and systemic
change in board diversity, the majority also stated that a disclosure-
based approach would be more palatable to the U.S. business community
than a mandate. Most organizations Nasdaq spoke with expressed general
discomfort with mandates, although they acknowledged that opposition is
lessening in the wake of California's S.B. 826 \206\ and A.B. 979.\207\
While many recognized that mandates can force boards to act more
quickly and accelerate the rate of change, they believe that a
disclosure-based approach is less controversial and would spur
companies to take action and achieve the same results. Some
stakeholders also highlighted additional challenges that smaller
companies and companies in certain industries may face finding diverse
board members. In contrast, a disclosure-based framework that provides
companies with flexibility would empower companies to maintain
decision-making authority over their board's composition while
providing stakeholders with a better understanding of the company's
current board composition and its philosophy regarding diversity. This
approach would better inform the investment community and enable more
informed analysis of, and conversations with, companies. Nasdaq
believes that these goals will be achieved through the disclosure of
consistent, comparable data across companies, as would be required by
the Exchange's proposed definition of Diverse.
---------------------------------------------------------------------------

\206\ See Cal. S.B. 826, supra note 112.
\207\ See Cal. A.B. 979, supra note 112.
---------------------------------------------------------------------------

For example, if, under Israeli law regarding board diversity, an
Israeli company is required only to have a minimum of one woman on the
board and such Israeli company chooses to comply with Israeli home
country law in lieu of meeting the diversity objectives of Rule
5605(f)(2)(B), it may choose to disclose that ``the Company is
incorporated in Israel and required by Israeli law to have a minimum of
one woman on the board, and satisfies home country requirements in lieu
of Nasdaq Rule 5605(f)(2)(B), which requires each Foreign Issuer to
have at least two Diverse directors.'' If a U.S. company had two
Diverse directors but one resigned due to unforeseen circumstances, it
could disclose, for example: ``Due to the unexpected resignation of Ms.
Smith this year, the Company does not have at least one director who
self-identifies as Female and one director who self-identifies as an
Underrepresented Minority or LGBTQ+. We intend to undertake reasonable
efforts to meet the diversity objectives of Rule 5605(f)(2)(A) prior to
our next annual shareholder meeting and have engaged a search firm to
identify qualified Diverse candidates. However, due to unforeseen
circumstances, we may not achieve this goal.'' Or a U.S. company may
disclose that it chooses to define diversity more broadly than Nasdaq's
definition by considering national origin, veteran status or
individuals with disabilities when identifying nominees for director
because it believes such diversity brings a wide range of perspectives
and experiences to the board. In each case, investors will have a
better understanding of the company's reasons for not having at least
two Diverse directors and can use that information to make an informed
investment or voting decision.
ii. Higher vs. Lower Diversity Objectives
Nasdaq observed that existing empirical research spanned companies
across several countries, including the United States, Spain, China,
Canada, France and Norway. Nasdaq considered that the studies related
to company performance and board diversity found positive associations
at various levels and measures of board diversity, including having at
least one woman on the board,\208\ two or more diverse directors (with
diverse considered female, Black, Hispanic or Asian),\209\ at least
three women on the board \210\ and being in the top quartile for gender
and ethnic diversity.\211\
---------------------------------------------------------------------------

\208\ See Credit Suisse, supra note 30, at 16.
\209\ See Thomas and Starr, supra note 23, at 5.
\210\ See Eastman et al., supra note 31, at 3; Wagner, supra
note 32.
\211\ See McKinsey, supra note 36.
---------------------------------------------------------------------------

Nasdaq considered that the academic studies related to investor
protection and board diversity found positive associations at various
levels and measures of board diversity, including having at least one
woman on the board \212\ or up to 50% women on the board, and the
assertions of certain academics that their findings may extend to other
forms of diversity, including racial and ethnic diversity.\213\ Nasdaq
also reviewed academic research suggesting that ``critical mass'' is
achieved by having three or more women on the board, and that having
only one diverse director on the board risks ``tokenism.'' \214\ Nasdaq
considered that although the legislation enacted by Norway and
California, and proposed by several other states, varies based on board
size, the academic research considered companies across a spectrum of
sizes and board sizes, including Fortune 100, S&P 500, Fortune 1000 and
smaller (non-Fortune 1000) companies.
---------------------------------------------------------------------------

\212\ See Abbott et al., supra note 58; Chen et al., supra note
64.
\213\ See Wahid, supra note 59; Cumming et al., supra note 62,
at 34.
\214\ See Alison M. Konrad et al., Critical Mass: The Impact of
Three or More Women on Corporate Boards, 37(2) Org. Dynamics 145
(April 2008); Miriam Schwartz-Ziv, Gender and Board Activeness: The
Role of a Critical Mass, 52(2) J. Fin. & Quant. Analysis 751 (April
2017); Mariateresa Torchia et al., Women Directors on Corporate
Boards: From Tokenism to Critical Mass, 102(2) J. Bus. Ethics. 299
(Feb. 25, 2011), available at https://ssrn.com/abstract=1858347.
---------------------------------------------------------------------------

Nasdaq concluded that there is no ``one-size fits all'' approach to
promoting board diversity and that the academic literature regarding
the relationship between board diversity, company performance and
investor protections is continuing to evolve. However, in Nasdaq's
survey of academic studies described above--and of the targets or
mandates promulgated by regulatory bodies and organizations worldwide--
Nasdaq observed a common denominator of having at least one woman on
the board. Similarly, Nasdaq observed a common denominator of having at
least one director who is diverse in terms of race, ethnicity or sexual
orientation among

[[Page 80493]]

the requirements related to, and academic research considering, board
diversity beyond gender identity. Nasdaq therefore believes that a
diversity objective of at least two Diverse directors provides a
reasonable baseline for comparison across companies. Companies are not
precluded from meeting a higher or lower alternative measurable
objective. For example, a company may choose to disclose that it does
not meet the diversity objectives under Rule 5605(f)(2) because it is
subject to an alternative standard under state or foreign laws and has
chosen to satisfy that diversity objective instead. On the other hand,
many firms may strive to achieve even greater diversity than the
objectives set forth in Nasdaq's proposed rule. Nasdaq believes that
providing flexibility and clear disclosure when the company determines
to follow a different path will improve the quality of information
available to investors who rely on this information to make informed
investment and voting decisions.
iii. Longer vs. Shorter Timeframes
Nasdaq considered whether an alternative timeframe for satisfying
the diversity objectives of Rule 5605(f)(2) would better promote the
public interest than the timeframe Nasdaq has proposed under Rule
5605(f)(7). While companies are not precluded from adding additional
directors to their boards to satisfy Rule 5605(f)(2) by having two
Diverse directors sooner than contemplated by the proposed rule, Nasdaq
understands that some companies may need to obtain shareholder approval
to amend their governing documents to allow for board expansion. Other
companies may choose to replace an existing director on the board with
a Diverse director, and board turnover may be low.\215\ Nasdaq
recognizes that it also takes substantial lead time to identify,
interview and select board nominees. To provide companies with
sufficient time to satisfy Rule 5605(f) by having two Diverse
directors, while recognizing that investors are calling for expedient
change, Nasdaq has structured its proposal similarly to the approach
taken by California, where companies must achieve one target by an
earlier date and satisfy the entire diversity objective at a later
date. Nasdaq also considered the approaches taken by foreign
jurisdictions to implement diversity objectives. For example, Belgium
and France implemented diversity objectives under a phased approach
that provided companies with at least five years to fully satisfy the
objectives,\216\ whereas Iceland and Portugal provided companies with
three years or less.\217\
---------------------------------------------------------------------------

\215\ See Matteo Tonello, Corporate Board Practices in the
Russell 3000 and S&P 500, Harv. L. Sch. Forum on Corp. Governance
(Oct. 18, 2020), https://corpgov.law.harvard.edu/2020/10/18/corporate-board-practices-in-the-russell-3000-and-sp-500/ (last
accessed Nov. 24, 2020).
\216\ See Paul Hastings, supra note 177, at 79 and 90; see also
supra note 179.
\217\ See Deloitte, Women in the Boardroom, supra note 86, at
115 and 143; see also supra note 179.
---------------------------------------------------------------------------

While companies may choose to satisfy Rule 5605(f)(2) on an
alternative timeframe, a company that chooses a timeframe that is
longer than the timeframes set forth in Rule 5605(f)(7) also must
publicly explain its reasons for doing so. For example, an NGM-listed
company that, while not technically a Smaller Reporting Company, views
itself as similarly situated to a NCM-listed Smaller Reporting Company
may disclose the following: ``While the Company is listed on NGM and
technically qualifies as a Smaller Reporting Company, it does not file
its SEC reports utilizing the Smaller Reporting Company designation.
However, the Company believes that it is similarly situated to other
Smaller Reporting Companies listed on NCM in terms of its annual
revenues and public float, and therefore has chosen to satisfy Rule
5605(f)(2)(C) in lieu of Rule 5605(f)(2)(A) and has satisfied this
requirement by having at least two Diverse directors on the board who
self-identify as Female within the timeframe provided under Rule
5605(f)(7) applicable to NCM-listed companies.''
iv. Broader vs. Narrower Definition of Diverse
Nasdaq considered whether the definition of Diverse should include
broader characteristics than those reported on the EEO-1 report, such
as the examples provided by the Commission's CD&I, including LGBTQ+,
nationality, veteran status, and individuals with disabilities. During
its stakeholder outreach, Nasdaq inquired whether a broad definition of
Diversity would promote the public interest. While recognizing the
diverse perspectives that different backgrounds can provide, most
stakeholders supported a narrower definition of Diversity focused on
gender, race and ethnicity, with several supporting broadening the
definition to include the LGBTQ+ community.
As discussed above, companies currently are permitted to define
diversity ``in ways they consider appropriate'' under federal
securities laws. One of the challenges of this principles-based
approach has been the disclosure of inconsistent and noncomparable data
across companies. However, most companies are required by law to report
data on race, ethnicity and gender to the EEOC through the EEO-1
Report. Nasdaq believes that adopting a broad definition of Diverse
would maintain the status quo of inconsistent, noncomparable
disclosures, whereas a narrower definition of Diverse focused on race,
ethnicity, sexual orientation and gender identity will promote the
public interest by improving transparency and comparability. Nasdaq
also is concerned that the broader definitions of diversity utilized by
some companies may result in Diverse candidates being overlooked, and
may be hindering meaningful progress on improving diversity related to
race, ethnicity, sexual orientation and gender identity. For example, a
company may consider diversity to include age, education and board
tenure. While such characteristics may provide laudable cognitive
diversity, this focus may result in a homogenous board with respect to
race, ethnicity, sexual orientation and gender identity that, by
extension, does not reflect the diversity of a company's communities,
employees, investors or other stakeholders.
Nasdaq also believes that a transparent, consistent definition of
Diverse would provide stakeholders with a better understanding of the
company's current board composition and its philosophy regarding
diversity if it does not have two Diverse directors. This would enable
the investment community to conduct more informed analysis of, and have
more informed conversations with, companies. To the extent a company
chooses to satisfy the requirement of Rule 5605(f)(2) by having at
least two Diverse directors on its board, it will have the ancillary
benefit of making meaningful progress in improving board diversity
related to race, ethnicity, sexual orientation and gender identity.
Nasdaq's review of academic research on board diversity revealed a
dearth of empirical analysis on the relationship between investor
protection or company performance and broader diversity characteristics
such as veteran status or individuals with disabilities.\218\ Nasdaq

