In December last year Nasdaq proposed changing its exchange rules in order to encourage the creation of more diverse boards and improve disclosure, and the US Securities and Exchange Commission approved the proposal on 6 August.
Adena Friedman, President and CEO of Nasdaq, said in a statement at the time: “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
Ratings agency Moody’s Investors Service said in a report that the regulatory approval is credit positive for Nasdaq and its listed firms because the rules will improve transparency and disclosure, as well as encourage board-level diversity and inclusive representation.
Moody’s said: “Access to high quality and consistent data is essential for ESG investing because of the data-driven nature of investment products such as diversity-specific and ESG indexes. A more detailed and consistent disclosure of board diversity data has the potential to be a valuable addition to Nasdaq’s suite of index products.”
The new rule requires most Nasdaq-listed companies to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+, or explain why they do not.
The SEC received more than 200 comment letters during the comment period for the rule change and nearly 85% of substantive letters supported the proposal according to Nasdaq. The most common theme for support was the enhancement in corporate governance, followed by enhancement in corporate performance (see graph).
Moody’s said: “In its proposal, Nasdaq indicated that it would be unable to provide definitive estimates on the number of affected companies following the proposed change because of inconsistent disclosures among companies, a gap that we believe this exchange rule will help address.”
The ratings agency continued that the new rules will take effect between two to five years, depending on the firms’ listing tiers, with a step-up starting by meeting the objective of one diverse board member within one year of SEC approval. Nasdaq has said that it did not expect companies to be delisted solely for choosing not to meet the minimum diverse director objective because companies have the option to provide an explanation instead.
©Markets Media Europe 2021
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