Last month, Nasdaq obtained approval from the U.S. Securities and Exchange Commission (SEC) to require a new board diversity rule for public companies listed on its stock exchange.

According to a fact sheet issued by Nasdaq, the rule is intended to “encourage a minimum board diversity objective for companies and provide stakeholders with consistent, comparable disclosures concerning a company’s current board composition.”

The rule sets a new benchmark for corporate governance that employers everywhere should note. Below we outline what you need to know about the requirements and their far-reaching impacts.

Under the new rule’s Comply-or-Explain Provision, Nasdaq-listed organizations must diversify their boards with at least one female director and one director from an underrepresented minority or the LGBTQ+ community. In both cases, directors will self-identify these attributes.

Companies that don’t meet this requirement will be required to publicly explain why, either on their websites, proxy statements, or annual 10-K reports.

The new rule will also require that companies release board-level diversity statistics annually using a standardized template related to how directors self-identify their gender, race, and LGBTQ+ identification. The disclosure requirements take effect beginning August 8, 2022.

Certain types of companies have flexibility in satisfying the diversity rule, including:

  • Smaller Reporting Companies will be required to have two female directors, or one female director and one director who is an underrepresented minority or LGBTQ+.
  • Foreign Issuers will be required to have two female directors, or one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious, or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+.
  • Companies with five or fewer directors will be required to have at least one diverse director.
  • Special Purpose Acquisition Companies (SPAC) are exempt from the board diversity rule until their business combination is complete, but must comply with some reporting requirements.

According to The National Law Review, “Nasdaq filed a proposal for the new rules with the SEC last December, and then amended the proposal in February to, among other things, provide accommodations for smaller boards and newly listed companies.”

The SEC has taken steps in recent months to standardize environmental, societal, and governance (ESG) reporting with the rollout of a new risk alert, among other measures.

As investor interest in diversity, equity, and inclusion (DEI) mounts, Nasdaq’s decision to require diversity objectives in its listing rules comes as no surprise. 

Shareholders are increasingly looking for all public companies to advance equitable practices in their workplaces. Moreover, the decision reflects a growing focus on diverse representation in boardrooms and legislative discussions across the country. But corporate diversity is just one part of the equation. The Biden administration has made workplace fairness a priority, passing two executive orders this year aimed at promoting DEI in the federal workforce.

DEI requirements shouldn’t be seen as a limitation for companies, but as a way to expand opportunities for people from all backgrounds and tap into new perspectives and talents. Employers can get ahead of inevitable universal directives by taking preemptive actions in their organizations now.

Learn how your organization can be proactive and achieve its equity goals in our sponsored research report, Creating a Culture of Diversity, Equity, and Inclusion, conducted by Harvard Business Review Analytic Services.