[[Page 80494]]

acknowledges that there also is a lack of published research on the
issue of LGBTQ+ representation on boards.\219\ This may be due to a
lack of consistent, transparent data on broader diverse attributes, or
because there is no voluntary self-disclosure workforce reporting
requirements for LGBTQ+ status, such as the EEO-1 reporting framework
for race, ethnicity, and gender. In any event, it is evident that while
``[b]oardroom diversity is a topic that has gained significant traction
. . . LGBT+ diversity, however, has largely been left out of the
conversation.'' \220\
---------------------------------------------------------------------------

\218\ KPMG (2020) states that veterans are underrepresented in
boardrooms, with retired General and Flag Officers (``GFOs'')
occupying less than 1% of Fortune 500 board seats. See KPMG, The
value of veterans in the boardroom 1 (2020), available at: https://boardleadership.kpmg.us/content/dam/boardleadership/en/pdf/2020/the-value-of-veterans-in-the-boardroom.pdf (noting that ``[r]etired GFOs
who have honed their leadership and critical decision-making skills
in a high-threat environment can bring extensive risk oversight
experience to the board, which may be especially valuable in the
context of today's risk landscape''). Accenture (2018) observed that
companies that offered inclusive working environments for employees
with disabilities achieved an average of 28% higher revenue, 30%
higher economic profit margins, and 2x net income than their
industry peers. See Accenture, Getting to Equal: The Disability
Inclusion Advantage (2018), available at: https://www.accenture.com/_acnmedia/PDF-89/Accenture-Disability-Inclusion-Research-Report.pdf.
\219\ See Credit Suisse ESG Research, supra note 33, at 1; see
also Out Leadership, supra note 35.
\220\ See Out Leadership, supra note 35, at 3.
---------------------------------------------------------------------------

Nonetheless, Nasdaq believes it is reasonable and in the public
interest to include a reporting category for LGBTQ+ in recognition of
the U.S. Supreme Court's recent affirmation that sexual orientation and
gender identity are ``inextricably'' intertwined with sex,\221\ and
based on studies demonstrating a positive association between board
diversity and decision making, company performance and investor
protections. Nasdaq also believes that the proposed rule would foster
the development of data to conduct meaningful assessments of the
association between LGBTQ+ board diversity, company performance and
investor protections.
---------------------------------------------------------------------------

\221\ See Bostock v. Clayton Cnty., supra note 160.
---------------------------------------------------------------------------

As noted above, the proposal does not preclude companies from
considering additional diverse attributes, such as nationality,
disability, or veteran status in selecting board members; however,
company would still have to provide the required disclosure under Rule
5605(f)(3) if the company does not also have at least two directors who
are Diverse. Nor would the proposal prevent companies from disclosing
information related to other diverse attributes of board members beyond
those highlighted in the rule if they felt such disclosure would
benefit investors. Nasdaq believes such disclosure would help inform
the evolving body of research on the relationship between broader
diverse attributes, company performance and investor protection and
provide investors with additional information about the company's
philosophy regarding broader diversity characteristics.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\222\ in general, and furthers the objectives of
Section 6(b)(5) of the Act,\223\ in that it is designed to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, to prevent fraudulent and manipulative acts
and practices, and, in general, to protect investors and the public
interest, for the reasons set forth below. Further, Nasdaq believes the
proposal is not designed to permit unfair discrimination between
issuers or to regulate by virtue of any authority conferred by the Act
matters not related to the purposes of the Act or the administration of
the Exchange, for the reasons set forth below.
---------------------------------------------------------------------------

\222\ See 15 U.S.C. 78f(b).
\223\ Id. Sec. 78f(b)(5).
---------------------------------------------------------------------------

I. Board Statistical Disclosure

Nasdaq has proposed what it believes to be a straightforward and
clear approach for companies to publish their statistical data pursuant
to proposed Rule 5606. The disclosure will assist investors in making
more informed decisions by making meaningful, consistent, and reliable
data readily available and in a clear and comprehensive format
prescribed by the proposed rule. Nasdaq also believes that the
disclosure format required by proposed Rule 5606 protects investors by
eliminating data collection inaccuracies and decreasing costs, while
enhancing investors' ability to utilize the information.
As a threshold matter, as discussed above, diversity has become an
increasingly important subject and, in recent years, investors
increasingly have been advocating for greater board diversity and for
the disclosure of board diversity statistics. The current board
diversity disclosure regime is lacking in several respects, and Nasdaq
believes that its proposed Rule 5606 addresses many of the current
concerns and responds to investors' demands for greater transparency
into the diversity characteristics of a company's board composition by
mandating disclosure and curing certain deficiencies that exist within
the current SEC disclosure requirements.
Investors have expressed their dissatisfaction with having to
independently collect board-level data about race, ethnicity and gender
identity because such investigations can be time consuming, expensive,
and fraught with inaccuracies.\224\ The lack of consistency and
specificity in Regulation S-K has been a major impediment for many
investors and data collectors. As a general matter, the Commission's
requirements have not addressed the concerns expressed by commenters
that ``disclosure about board diversity was important information to
investors.'' \225\ Nasdaq believes that its proposed Rule 5606
addresses many of the concerns that have been raised.
---------------------------------------------------------------------------

\224\ See Petition for Amendment of Proxy Rule, supra note 80,
at 2.
\225\ See Proxy Disclosure Enhancements, 74 FR at 68,343-44
(amending Item 407(c)(2)(vi) of Regulation S-K, codified at 17 CFR
229.407(c)(2)(vi)).
---------------------------------------------------------------------------

Nasdaq believes that requiring the annual disclosure of a company's
board diversity, as proposed in Rule 5606(a), will provide consistent
information to the public and will enable investors to continually
review the board composition of a company to track trends and simplify
or eliminate the need for a company to respond to multiple investor
requests for information about the diverse characteristics of the
company's board. Requiring annual disclosures also would make
information available to investors who otherwise would not be able to
obtain individualized disclosures.\226\ Moreover, consistent
disclosures may encourage boards to consider a wider range of board
candidates in the nomination process, including candidates with fewer
ties to the current board.\227\
---------------------------------------------------------------------------

\226\ See Petition for Rulemaking, supra note 123.
\227\ See Proxy Disclosure Enhancements, 74 FR at 68,355 (``To
the extent that boards branch out from the set of candidates they
would ordinarily consider, they may nominate directors who have
fewer existing ties to the board or management and are,
consequently, more independent.''); Hazen and Broome, supra note
114, at 57-58.
---------------------------------------------------------------------------

The Commission's 2009 amendments to Regulation S-K provide no
definition for diversity and do not explicitly require disclosures
specifically related to details about the board's gender, racial,
ethnic and LGBTQ+ composition. Additionally, the Commission's CD&I does
not address the definition of diversity, and it requires a registrant
to disclose diversity information only in certain limited
circumstances. Investors have expressed that current regulations and
accompanying interpretations impair their ability to obtain clear and
consistent data.\228\ As a result, Nasdaq believes that proposed Rule
5606(a) protects investors and the public

[[Page 80495]]

interest by making clear that a company's annual diversity data
disclosure must include information related to gender identity, race,
ethnicity and LGBTQ+ status, thereby leaving less discretion for
companies to selectively disclose certain diversity information and
enhancing the comparability of such data across companies. Moreover, it
is in the public interest to provide clear requirements for diversity
disclosure, and Nasdaq's proposed Board Diversity Matrix format
provides such clarity.
---------------------------------------------------------------------------

\228\ See Petition for Amendment of Proxy Rule, supra note 80,
at 2; Petition for Rulemaking, supra note 123, at 7.
---------------------------------------------------------------------------

Nasdaq does not intend to obligate directors to self-identify in
any of the categories related to gender identity, race, ethnicity and
LGBTQ+. Nasdaq believes that a director should have autonomy to decide
whether to provide such information to their company. Therefore, Nasdaq
believes that it is reasonable and in the public interest to allow
directors to opt out of disclosing the information required by proposed
Rule 5606(a) by permitting a company to identify such directors in the
``Undisclosed'' category.
Nasdaq believes that it is in the public interest to utilize the
Board Diversity Matrix format for all companies as proposed in Rule
5606(a). Additionally, Nasdaq believes that the format removes any
impediments to aggregating and analyzing data across all companies by
requiring each company to disclose separately the number of male,
female, and non-binary directors, the number of male, female, and non-
binary directors that fall into certain racial and ethnic categories,
and the number of directors that identify as LGBTQ+. The format allows
investors to easily disaggregate the data and track directors with
multiple diversity characteristics.
As discussed above, most listed companies are required by law to
complete an EEOC Employer Information Report EEO-1 Form. Although
outside directors generally are not employees and therefore are not
covered in the EEO-1,\229\ Nasdaq believes that collecting the
information required by proposed Rule 5606(a) is familiar to most
companies, and that it is reasonable to require disclosure of the
additional board information.
---------------------------------------------------------------------------

\229\ The EEO-1 Form does not require a company to disclose data
for outside directors because such directors are not company
employees.
---------------------------------------------------------------------------

Nasdaq also believes that requiring currently listed companies to
comply with proposed Rule 5606 within one year from the date of
Commission approval is a reasonable amount of time, given that most
companies already collect similar information for certain employees.
Moreover, most companies are required to prepare an annual proxy
statement and update the Commission within four business days when a
new director is appointed to the board.\230\
---------------------------------------------------------------------------

\230\ See SEC Form 8-K, available at: https://www.sec.gov/files/form8-k.pdf.
---------------------------------------------------------------------------

