In December, the NASDAQ  proposed new listing rules that—if implemented—would require companies to (i) disclose information about the diversity of their directors on an annual basis and (ii) have at least two diverse directors, or else provide an explanation why they do not.

By “diverse directors,” the rules contemplate “one [director] who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”  In turn, underrepresented minorities, as defined by the proposed rules, encompass as individuals who self-identify as: 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.

Companies have a significant runway before these rules would be implemented.  The current proposal is subject to a public comment period and must be approved by the SEC.  If approved, companies would then have: (a) one year to comply with the reporting requirement, and (b) two years to garner one director from an underrepresented group, or else explain their failure to do so.  The three tiers in the NASDAQ Stock Market will be given different time frames to comply.  Companies on the NASDAQ Global Select Market and NASDAQ Global Market would need two diverse directors within four years, while companies on the NASDAQ Capital Market would have five years to attain this benchmark.  Further, the rules incorporate allowances for small and foreign companies, permitting them to comply with the rules through two female directors on their Boards (as opposed to one who self-identifies as either an underrepresented minority or LGBTQ+).

These rules, if adopted, would represent the first rules, on a stock exchange or otherwise, requiring companies to retain diverse board members.  On a broader scale, they could also herald a shift towards the manifestation of ESG priorities into formal law.  While legislation and regulation to this end could lead to novel compliance issues for companies, it could also provide much needed clarity and codify where de facto ESG liability already exits.