Further, Nasdaq believes that the disclosure required by proposed
Rule 5606(a) will remove impediments to shareholders by making
available information related to board-level diversity in a
standardized manner, thereby enhancing the consistency and
comparability of the information and helping to better protect
investors. The proposed disclosure will also help protect investors and
the public interest by enabling investors to determine the total number
of diverse directors, which is information that is not consistently
available in existing proxy disclosures in cases where a single
director has multiple diverse characteristics. While companies can
elect to make this information available either in a proxy statement or
on the company's website, Nasdaq believes it is in the public interest
to allow companies the option to provide the disclosure in a way they
believe will be most meaningful to their shareholders.
Nasdaq recognizes that the proposed definition of Underrepresented
Minority in Rule 5605(f)(1) may not apply to companies outside of the
United States because each country has its own unique demographic
composition. Moreover, Nasdaq's definition of Underrepresented Minority
proposed in Rule 5606(f)(1) may be inapplicable to a Foreign Issuer,
making this Board Matrix data less relevant for such companies and not
useful for investors. Therefore, Nasdaq believes that offering Foreign
Issuers the option of a separate template that requires different
disclosure categories will provide investors with more accurate
disclosures related to the diversity of directors among the board of a
Foreign Issuer. Additionally, Nasdaq believes that providing an
``Underrepresented Individual in Home Country Jurisdiction'' category
provides Foreign Issuers with more flexibility to identify and disclose
diverse directors within their home countries.
The annual requirement in the proposed rule will guarantee that the
information is available to the public on a continuous and consistent
basis. As described in the instructions to the Board Diversity Matrix
disclosure form and Rule 5606(a), each year following the first year
that a company publishes the Board Diversity Matrix, the company will
be required to publish its data for the current and immediately prior
years. Nasdaq believes that disclosing at least two years of data
allows the public to view any changes and track a board's diversity
progress.
In addition to providing a means for shareholders to assess a
company's board-level diversity and measure its progress in improving
that diversity over time, Nasdaq believes that proposed Rule 5606 will
provide a means for Nasdaq to assess whether companies meet the
diversity objectives of proposed Rule 5605(f). The ability to determine
satisfaction of the proposed listing rule's diversity objectives will
protect investors and the public interest.
Moreover, the proposed rule provides transparency into diversity
based not only on race, ethnicity, and gender identity, but also on a
director's self-identified sexual orientation. Nasdaq believes that
expanding the diversity characteristics beyond those which are commonly
reported by companies currently will broaden the way boards view
diversity, and ensure that board diversity is occurring across all
protected groups.
Finally, Nasdaq believes that the proposal is not unfairly
discriminatory because proposed Rule 5606 will apply to all Nasdaq-
listed companies, except for the following companies: Acquisition
companies listed under IM-5101-2; asset-backed issuers and other
passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set
forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule
5615(a)(4)); management investment companies (as set forth in Rule
5615(a)(5)); issuers of non-voting preferred securities, debt
securities and Derivative Securities (as set forth in Rule 5615(a)(6));
and issuers of securities listed under the Rule 5700 Series--which meet
the definition of Exempt Companies as defined under proposed Rule
5605(f)(4). Nasdaq believes it is reasonable and not unfairly
discriminatory to exempt these companies from the proposed rule because
the exemption of these companies is consistent with the approach taken
by Nasdaq in Rule 5615 as it relates to certain Nasdaq corporate
governance standards for board composition.
Nasdaq further believes it is reasonable to provide companies with
a one-year phase-in period to comply with proposed Rule 5606. Nasdaq
believes there is only a de minimis burden placed on companies to
collect the board data and prepare the Board Diversity Matrix.
Moreover, as discussed above, companies already are required to gather
similar information for certain employees. Therefore, Nasdaq believes
that one year is

[[Page 80496]]

sufficient time for companies to incorporate their directors into their
data collection. Furthermore, newly listed companies have many
obligations to meet under Nasdaq listing rules. Therefore, Nasdaq
believes that it is reasonable under proposed Rule 5606(d) to provide
newly listed Nasdaq companies, including companies listing in
connection with a business combination under IM-5101-2, with one year
from the time of listing to comply with the proposed rule.

II. Diverse Board Representation or Explanation

a. Removes Impediments to and Perfects the Mechanism of a Free and Open
Market and a National Market System
As discussed above, studies suggest that the traditional director
candidate selection process may create barriers to considering
qualified diverse candidates for board positions by limiting the search
for director nominees to existing directors' social networks and
candidates with C-suite experience.\231\ In analyzing Norway's
experience in implementing a gender mandate, Dhir (2015) observed that
``[b]oard seats tend to be filled by directors engaging their networks,
and the resulting appointees tend to be of the same socio-demographic
background.'' \232\ Dhir concluded that broadening the search for
directors outside of traditional networks ``is unlikely to occur
without some form of regulatory intervention, given the prevalence of
homogenous social networks and in-group favoritism.'' \233\ Regulatory
action was effective in increasing the representation of women on
boards in Norway by ``democratiz[ing] access to a space previously
unavailable to women.'' \234\ The number of public company board seats
held by women in Norway increased from 6% in 2002 to 42% in 2020.\235\
One Norwegian director ``grudgingly accept[ed] that the free market
principles she held so dearly had disappointed her--and that the
[mandate] was a necessary correction of market failure.'' \236\
---------------------------------------------------------------------------

\231\ See GAO Report, supra note 44; Vell, supra note 100; Rhode
& Packel, supra note 104, at 39; Deloitte, Women in the Boardroom,
supra note 86; see also Parker, supra note 97, at 38 (acknowledging
that, ``as is the case with gender, people of colour within the UK
have historically not had the same opportunities as many mainstream
candidates to develop the skills, networks and senior leadership
experience desired in a FTSE Boardroom'').
\232\ See Dhir, supra note 78, at 52.
\233\ Id. at 51. See also Albertine d'Hoop-Azar et al., Gender
Parity on Boards Around the World, Harv. L. Sch. Forum on Corp.
Governance (January 5, 2017), available at: https://corpgov.law.harvard.edu/2017/01/05/gender-parity-on-boards-around-the-world/ (comparing gender diversity on boards in countries with
varying requirements and enforcement measures and concluding that
external pressures--``progressive societal norms'' and regulations--
are needed to increase board diversity).
\234\ See Dhir, supra note 78, at 101.
\235\ See Marianne Bertrand et al., Breaking the Glass Ceiling?
The Effect of Board Quotas on Female Labor Market Outcomes in
Norway, Nat'l Bureau of Econ. Rsch. Working Paper 20256 (June 2017),
available at https://www.nber.org/papers/w20256; Statistics Norway,
Board and management in limited companies (Mar. 6, 2020), https://www.ssb.no/en/styre (last accessed Nov. 27, 2020).
\236\ See Dhir, supra note 78, at 116.
---------------------------------------------------------------------------

In contrast, Nasdaq observed that other countries have made
comparable progress using a disclosure-based model. Women account for
at least 30% of the largest boards of companies in six countries using
comply-or-explain models:\237\ Australia, Finland, Sweden, New Zealand,
Canada and the United Kingdom.\238\ Nasdaq discussed the benefits and
challenges of mandate and disclosure-based models with over a dozen
stakeholders, and the majority of organizations were in agreement that
companies would benefit from a regulatory impetus to drive meaningful
and systemic change in board diversity, and that a disclosure-based
approach would be more palatable to the U.S. business community than a
mandate. While many organizations recognized that mandates can force
boards to act more quickly and accelerate the rate of change, they
believe that a disclosure-based approach is less controversial and
would spur companies to take action and achieve the same results. Some
stakeholders also highlighted additional challenges that smaller
companies and companies in certain industries may face finding diverse
board members. However, leaders from across the spectrum of
stakeholders with whom Nasdaq spoke reinforced the notion that if
companies recruit by skill set and expertise rather than title, then
they will find there is more than enough diverse talent to satisfy
demand.
---------------------------------------------------------------------------

\237\ See Paul Hastings, supra note 177; Deloitte, Women in the
Boardroom, supra note 86.
\238\ See Conference Board of Canada, supra note 201; Osler,
supra note 203, at 4.
---------------------------------------------------------------------------

Nasdaq also considered Commissioner Lee's observation that
disclosure ``gets investors the information they need to make
investment decisions based on their own judgment of what indicators
matter for long-term value. Importantly, it can also drive corporate
behavior.'' Specifically, she observed that:

For one thing, when companies have to formulate disclosure on
topics it can influence their treatment of them, something known as
the ``what gets measured, gets managed'' phenomenon. Moreover, when
companies have to be transparent, it creates external pressure from
investors and others who can draw comparisons company to company.
The Commission has long-recognized that influencing corporate
behavior is an appropriate aim of our regulations, noting that
``disclosure may, depending on determinations made by a company's
management, directors and shareholders, influence corporate
conduct'' and that ``[t]his sort of impact is clearly consistent
with the basic philosophy of the disclosure provisions of the
federal securities laws.\239\
---------------------------------------------------------------------------

\239\ See Lee, supra note 22.

Nasdaq believes that a disclosure-based framework may influence
corporate conduct if a company chooses to meet the diversity objective
of Rule 5605(f)(2) by having two Diverse directors on the board. A
company may satisfy that objective by broadening the search for
qualified candidates and considering candidates from other professional
pathways that bring a wider range of skills and perspectives beyond
traditional C-suite experience.\240\ Nasdaq believes that this will
help increase opportunities for Diverse candidates that otherwise may
be overlooked due to the impediments of the traditional director
recruitment process, which will thereby remove impediments to a free
and open market and a national market system. Further, boards that
choose to have at least two Diverse directors may experience other
benefits from diversity that perfect the mechanism of a free and open
market and national market system. As discussed above in Section
II.A.1.II.b (Diversity and Investor Protection), and further discussed
below in Section II.A.2.II.b (Prevent Fraudulent and Manipulative Acts
and Practices), studies suggest that diversity is positively associated
with reduced stock volatility,\241\ more transparent public
disclosures,\242\ and less information asymmetry,\243\ leading to stock
prices that better reflect public information, and further removing
impediments to and perfecting a free and open market and a national
market system. Importantly, Nasdaq believes that the disclosure-based
framework proposed under Rule 5605(f) will not create additional
impediments to a free and open market and a national market system
because it will empower

[[Page 80497]]

companies to maintain decision-making authority over the composition of
their boards.
---------------------------------------------------------------------------

\240\ See, e.g., Hillman et al., supra note 105 (finding that
African-American and white women directors were more likely to have
specialized expertise in law, finance, banking, public relations or
marketing, or community influence from positions in politics,
academia or clergy).
\241\ See Bernile et al., supra note 28.
\242\ See Gul et al., supra note 66; Bravo and Alcaide-Ruiz,
supra note 56.
\243\ See Abad et al., supra note 67.
---------------------------------------------------------------------------

To the extent a company chooses not to meet the diversity
objectives of Rule 5605(f)(2) to have at least two Diverse directors,
Nasdaq believes that proposed Rule 5605(f)(3) will provide analysts and
investors with a better understanding about the company's reasons for
not doing so and its philosophy regarding diversity. Rule 5605(f) will
thus remove impediments to a free and open market and a national market
system by enabling the investment community to conduct more informed
analyses of, and have more informed conversations with, companies.
Nasdaq believes that such analyses and conversations will be better
informed by consistent, comparable data across companies, which Nasdaq
proposes to achieve by adopting a consistent definition of ``Diverse''
under Rule 5605(f)(1). Nasdaq further believes that providing such
disclosure will improve the quality of information available to
investors who rely on this information to make informed investment and
voting decisions, thereby promoting capital formation and efficiency
and perfecting the mechanism of a free and open market and a national
market system.
b. Prevent Fraudulent and Manipulative Acts and Practices
Nasdaq's analysis discussed above in Section II.A.1.II raises the
concern that the failure of homogenous boards to consider a broad range
of viewpoints can result in suboptimal decisions that have adverse
effects on company performance, board performance and stakeholders.
Nasdaq believes that including diverse directors with a broader range
of skills, perspectives and experiences may help detect and prevent
fraudulent and manipulative acts and practices by mitigating
``groupthink.'' Increased board diversity also may reduce the
likelihood of insider trading and other fraudulent and manipulative
acts and practices.
Nasdaq reached this conclusion by reviewing public statements by
investors and organizations regarding the impact of groupthink on
decision making processes, as well as academic studies on the
relationship between diversity, groupthink and fraud. Nasdaq observed
that groupthink can result in ``self-censorship'' \244\ and failure to
voice dissenting viewpoints in pursuit of ``consensus without critical
evaluation and without considering different possibilities.'' \245\ In
contrast, ``board members who possess a variety of viewpoints may raise
different ideas and encourage a full airing of dissenting views. Such a
broad pool of talent can be assembled when potential board candidates
are not limited by gender, race, or ethnicity.'' \246\
---------------------------------------------------------------------------

\244\ See Forbes and Milliken, supra note 74, at 496.
\245\ See Dhir, supra note 78, at 124.
\246\ See Petition for Amendment of Proxy Rule, supra note 80,
at 4.
---------------------------------------------------------------------------

Dhir (2015) concluded that gender diversity may ``promote cognitive
diversity and constructive conflict in the boardroom'' and may be more
effective at overseeing management.\247\ One respondent in Dhir's
survey of Norwegian directors observed that:
---------------------------------------------------------------------------

\247\ See Dhir, supra note 78, at 150.

I've seen situations where the women were more willing to dig
into the difficult questions and really go to the bottom even if it
was extremely painful for the rest of the board, but mostly for the
CEO . . . when it comes to the really difficult situations, [where]
you think that the CEO has . . . done something criminal . . . [o]r
you think that he has done something negligent, something that makes
it such that you . . . are unsure whether he's the suitable person
to be in the driving seat.\248\
---------------------------------------------------------------------------

\248\ Id. at xiv.

Another director observed that ``[i]f you have different
experiences and a more diversified board, you will have different
questions asked.'' \249\ Dhir concluded that ``women directors may be
particularly adept at critically questioning, guiding and advising
management without disrupting the overall working relationship between
the board and management.'' \250\
---------------------------------------------------------------------------

\249\ Id. at 120.
\250\ Id. at 35.
---------------------------------------------------------------------------

Pucheta[hyphen]Mart[iacute]nez et al. (2016) reasoned that
questioning management is a critical part of the audit committee's
oversight role, along with ensuring that management does not pressure
the external auditor to issue a clean audit opinion notwithstanding the
identification of any uncertainties or scope limitations.\251\
Otherwise, ``[a]uditors may accept the demands of management for a
clean audit report when the firm deserves a scope limitation and an
uncertainty qualification.'' \252\ The authors found that ``the
percentage of female [directors] on [audit committees] reduces the
probability of [audit] qualifications due to errors, non-compliance or
the omission of information,'' \253\ and further found a positive
association between gender-diverse audit committees and disclosing
audit reports with uncertainties and scope limitations. This suggests
that gender-diverse audit committees better ``ensure that managers do
not seek to pressure auditors into issuing a clean opinion instead of a
qualified opinion'' when any uncertainties or scope limitations are
identified.\254\
---------------------------------------------------------------------------

\251\ See Pucheta[hyphen]Mart[iacute]nez et al., supra note 52,
at 368.
\252\ Id. at 364.
\253\ Id. at 363.
\254\ Id. at 368.
---------------------------------------------------------------------------

Nasdaq also reviewed other studies that found a positive
association between board gender diversity and important investor
protections regardless of whether women are on the audit committee, and
considered the assessment of some academics that their findings may
extend to other forms of diversity, including racial and ethnic
diversity. Nasdaq therefore believes that such findings with respect to
audit committees would be expected to be more broadly applicable to the
quality of the broader board's decision-making process, and to other
forms of diversity, including diversity of race, ethnicity and sexual
orientation.
In examining the association between broader board gender diversity
and fraud, Cumming, et al. observed that ``[g]ender diversity in
particular facilitates more effective monitoring by the board and
protection of shareholder interests by broadening the board's
expertise, experience, interests, perspectives and creativity.'' \255\
They observed that the presence of women on boards is associated with a
lower likelihood of securities fraud; indeed, they found ``strong
evidence of a negative and diminishing effect of women on boards and
the probability of being in our fraud sample.'' \256\ The authors
suggested that ``other forms of board diversity, including but not
limited to gender diversity, may likewise reduce fraud.'' \257\
---------------------------------------------------------------------------

\255\ See Cumming et al., supra note 62, at 34.
\256\ Id. at 12-14.
\257\ Id. at 33.
---------------------------------------------------------------------------

Similarly, Wahid (2017) noted that board gender diversity may
``lead to less biased and superior decision-making'' because it ``has a
potential to alter group dynamics by affecting cognitive conflict and
cohesion.'' \258\ Wahid (2017) concluded that ``gender-diverse boards
commit fewer financial reporting mistakes and engage in less fraud,''
\259\ finding that companies with female directors have ``fewer
irregularity-type [financial] restatements, which tend to be indicative
of financial manipulation.'' \260\ Wahid also suggested that other
forms of diversity, including

[[Page 80498]]

racial diversity, could introduce additional perspectives to the
boardroom,\261\ which Nasdaq believes could further mitigate
groupthink.
---------------------------------------------------------------------------

\258\ See Wahid, supra note 59, at 6.
\259\ Id. at 1.
\260\ Id. at 23.
\261\ Id. at 24-25; see also Shecter, supra note 61 (quoting
Wahid as saying that ``[i]f you're going to introduce perspectives,
those perspectives might be coming not just from male versus female.
They could be coming from people of different ages, from different
racial backgrounds. . .. If we just focus on one, we could be
essentially taking away from other dimensions of diversity and
decreasing perspective.'').
---------------------------------------------------------------------------

Abbott, Parker and Persley (2012) posited that ``a female board
presence contribut[es] to the board's ability to maintain an attitude
of mental independence, diminish[es] the extent of groupthink and
enhance[es] the ability of the board to monitor financial reporting.''
\262\ They noted that ``poorer [internal] controls and the lack of an
independent and questioning board-level attitude toward accounting
judgments can create an opportunity for fraud.'' \263\ They observed a
lower likelihood of a material financial restatements stemming from
fraud or error in companies with at least one woman on the board.\264\
---------------------------------------------------------------------------

\262\ See Abbott et al., supra note 58, at 607.
\263\ Id. at 610.
\264\ Id. at 613 (``The previously discussed lines of research
lead us to form our hypothesis. In summary, restatements may stem
from error or fraud. In either instance, the internal control system
(to which the board of directors contributes by setting the overall
tone at the top) has failed to detect or prevent a misstatement.
Ineffective internal controls may stem from insufficient questioning
of assumptions underlying financial reporting, inadequate attention
to the internal control systems, or insufficient support for the
audit committee's activities.'').
---------------------------------------------------------------------------

Nasdaq believes that these studies provide substantial evidence
suggesting an association between gender diverse boards or audit
committees and a lower likelihood of fraud; a lower likelihood of
receiving audit qualifications due to errors, non-compliance or
omission of information; and a greater likelihood of disclosing audit
reports with uncertainties and scope limitations. Moreover, academics
have suggested that other forms of diversity, including racial and
ethnic diversity, may reduce fraud and mitigate groupthink. Further,
while homogenous boards may unwittingly fall into the trap of
groupthink due to a lack of diverse perspectives, ``heterogeneous
groups share conflicting opinions, knowledge, and perspectives that
result in a more thorough consideration of a wide range of
interpretations, alternatives, and consequences.'' \265\ Nasdaq
therefore believes that the proposed rule is designed to reduce
groupthink, and otherwise to enhance the functioning of boards, and
thereby to prevent fraudulent and manipulative acts and practices.
---------------------------------------------------------------------------

\265\ See Dallas, supra note 76, at 1391.
---------------------------------------------------------------------------

Further, the Commission has suggested that in seeking board
diversity, ``[t]o the extent that boards branch out from the set of
candidates they would ordinarily consider, they may nominate directors
who have fewer existing ties to the board or management and are,
consequently, more independent.'' \266\ Nasdaq believes that the
benefits of the proposed rule are analogous to the benefits of Nasdaq's
rules governing and requiring director independence. In 2003, Nasdaq
adopted listing rules requiring, among other things, that independent
directors comprise a majority of listed companies' boards, which were
``intended to enhance investor confidence in the companies that list on
Nasdaq.'' \267\ The Commission observed that self-regulatory
organizations ``play an important role in assuring that their listed
issuers establish good governance practices,'' and concluded that the
proposed rule changes would secure an ``objective oversight role'' for
issuers' boards of directors, and ``foster greater transparency,
accountability, and objectivity'' in that role.'' \268\ Along the same
lines, in approving Nasdaq's application for registration as a national
securities exchange, the Commission found Nasdaq's rules governing the
independence of members of boards and certain committees to be
consistent with Section 6(b)(5) of the Act because they advanced the
``interests of shareholders'' in ``greater transparency,
accountability, and objectivity'' in oversight and decision-making by
corporate boards.\269\ Nasdaq proposes to promote accountability in
corporate decision-making by requiring companies who do not have at
least two Diverse directors on their board to provide investors with a
public explanation of the board's reasons for not doing so under Rule
5605(f)(3).
---------------------------------------------------------------------------

\266\ See Proxy Disclosure Enhancements, supra note 73, 74 FR at
68,355.
\267\ See Order Approving Proposed Rule Changes, 68 FR at
64,161.
\268\ Id. at 64, 175.
\269\ See In re Nasdaq Stock Market, 71 FR 3550, 3565 (Jan. 23,
2006). See also 68 FR 18,788, 18,815 (April 16, 2003) (in adopting
Rule 10A-3, setting standards for the independence of audit
committee members, the Commission concluded that such standards
would ``enhance the quality and accountability of the financial
reporting process and may help increase investor confidence, which
implies increased efficiency and competitiveness of the U.S. capital
markets'').
---------------------------------------------------------------------------

Nasdaq believes it is critical to the detection and prevention of
fraudulent and manipulative acts and practices to have directors on the
board who are willing to critically question management and air
dissenting views. Nasdaq believes that boards comprised of directors
from Diverse backgrounds enhance investor confidence by ensuring that
board deliberations consider the perspectives of more than one
demographic group, leading to robust dialogue and better decision
making. However, Nasdaq recognizes that directors may bring diverse
perspectives, skills and experiences to the board, notwithstanding that
they have similar attributes. Nasdaq therefore believes it is in the
public interest to permit a company that chooses not to meet the
diversity objectives of Rule 5605(f)(2) to explain why it does not, in
accordance with Rule 5605(f)(3)--for example, if it believes that
defining diversity more broadly than Nasdaq, for example by considering
national origin, veteran status and disabilities, brings a wide range
of perspectives and experiences to the board. Nasdaq believes such
disclosure will provide investors with a better understanding of the
company's philosophy regarding diversity. This would better inform the
investment community and enable more informed analyses of, and
conversations with, companies. Therefore, Nasdaq believes satisfying
Rule 5605(f)(2) through disclosure pursuant to Rule 5605(f)(3) is
consistent with Section 6(b)(5) of the Act because it advances the
``interests of shareholders'' in ``greater transparency,
accountability, and objectivity'' of boards and their decision-making
processes.\270\ In addition, as discussed further in Section
II.A.2.II.c (Promotes Investor Protection and the Public Interest)
below, Nasdaq believes that the proposed diversity requirement could
help to reduce information asymmetry, and thereby reduce the risk of
insider trading or other opportunistic insider behavior.
---------------------------------------------------------------------------

\270\ Id.
---------------------------------------------------------------------------

c. Promotes Investor Protection and the Public Interest
Nasdaq has found substantial evidence that board diversity is
positively associated with more transparent public disclosures and
higher quality financial reporting, thereby promoting investor
protection. Specifically, studies have concluded that companies with
gender-diverse boards are associated with more transparent public
disclosures and less information asymmetry, leading to stock prices
that better reflect public information. Gul, Srinidhi & Ng (2011) found
that ``gender diversity improves stock price informativeness by
increasing voluntary public disclosures in large firms and increasing
the

[[Page 80499]]

incentives for private information collection in small firms.'' \271\
Bravo and Alcaide-Ruiz (2019) found a positive association between
women on the audit committee with financial or accounting expertise and
the voluntary disclosure of forward-looking information.\272\ Abad et
al. (2017) concluded that companies with gender-diverse boards are
associated with lower levels of information asymmetry, suggesting that
``the policies recently implemented in several European countries to
increase the presence of female directors in company boards could have
beneficial effects on stock markets by reducing the risk of informed
trading and enhancing stock liquidity.'' \273\
---------------------------------------------------------------------------

\271\ See Gul et al., supra note 66, at 2.
\272\ See Bravo and Alcaide-Ruiz, supra note 56, at 151.
\273\ See Abad et al., supra note 67, at 202.
---------------------------------------------------------------------------

Nasdaq believes that one consequence of information asymmetry is
that insiders may engage in opportunistic behavior prior to a public
announcement of financial results and before the market incorporates
the new information into the company's stock price. This can result in
unfair gains or an avoidance of losses at the expense of shareholders
who did not have access to the same information. This may exacerbate
the principal-agent problem, in which the interests of a company's
board and shareholders are not aligned. Lucas-Perez et al. (2014) found
that board gender diversity is positively associated with linking
executive compensation plans to company performance,\274\ which may be
an effective mechanism to deter opportunistic behavior by management
and better align their interests with those of their company's
shareholders.\275\
---------------------------------------------------------------------------

\274\ See Lucas-Perez et al., supra note 69.
\275\ Id.
---------------------------------------------------------------------------

Another concern is that ``[w]hen information asymmetry is high,
stakeholders do not have sufficient resources, incentives, or access to
relevant information to monitor managers' actions, which gives rise to
the practice of earnings management.'' \276\ Earnings management ``is
generally defined as the practice of using discretionary accounting
methods to attain desired levels of reported earnings.'' \277\
Manipulating earnings is particularly concerning to investors because
``[i]f users of financial data are `misled' by the level of reported
income, then investors' allocation of resources may be inappropriate
when based on the financial statements provided by management,'' \278\
thereby undermining the efficacy of the capital formation process for
investors who rely on such information to make informed investment and
voting decisions.
---------------------------------------------------------------------------

\276\ See Vernon J. Richardson, Information Asymmetry and
Earnings Management: Some Evidence, 15 Rev. Quantitative Fin. and
Acct. 325 (2000).
\277\ See Gull et al., supra note 55, at 2.
\278\ Id.
---------------------------------------------------------------------------

Gull et al. (2018) \279\ observe that overseeing management is a
crucial component of investor protection, particularly with regard to
earnings management:

\279\ See generally id.
---------------------------------------------------------------------------

The role of the board of directors and board characteristics
(i.e. board independence and gender diversity) is usually associated
with the protection of shareholder interests. . .. This role is
particularly crucial with regard to the issue of earnings
management, in that one of the responsibilities of boards is to
monitor management.\280\
---------------------------------------------------------------------------

\280\ Id. at 6 (citations omitted).

The authors of that study found that the presence of female audit
committee members with business expertise is associated with a lower
magnitude of earnings management. Srinidhi, Gul and Tsui (2011)
observed that better oversight of management combined with lower
information asymmetry leads to better earnings quality. They noted that
``[e]arnings quality is an important outcome of good governance
demanded by investors and therefore its improvement constitutes an
important objective of the board.'' \281\ They found that companies
with women on the board, specifically on the audit committee, exhibit
``higher earnings quality'' and ``better reporting discipline by
managers.'' \282\ They concluded that ``including female directors on
the board and the audit committee are plausible ways of improving the
firm's reporting discipline and increasing investor confidence in
financial statements.'' \283\
---------------------------------------------------------------------------

\281\ See Srinidhi et al., supra note 50, at 1638.
\282\ Id. at 1612.
\283\ Id.
---------------------------------------------------------------------------

Chen, Eshleman and Soileau (2016) suggested that the relationship
between gender diversity and higher earnings quality observed by
Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced internal
control weaknesses, noting that ``prior literature has established a
negative relationship between internal control weaknesses and earnings
quality.'' \284\ Internal control over financial reporting are
procedures designed ``to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.'' \285\
Weaknesses in internal controls can ``lead to poor financial reporting
quality'' and ``more severe insider trading'' \286\ or failure to
detect a material misstatement. According to the PCAOB:

\284\ See Chen et al., supra note 64, at 18.
\285\ See Public Company Accounting Oversight Board, Auditing
Standard No. 5: Appendix A, A5 available at: https://pcaobus.org/oversight/standards/archived-standards/details/Auditing_Standard_5_Appendix_A.
\286\ See Chen et al., supra note 64, at 12.
---------------------------------------------------------------------------

A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company's annual or interim financial statements will not be
prevented or detected on a timely basis.\287\
---------------------------------------------------------------------------

\287\ See Public Company Accounting Oversight Board, supra note
285, at A7.

A material misstatement can occur ``as a result of some type of
inherent risk, whether fraud or error (e.g., management's aggressive
accounting practices, erroneous application of GAAP).'' \288\ The
failure to prevent or detect a material misstatement before financial
statements are issued can require the company to reissue its financial
statements and potentially face costly shareholder litigation. Chen et
al. found that having at least one woman on the board (regardless of
whether or not she is on the audit committee) ``may lead [a] to reduced
likelihood of material weaknesses [in internal control over financial
reporting],'' \289\ and Abbott, Parker and Persley (2012) found ``a
significant association between the presence of at least one woman on
the board and a lower likelihood of [a material financial]
restatement.'' \290\ Notably, while the Sarbanes-Oxley Act (``SOX'')
implemented additional measures to ensure that a company has robust
internal controls, the findings of Abbott et al. were consistent among
a sample of pre- and post-SOX restatements, suggesting that ``an
additional, beneficial layer of independence in group decision-making
is associated with gender diversity.'' \291\
---------------------------------------------------------------------------

\288\ See Abbott et al., supra note 58, at 609-10.
\289\ See Chen et al., supra note 64, at 18.
\290\ See Abbott et al., supra note 58, at 607.
\291\ Id. at 609.
---------------------------------------------------------------------------

Nasdaq believes that the proposal to require listed companies to
have at least two Diverse directors under Rule 5605(f) could help to
lower information asymmetry and reduce the risk of insider trading or
other opportunistic insider behavior, which would help to increase
stock price informativeness and enhance stock liquidity, thereby
protecting investors and promoting capital formation and efficiency.
Nasdaq

[[Page 80500]]

believes that information asymmetry could also be reduced by permitting
companies to satisfy Rule 5605(f)(2) by publicly disclosing their
reasons for not meeting its diversity objectives in accordance with
Rule 5605(f)(3), because the requirement will improve the quality of
information available to investors who rely on this information to make
informed investment and voting decisions, which will further protect
investors and promote capital formation and efficiency.
Moreover, Nasdaq believes that proposed Rule 5605(f) could foster
more transparent public disclosures, higher quality financial
reporting, and stronger internal control over financial reporting and
mechanisms to monitor management. This could be particularly beneficial
for Smaller Reporting Companies that are not subject to the SOX 404(b)
requirement to obtain an independent auditor's attestation of
management's assessment of the effectiveness of internal control over
financial reporting, thereby promoting investor protection.
Nasdaq believes that the body of research on the relationship
between economic performance and board diversity summarized under
Section II.A.1.II.a above provides substantial evidence supporting the
conclusion that board diversity does not have adverse effects on
company financial performance, and therefore Nasdaq believes the
proposal will not negatively impact capital formation, competition or
efficiency among its public companies.\292\ Nasdaq considered that some
studies on gender diversity alone have had mixed results,\293\ and that
the U.S. GAO (2015) and Carter et al. (2010) concluded that the mixed
results are due to differences in methodologies, data samples and time
periods.\294\ This is not the first time Nasdaq has considered whether,
on balance, various studies finding mixed results related to board
composition and company performance are sufficient rationale to propose
a listing rule. For example, in 2003, notwithstanding the mixed results
of studies regarding the relationship between company performance and
board independence,\295\ Nasdaq adopted listing rules requiring a
majority independent board that were ``intended to enhance investor
confidence in the companies that list on Nasdaq.'' \296\ In its
Approval Order, the SEC noted that ``[t]he Commission has long
encouraged exchanges to adopt and strengthen their corporate governance
listing standards in order to, among other things, enhance investor
confidence in the securities markets;'' the Commission concluded that
the independence rules would secure an ``objective oversight role'' for
issuers' boards, and ``foster greater transparency, accountability, and
objectivity'' in that role.\297\ Nasdaq believes this reasoning applies
to the current proposed rule as well. Even without clear consensus
among studies related to board diversity and company performance, the
heightened focus on corporate board diversity by investors demonstrates
that investor confidence is undermined when data on board diversity is
not readily available and when companies do not explain the reasons for
the apparent absence of diversity on their boards.\298\ Legislators are
increasingly taking action to encourage corporations to diversify their
boards and improve diversity disclosures.\299\ Moreover, during its
discussions with stakeholders, Nasdaq found consensus across every
constituency that there is inherent value in board diversity. Lastly,
it has been a longstanding principle that ``Nasdaq stands for integrity
and ethical business practices in order to enhance investor confidence,
thereby contributing to the financial health of the economy and
supporting the capital formation process.'' \300\
---------------------------------------------------------------------------

\292\ See Alexandre Di Miceli and Angela Donaggio, Women in
Business Leadership Boost ESG Performance: Existing Body of Evidence
Makes Compelling Case, 42 International Finance Corporation World
Bank Group, Private Sector Opinion at 11 n.15 (2018), available at:
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/resources/private+sector+opinion/women+in+business+leadership+boost+esg+performance (``The
overwhelming majority of empirical studies conclude that a higher
ratio of women in business leadership does not impair corporate
performance (virtually all studies find positive or non-
statistically significant results)''). See also Wahid, supra note
59, at 6 (suggesting that ``at a minimum, gender diversity on
corporate boards has a neutral effect on governance quality, and at
best, it has positive consequences for boards' ability to monitor
firm management'').
\293\ See, e.g., Pletzer et al., supra note 38; Post and Byron,
supra note 39; Adams and Ferreira, supra note 42.
\294\ See GAO Report, supra note 44, at 5 (``Some research has
found that gender diverse boards may have a positive impact on a
company's financial performance, but other research has not. These
mixed results depend, in part, on differences in how financial
performance was defined and what methodologies were used''); Carter
(2010), supra note 40, at 400 (observing that the different
``statistical methods, data, and time periods investigated vary
greatly so that the results are not easily comparable.'').
\295\ See supra note 45.
\296\ See Order Approving Proposed Rule Changes, 68 FR at
64,161.
\297\ Id. at 64,176.
\298\ See supra notes 4 and 8.
\299\ See supra note 112.
\300\ See Nasdaq Rulebook, Rule 5101.
---------------------------------------------------------------------------

For all the foregoing reasons, Nasdaq believes that proposed Rule
5605(f) will promote investor protection and the public interest by
enhancing investor confidence that all listed companies are considering
diversity in the context of selecting directors, either by including at
least two Diverse directors on their boards or by explaining their
rationale for not meeting that objective. To the extent a company
chooses not to meet the diversity objectives of Rule 5605(f)(2), Nasdaq
believes that the proposal will provide investors with additional
disclosure about the company's reasons for doing so under Rule
5605(f)(3). For example, the company may choose to disclose that it
does not meet the diversity objectives of Rule 5605(f)(2) because it is
subject to an alternative standard under state or foreign laws and has
chosen to satisfy that diversity objective instead. On the other hand,
many firms may strive to achieve even greater diversity than the
objectives set forth in our proposed rule. Nasdaq believes that
providing such flexibility and clear disclosure where the company
determines to follow a different path will improve the quality of
information available to investors who rely on this information to make
informed investment and voting decisions, thereby promoting capital
formation and efficiency, and further promoting the public interest.
d. Not Designed to Permit Unfair Discrimination Between Customers,
Issuers, Brokers, or Dealers
Nasdaq believes that proposed Rule 5605(f) is not designed to
permit unfair discrimination among companies because it requires all
companies subject to the rule to have at least two Diverse directors or
explain why they do not. Further, the proposal requires at least one of
the two Diverse directors to be an individual who self-identifies as
Female. While the proposal provides different requirements for the
second Diverse director among Smaller Reporting Companies, Foreign
Issuers and other companies, Nasdaq believes that the rule is not
designed to permit unfair discrimination among companies. In all cases,
a company can choose to meet the diversity objectives of the entire
rule or to satisfy only certain elements of the rule. Further, the
proposed rule does not limit board sizes--if a board chooses to
nominate a Diverse individual to the board to meet the diversity
objectives of the proposed rule, it is not precluded from also
nominating a non-Diverse director for an additional board seat.

[[Page 80501]]

i. Rule 5605(f)(2)(B): Foreign Issuers
Similar to all other companies subject to Rule 5605(f), the
proposal requires all Foreign Issuers to have, or explain why they do
not have, at least two Diverse directors, including one director who
self-identifies as Female. However, Nasdaq proposes to provide Foreign
Issuers with additional flexibility with regard to the second Diverse
director. Foreign Issuers could satisfy the second director objective
by including another Female director, or an individual who self-
identifies as LGBTQ+ or as an underrepresented individual based on
national, racial, ethnic, indigenous, cultural, religious or linguistic
identity in the company's home country jurisdiction. While the proposal
provides a different requirement for the second Diverse director for
Foreign Issuers, Nasdaq believes it is not designed to permit unfair
discrimination between Foreign Issuers and other companies because it
recognizes that the unique demographic composition of the United
States, and its historical marginalization of Underrepresented
Minorities and the LGBTQ+ community, may not extend to all countries
outside of the United States. Further, Nasdaq believes that it is
challenging to apply a consistent definition of minorities to all
countries globally because ``[t]here is no internationally agreed
definition as to which groups constitute minorities.'' \301\ Similarly,
``there is no universally accepted international definition of
indigenous peoples.'' \302\ Rather, the United Nations Declaration on
the Rights of Indigenous Peoples recognizes ``that the situation of
indigenous peoples varies from region to region and from country to
country and that the significance of national and regional
particularities and various historical and cultural backgrounds should
be taken into consideration.'' \303\ Accordingly, Nasdaq believes that
it is not unfairly discriminatory to allow an alternative mechanism for
Foreign Issuers to satisfy Rule 5605(f)(2) in recognition that the
U.S.-based EEOC definition of Underrepresented Minorities is not
appropriate for every Foreign Issuer. In addition, Foreign Issuers have
the ability to satisfy Rule 5605(f)(2)(B) by explaining that they do
not satisfy this alternative definition. Similarly, any company that is
not a Foreign Issuer, but that prefers the alternative definition
available for Foreign Issuers, could follow Rule 5605(f)(2)(B) and
disclose its reasons for doing so.
---------------------------------------------------------------------------

\301\ See United Nations, Minority Rights: International
Standards and Guidance for Implementation 2 (2010), available at:
https://www.ohchr.org/Documents/Publications/MinorityRights_en.pdf.
See also G.A. Res. 47/135. art. 1.1 (Dec. 18, 1992) (``States shall
protect the existence and the national or ethnic, cultural,
religious and linguistic identity of minorities within their
respective territories and shall encourage conditions for the
promotion of that identity.''). The preamble to the Declaration also
``[r]eaffirm[s] that one of the basic aims of the United Nations, as
proclaimed in the Charter, is to promote and encourage respect for
human rights and for fundamental freedoms for all, without
distinction as to race, sex, language or religion.''
\302\ See United Nations, Minority Rights, supra note 301, at 3.
\303\ See G.A. Res. 61/295 (Sept. 13, 2007).
---------------------------------------------------------------------------

Under the proposal, Foreign Issuer means (a) a Foreign Private
Issuer (as defined in Rule 5005(a)(19)) or (b) a company that (i) is
considered a ``foreign issuer'' under Rule 3b-4(b) under the Act, and
(ii) has its principal executive offices located outside of the United
States. For example, a company that is considered a ``foreign issuer''
under Rule 3b-4(b) under the Act and has its principal executive
offices located in Ireland would qualify as a Foreign Issuer for
purposes of Rule 5605(f)(2), even if it is not considered a Foreign
Private Issuer under Nasdaq or SEC rules.
Nasdaq recognizes that Foreign Issuers may be located in
jurisdictions that impose privacy laws limiting or prohibiting self-
identification questionnaires, particularly as they relate to race or
ethnicity. In such countries, a company may not be able to determine
each director's self-identified Diverse attributes due to restrictions
on the collection of personal information. The company may instead
publicly disclose pursuant to Rule 5605(f)(3) that ``Due to privacy
laws in the company's home country jurisdiction limiting its ability to
collect information regarding a director's self-identified Diverse
attributes, the company is not able to determine that it has two
Diverse directors as set forth under Rule 5605(f)(2)(B)(ii).''
ii. Rule 5605(f)(2)(C): Smaller Reporting Companies
While the proposal provides a different requirement for the second
Diverse director for Smaller Reporting Companies, Nasdaq believes that
this distinction is not designed to permit unfair discrimination among
companies. Nasdaq has designed the proposed rule to ensure it does not
have a disproportionate economic impact on Smaller Reporting Companies
by imposing undue costs or burdens. Nasdaq recognizes that Smaller
Reporting Companies, especially pre-revenue companies that depend on
the capital markets to fund ground-breaking research and technological
advancements, may not have the resources to compensate an additional
director or engage a search firm to find director candidates outside of
the directors' traditional networks. Nasdaq believes that this is a
reasonable basis to distinguish Smaller Reporting Companies from other
companies subject to the rule.
Smaller Reporting Companies already are provided certain exemptions
from Nasdaq's listing rules. For example, under Rule 5605(d)(3),
Smaller Reporting Companies must have a compensation committee
comprised of at least two independent directors and a formal written
compensation committee charter or board resolution that specifies the
committee's responsibilities and authority, but such companies are not
required to grant authority to the committee to retain or compensate
consultants or advisors or consider certain independence factors before
selecting such advisors, consistent with Rule 10C-1 of the Act.\304\ In
its approval order, the SEC concluded as follows:
---------------------------------------------------------------------------

\304\ See Nasdaq Rulebook, Rule 5605(d)(3).

The Commission believes that these provisions are consistent
with the Act and do not unfairly discriminate between issuers. The
Commission believes that, for similar reasons to those for which
Smaller Reporting Companies are exempted from the Rule 10C-1
requirements, it makes sense for Nasdaq to provide some flexibility
to Smaller Reporting Companies regarding whether the compensation
committee's responsibilities should be set forth in a formal charter
or through board resolution. Further . . . in view of the potential
additional costs of an annual review, it is reasonable not to
require a Smaller Reporting Company to conduct an annual assessment
of its charter or board resolution.\305\
---------------------------------------------------------------------------

\305\ See Order Granting Accelerated Approval of Proposed Rule
Change, 78 FR 4,554, 4,567 (Jan. 22, 2013).

The Commission also makes accommodations for Smaller Reporting
Companies based on their more limited resources, allowing them to
comply with scaled disclosure requirements in certain SEC reports
rather than the more rigorous disclosure requirements for larger
companies. For example, Smaller Reporting Companies are not required to
include a compensation discussion and analysis in their proxy or Form
10-K describing the material elements of the compensation of its named
executive officers.\306\ Eligible Smaller Reporting Companies also are
relieved from the SOX 404(b) requirement to obtain an independent
auditor's attestation of management's assessment of the effectiveness
of internal control over

[[Page 80502]]

financial reporting.\307\ In each case, companies may choose to comply
with the more rigorous requirements in lieu of relying on the
exemptions.
---------------------------------------------------------------------------

\306\ See 17 CFR 229.402(l).
\307\ See Accelerated Filer and Large Accelerated Filer
Definitions, 85 FR 17,178 (March 26, 2020).
---------------------------------------------------------------------------

Any company that is not a Smaller Reporting Company, but prefers
the alternative rule available for Smaller Reporting Companies, could
follow Rule 5605(f)(2)(C) and disclose their reasons for doing so. As
such, Nasdaq believes that the proposed alternative rule for Smaller
Reporting Companies is not designed to, and does not, unfairly
discriminate among companies. Lastly, Nasdaq believes that Rule
5605(f)(2)(C) is not designed to permit unfair discrimination among
companies because it requires Smaller Reporting Companies to have at
least one director who self-identifies as Female, similar to other
companies subject to Rule 5065(f).
iii. Rule 5605(f)(3): Public Disclosure of Non-Diverse Board
Under proposed Rule 5605(f)(3), if a company determines not to meet
the diversity objectives of Rule 5605(f) in its entirety, it must
specify the applicable requirements of the Rule and explain its reasons
for not having at least two Diverse directors. Nasdaq designed the
proposal to avoid unduly burdening competition or efficiency, or
conflicting with existing securities laws, by providing all companies
subject to Rule 5605(f) with the option to make the public disclosure
required under Rule 5605(f)(3) in the company's proxy statement or
information statement for its annual meeting of shareholders or,
alternatively on the company's website, provided that the company
submits a URL link to such disclosure to Nasdaq through the Listing
Center no later than 15 calendar days after the company's annual
shareholder meeting. Nasdaq believes Rule 5605(f)(3) is not designed to
permit unfair discrimination among companies because the proposed rule
provides all companies subject to Rule 5605(f) the option to disclose
an explanation rather than meet the diversity objectives of Rule
5605(f)(2).
Certain federal securities laws similarly permit companies to
satisfy corporate governance requirements through disclosure of reasons
for not meeting the applicable requirement. For example, under
Regulation S-K, Item 407 requires a company to disclose whether or not
its board of directors has determined that the company has at least one
audit committee financial expert. If a company does not have a
financial expert on the audit committee, it must provide an
explanation.\308\ Item 406 requires a company to disclose whether it
has adopted a written code of ethics that applies to the chief
executive officer and senior financial or accounting officers. If a
company has not adopted such a code of ethics, it must disclose the
reasons why not.\309\ Item 402 regarding pay ratio disclosure defines
how total compensation for employees should be calculated, but permits
companies to use a different measure as long as they explain their
approach.\310\
---------------------------------------------------------------------------

\308\ See 17 CFR 229.407(d)(5).
\309\ Id. Sec. 229.406(a).
\310\ Id. Sec. 229.402.
---------------------------------------------------------------------------

Furthermore, Nasdaq rules and SEC guidance already recognize that
website disclosure can be a method of disseminating information to the
public. For example, Nasdaq listing rules permit companies to provide
website disclosures related to third party director compensation,\311\
foreign private issuer home country practices,\312\ and reliance on the
exception relating to independent compensation committee members.\313\
The SEC has recognized that ``[a] company's website is an obvious place
for investors to find information about the company'' \314\ and permits
companies to make public disclosure of material information through
website disclosures if, among other things, the company's website is
``a recognized channel of distribution of information.'' \315\
---------------------------------------------------------------------------

\311\ See Nasdaq Rulebook, Rule 5250(b)(3)(A).
\312\ Id., Rule 5615(a)(3)(B) and IM-5615-3.
\313\ Id., Rules 5605(d)(2)(B) (non-independent compensation
committee member under exceptional and limited circumstances) and
5605(e)(3) (non-independent nominations committee member under
exceptional and limited circumstances).
\314\ See Commission Guidance on the Use of Company websites, 73
FR 45,862, 45,864 (Aug. 7, 2008).
\315\ Id. at 45,867.
---------------------------------------------------------------------------

iv. Rule 5605(f)(4): Exempt Companies
Under proposed Rule 5605(f)(4), Nasdaq proposes to exempt the
following types of companies from the requirements of Rule 5605(f)
(defined as ``Exempt Companies''): acquisition companies listed under
IM-5101-2; asset-backed issuers and other passive issuers (as set forth
in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2));
limited partnerships (as set forth in Rule 5615(a)(4)); management
investment companies (as set forth in Rule 5615(a)(5)); issuers of non-
voting preferred securities, debt securities and Derivative Securities
(as set forth in Rule 5615(a)(6)); and issuers of securities listed
under the Rule 5700 Series. Each of the types of Exempt Companies
either has no board of directors, lists only securities with no voting
rights towards the election of directors, or is not an operating
company, and the holders of the securities they issue do not expect to
have a say in the composition of their boards. As such, Nasdaq believes
the proposal is not designed to permit unfair discrimination by
excluding Exempt Companies from the application of proposed Rule
5605(f). These companies already are exempt from certain of Nasdaq's
corporate governance standards related to board composition, as
described in Rule 5615.
v. Rule 5605(f)(5): Phase-in Period
Proposed Rule 5605(f)(5)(A) will allow any newly listing company
that was not previously subject to a substantially similar requirement
of another national securities exchange one year from the date of
listing to satisfy the requirements of Rule 5605(f). Proposed Rule
5605(f)(5)(B) also will allow any company that ceases to be a Foreign
Issuer, a Smaller Reporting Company or an Exempt Company one year from
the date that the company no longer qualifies as a Foreign Issuer, a
Smaller Reporting Company or an Exempt Company, respectively, to
satisfy the requirements of Rule 5605(f). This phase-in period will
apply after the end of the transition period provided in Rule
5605(f)(7).
Nasdaq believes this approach is not designed to permit unfair
discrimination because it provides all companies that become newly
subject to the rule the same time period within which to comply. In
addition, this approach is similar to other phase-in periods granted to
companies listing on or transferring to Nasdaq. For example, Rule
5615(b)(1) provides a company listing in connection with its initial
public offering one year to fully comply with the compensation and
nomination committee requirements of Rules 5605(d) and (e), and the
majority independent board requirement of Rule 5605(b). Similarly, SEC
Rule 10A-3(b)(1)(iv)(A) allows a company up to one year from the date
its registration statement is effective to fully comply with the
applicable audit committee composition requirements. Nasdaq Rule
5615(b)(3) provides a one-year timeframe for compliance with the board
composition requirements for companies transferring from other listed
markets that do not have a substantially similar requirement.

[[Page 80503]]

vi. Rule 5605(f)(7): Effective Dates/Transition
Under proposed Rule 5605(f)(7), each company must have, or explain
why it does not have, one Diverse director no later than two calendar
years after the Approval Date,\316\ and two Diverse directors no later
than (i) four calendar years after the Approval Date for companies
listed on the NGS or NGM tiers, or (ii) five calendar years after the
Approval Date for companies listed on the NCM tier.
---------------------------------------------------------------------------

\316\ The ``Approval Date'' is the date that the SEC approves
the proposed rule.
---------------------------------------------------------------------------

Nasdaq believes this approach is not designed to permit unfair
discrimination because it recognizes that companies listed on the
Nasdaq Capital Market may not have the resources necessary to
compensate an additional director or engage a search firm to search for
director candidates outside of the directors' traditional networks.
Therefore, Nasdaq believes it is in the public interest to provide such
companies with one additional year to meet the diversity objectives of
Rule 5605(f), should they choose to do so. Nasdaq notes that all
companies may choose to follow a timeframe applicable to a different
market tier, provided they publicly describe their explanation for
doing so. They also may construct their own timeframe for meeting the
diversity objectives of Rule 5605(f), provided they publicly disclose
their reasons for not abiding by Nasdaq's timeframe.
e. Not Designed to Regulate by Virtue of any Authority Conferred by the
Act Matters Not Related to the Purposes of the Act or the
Administration of the Exchange
Nasdaq believes that the proposal is not designed to regulate by
virtue of any authority conferred by the Act matters not related to the
purposes of the Act or the administration of the Exchange.\317\ The
proposal relates to the Exchange's corporate governance standards for
listed companies. As discussed above, ``[t]he Commission has long
encouraged exchanges to adopt and strengthen their corporate governance
listing standards in order to, among other things, enhance investor
confidence in the securities markets.'' \318\ And because ``it is not
always feasible to define . . . every practice which is inconsistent
with the public interest or with the protection of investors,'' the Act
leaves to SROs ``the necessary work'' of rulemaking pursuant to Section
6(b)(5).\319\
---------------------------------------------------------------------------

\317\ See 15 U.S.C. 78f(b)(5).
\318\ See Order Approving Proposed Rule Changes, 68 FR at
64,161.
\319\ See Heath v. SEC, 586 F.3d 122, 132 (2d Cir. 2009) (citing
Avery v. Moffat, 55 N.Y.S.2d 215, 228 (Sup. Ct. 1945)).
---------------------------------------------------------------------------

Nasdaq recognizes that U.S. states are increasingly proposing and
adopting board diversity requirements, and because corporations are
creatures of state law, some market participants may believe that such
regulation is best left to states. However, Nasdaq considered that
certain of its listing rules related to corporate governance currently
relate to areas that are also regulated by states. For example, states
impose standards related to quorums \320\ and shareholder approval of
certain transactions,\321\ which also are regulated under Nasdaq's
listing rules.\322\ Nasdaq has adopted rules relating to such matters
to ensure uniformity of such rules among its listed companies.
Similarly, Nasdaq believes that the proposed rule will create
uniformity among listed companies by helping to assure investors that
all non-exempt companies have at least two Diverse directors on their
board or publicly describe why they do not.
---------------------------------------------------------------------------

\320\ See, e.g., 8 Del. Code Sec. 216 (providing that a quorum
at a shareholder's meeting shall consist of no less than \1/3\ of
the shares entitled to vote at such meeting).
\321\ See, e.g., id. Sec. Sec. 251, 271 (providing that
shareholder approval by a majority of the outstanding voting shares
entitled to vote is required for mergers and the sale of all or
substantially all of a corporation's assets).
\322\ See, e.g., Nasdaq Rulebook, Rules 5620(c) and 5635(a).
---------------------------------------------------------------------------

Further, Nasdaq believes the proposal will enhance investor
confidence that listed companies that have two Diverse directors are
considering the perspectives of more than one demographic group,
leading to robust dialogue and better decision making, as well as the
other corporate governance benefits of diverse boards discussed above
in Section II.A.1.II. To the extent companies choose to disclose their
reasons for not meeting the diversity objectives of Rule 5605(f)(2)
pursuant to Rule 5605(f)(3), Nasdaq believes that such disclosure will
improve the quality of information available to investors who rely on
this information to make an informed voting decision, thereby promoting
capital formation and efficiency. It has been the Exchange's
longstanding principle that ``Nasdaq stands for integrity and ethical
business practices in order to enhance investor confidence, thereby
contributing to the financial health of the economy and supporting the
capital formation process.'' \323\
---------------------------------------------------------------------------

\323\ Id., Rule 5101.
---------------------------------------------------------------------------

In addition, as discussed in Section II.A.1.I, in passing Section
342 of the Dodd-Frank Act, Congress recognized the need to respond to
the lack of diversity in the financial services industry, and the
Standards designed by the Commission and other financial regulators
provide a framework for addressing that industry challenge. The
Standards themselves identify several focus areas, including the
importance of ``Organizational Commitment,'' which speaks to the
critical role of senior leadership--including boards of directors--in
promoting diversity and inclusion across an organization. In addition,
like the proposed rule, the Standards also consider ``Practice to
Promote Transparency,'' and recognize that transparency is a key
component of any diversity initiative. Specifically, the Standards
provide that the ``transparency of an entity's diversity and inclusion
program promotes the objectives of Section 342,'' and also is important
because it provides the public with necessary information to assess an
entity's diversity policies and practices.\324\
---------------------------------------------------------------------------

\324\ Final Interagency Policy Statement Establishing Joint
Standards for Assessing the Diversity Policies and Practices of
Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule will impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Act. Nasdaq reviewed requirements related to
board diversity in two dozen foreign jurisdictions, and almost every
jurisdiction imposes diversity-focused requirements on listed
companies, either through a securities exchange, financial regulator or
the government. Nasdaq competes for listings globally, including in
countries that have implemented a more robust regulatory reporting
framework for diversity and ESG disclosures. Currently in the U.S., the
Long Term Stock Exchange (``LTSE''), which includes a number of
sponsors which have investment businesses, has communicated to
institutional investors that it that it seeks to distinguish itself by
focusing on corporate governance, including, for example, diversity and
inclusion. Under Rule 14.425, companies listed on LTSE must adopt and
publish a long-term stakeholder policy that explains, among other
things, ``the Company's approach to diversity and inclusion.'' \325\
---------------------------------------------------------------------------

\325\ See Long-Term Stock Exchange Rule Book, Rule 14.425.

---------------------------------------------------------------------------

[[Page 80504]]

I. Board Statistical Disclosure
The Exchange does not believe that proposed Rule 5606 will impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Act. Specifically, the Exchange believes that
the adoption of Rule 5606 will not impose any undue burden on
competition among listed companies for the reasons set forth below.
With a few exceptions, all companies would be required to make the
same disclosure of their board-level statistical information. The
average board size of a company that is currently listed on the
Exchange is eight directors. Although a company would be required to
disclose its board-level statistical data, directors may choose to opt
out rather than reveal their diversity characteristics to their
company. A company would identify such directors in the ``Undisclosed''
category. For directors who voluntarily disclose their diversity
characteristics, the company would collect their responses and disclose
the information in either the company's proxy statement, information
statement of shareholder meeting or on the company's website, using
Nasdaq's required format. While the time and economic burden may vary
based on a company's board size, Nasdaq does not believe there is any
significant burden associated with gathering, preparing and reporting
this data. Therefore, Nasdaq believes that there will be a de minimis
time and economic burden on listed companies to collect and disclose
the diversity statistical data.
Some investors value demographic diversity, and list it as an
important factor influencing their director voting decisions.\326\
Investors have stated that consistent data would make its collection
and analysis easier and more equitable for investors that are not large
enough to demand or otherwise access individualized disclosures.\327\
Therefore, Nasdaq believes that any burden placed on companies to
gather and disclose their board-level diversity statistics is
counterbalanced by the benefits that the information will provide to a
company's investors.
---------------------------------------------------------------------------

\326\ See Hunt et al., supra note 26.
\327\ See Petition for Rulemaking, supra note 123, at 2.
---------------------------------------------------------------------------

Moreover, as discussed above, most listed companies are required to
submit an annual EEO-1 Report, which provides statistical data related
to race and gender data among employees similar to the data required
under proposed Rule 5606(a). Because most companies are already
collecting similar information annually to satisfy their EEOC
requirement, Nasdaq does not believe that adding directors to the
collection will place a significant burden on these companies.
Additionally, the information requested from Foreign Issuers is limited
in scope and therefore does not impose a significant burden on them.
Nasdaq faces competition in the market for listing services.
Proposed Rule 5606 reflects that competition, but it does not impose
any burden on competition with other exchanges. As discussed above,
investors have made clear their desire for greater transparency into
public companies' board-level diversity as it relates to gender
identity, race, and ethnicity. Nasdaq believes that the proposed rule
will enhance the competition for listings. Other exchanges can set
similar requirements for their listed companies, thereby increasing
competition to the benefit of those companies and their shareholders.
Accordingly, Nasdaq does not believe the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
II. Diverse Board Representation or Explanation
Nasdaq believes that proposed Rule 5605(f) will not impose burdens
on competition among listed companies because the Exchange has
constructed a framework for similarly-situated companies to satisfy
similar requirements (i.e., Foreign Issuers, Smaller Reporting
Companies and other companies), and has provided all companies with the
choice of satisfying the requirements of Rule 5605(f)(2) by having at
least two Diverse directors, or by explaining why they do not. Nasdaq
believes that this will avoid imposing undue costs or burdens on
companies that, for example, cannot afford to compensate an additional
director or believe it is not appropriate, feasible or desirable to
meet the diversity objectives of Rule 5605(f) based on the company's
particular circumstances (for example, the company's size, operations
or current board composition). Rather than requiring a company to
divert resources to compensate an additional director, and place the
company at a competitive disadvantage with its peers, the rule provides
the flexibility for such company to explain why it does not meet the
diversity objective.
The cost of identifying director candidates can range from nothing
or a nominal fee (via personal, work or school-related networks, or
board affinity organizations, as well as internal research by the
corporate secretary's team) to amounts that can vary widely depending
on the specific search firm and the size of the company. Some industry
observers estimate board searches for independent directors cost about
one-third of a director's annual compensation, while others estimate it
costs between $75,000 and $150,000. The underlying figures vary; for
example, one search firm generally charges $25,000 to $50,000. Nasdaq
observes that total annual director compensation can range widely;
median director pay is estimated at $134,000 for Russell 3000 companies
and $232,000 for S&P 500 companies. Moreover, there is a wider range of
underlying compensation amounts. For example, Russell 3000 directors
may receive approximately $32,600 (10th percentile), or up to $250,000
(90th percentile) or more. S&P 500 directors may receive approximately
$100,000 (10th percentile) or up to $310,000 (90th percentile) or
more.\328\ Most, if not all, of these costs would be borne in any event
in the search for new directors regardless of the proposed rule. While
the proposed rule might lead some companies to search for director
candidates outside of already established networks, the incremental
costs of doing so would be tied directly to the benefit of a broader
search.
---------------------------------------------------------------------------

\328\ Total annual director compensation varies by compensation
elements and structure as well as amount, which is generally based
on the size, sector, maturity of the company, and company specific
situation. See Mark Emanuel et al., Semler Brossy and the Conference
Board, Director Compensation Practices in the Russell 3000 and S&P
500 (2020 ed.), available at https://conferenceboard.esgauge.org/directorcompensation/report.
---------------------------------------------------------------------------

To reduce costs for companies that do not currently meet the
diversity objectives of Rule 5605(f)(2), Nasdaq is proposing to provide
listed companies that have not yet met their diversity objectives with
free access to a network of board-ready diverse candidates and a tool
to support board evaluation, benchmarking and refreshment. This
offering is designed to ease the search for diverse nominees and reduce
the costs on companies that choose to meet the diversity objectives of
Rule 5605(f)(2). Nasdaq is contemporaneously submitting a rule filing
to the Commission regarding the provision of such services. Nasdaq also
plans to publish FAQs on its Listing Center to provide guidance to
companies on the application of the proposed rules, and to establish a
dedicated mailbox for companies and their counsel to email additional
questions to Nasdaq regarding the application of the proposed rule.
Nasdaq believes that these services will

[[Page 80505]]

help to ease the compliance burden on companies whether they choose to
meet the listing rule's diversity objectives or provide an explanation
for not doing so.
Nasdaq also has structured the proposed rule to provide companies
with at least four years from the Approval Date to satisfy Rule
5605(f)(2) so that companies do not incur immediate costs striving to
meet the diversity objectives of Rule 5605(f)(2). Nasdaq also has
reduced the compliance burden on Smaller Reporting Companies and
Foreign Issuers by providing them with additional flexibility when
satisfying the requirement related to the second Diverse director.
Smaller Reporting Companies could satisfy the proposed diversity
objective to have two Diverse directors under Rule 5605(f)(2)(C) with
two Female directors. Like other companies, Smaller Reporting Companies
also could satisfy the second director objective by including an
individual who self-identifies as an Underrepresented Minority or a
member of the LGBTQ+ community. Foreign Issuers could satisfy the
second director objective by including another Female director, or an
individual who self-identifies as LGBTQ+ or an underrepresented
individual based on national, racial, ethnic, indigenous, cultural,
religious or linguistic identity in the company's home country
jurisdiction. Nasdaq has further reduced the compliance burdens on
companies listed on the Nasdaq Capital Market tier by providing them
with five years from the Approval Date to satisfy Rule 5605(f)(2),
recognizing that such companies may face additional challenges and
resource constraints when identifying additional director nominees who
self-identify as Diverse.
For the foregoing reasons, Nasdaq does not believe that proposed
Rule 5605(f) will impose any burden on competition among issuers that
is not necessary or appropriate in furtherance of the purposes of the
Act. Further, Nasdaq does not believe the proposed rule will impose any
burden on competition among listing exchanges. As described above,
Nasdaq competes with other exchanges globally for listings, including
exchanges based in jurisdictions that have implemented disclosure
requirements related to diversity. Within the United States, LTSE
requires listed companies to adopt and publish a long-term stakeholder
policy that explains, among other things, ``the Company's approach to
diversity and inclusion.'' \329\ Other listing venues within the United
States may propose to adopt rules similar to LTSE's requirements or the
Exchange's proposal if they believe companies would prefer to list on
an exchange with diversity-related listing standards.
---------------------------------------------------------------------------

\329\ See Long-Term Stock Exchange Rule Book, Rule 14.425.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2020-081 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2020-081. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2020-081, and should be submitted
on or before January 4, 2021.
---------------------------------------------------------------------------

\330\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\330\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27091 Filed 12-10-20; 8:45 am]
BILLING CODE 8011-01-P

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