Inclusion, Equity, & Diversity Update – SEC Approves Nasdaq Rule on Board Diversity

As companies focus on workforce inclusion, equity, and diversity (IE&D), they are under increasing pressure to assure that the membership of their boards reflects these values. The Securities and Exchange Commission (SEC) recently approved a rule proposed by Nasdaq that requires companies listed on its exchange to meet certain minimum diversity targets on their boards or explain in writing why they are not doing so.  This “comply or explain” approach demands of corporations additional accountability for IE&D efforts, requiring them to navigate diversity and anti-discrimination considerations thoughtfully.

In the United States, implementing workforce quotas that mandate hiring on the basis of protected characteristics such as race, ethnicity, or gender is generally unlawful.  While the law encourages voluntary diversity efforts, they are subject to careful judicial scrutiny to ensure that they do not constitute unlawful “reverse” discrimination.  There has been an increase in investigations and related lawsuits as to whether diversity initiatives constitute unlawful discrimination.   

Implementing even an aspirational goal can run the risk that recruiters, human resource professionals or hiring managers will feel compelled to inappropriately inject criteria such as gender or minority status into their decisions. 

Evolving Trend: “Comply or Report”

The move toward mandating that women and individuals from underrepresented groups serve on boards is nevertheless picking up speed, particularly under state law.

For example, California requires that, by the end of 2021, publicly held corporations with principal executive offices in California have at least one board member “who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or … gay, lesbian, bisexual, or transgender.” That minimum increases in December 2022 to two if the corporation has five directors, and to three if the corporation has six or more directors.  Penalties may be assessed against corporations that fail to report or do not comply with these board diversity requirements.

Similarly, New York has enacted the “Women on Corporate Boards Study” law, requiring domestic and foreign corporations “authorized to do business” in the state to report the number of directors appointed to their board and the number of directors who are female.

While no U.S. state other than California currently mandates a minimum number of female directors, at least eleven other states have enacted or are considering board diversity legislation that require disclosures about diversity on boards or in senior management.

New Nasdaq IE&D Rule

Originally proposed in December 2020 and after significant public comment, the SEC announced its approval of Nasdaq’s board diversity rule on August 6, 2021. 

The rule as adopted by the SEC follows the “comply or explain” approach. It requires certain Nasdaq-listed companies to disclose annually aggregated statistical information about board members’ voluntarily disclosed, self-identified gender, race, ethnicity, and LGBTQ+ status, in a prescribed format provided by Nasdaq.  The information must be provided in a searchable format in the company’s proxy or information statement for its annual meeting of shareholders, in an Annual Report, or on the company’s website. If the information is provided on its website, the company must also submit the disclosure to the Nasdaq Listing Center no later than 15 calendar days after the company’s annual shareholders meeting.

The rule requires the companies to either include on their board of directors, or publicly disclose why their board does not include, a certain number of “diverse” directors.  The rule defines “diverse” as (1) a director who self-identifies her gender as female, without regard to the individual’s designated sex at birth, (2) a director who self-identifies as one more or of the following categories: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander (“underrepresented minority”), or two or more races or ethnicities, or (3) is lesbian, gay, bisexual, transgender or a member of the queer community (“LGBTQ+”).

The rule also permits Nasdaq to offer certain listed companies access to “a network of board-ready diverse candidates” to help them meet the Board Diversity Objective Rule.  Companies are not required to use the recruiting service, however, and Nasdaq will not penalize companies that choose not to do so.

Nasdaq has emphasized that the rule establishes a disclosure-based framework, and not a mandate or quota.  It sets forth “aspirational diversity objectives.”  Companies that fail to meet the objectives would need only explain why they do not.  In contrast with the California law, the rule does not require any particular board composition or require a company to select directors based on their minority status.

The rule requires most Nasdaq-listed companies, other than those the rule designates as exempt and those with boards consisting of five or fewer members, to have at least two self-identified “diverse” board members of their board of directors or explain why they do not.  At least one director must self-identify as female and at least one director must self-identify as an underrepresented minority and/or LGBTQ+. 

There are additional and different requirements for smaller companies and newly listed companies in different markets, and the rule includes a phase-in compliance period.  The rule also permits foreign issuers to note whether disclosure of the data required by the Board Diversity Disclosure Rule is prohibited under the company’s home country law.


In the United States, at least for the time being, adopting hiring or promotion quotas is generally unlawful in most instances.  While increasing legislative pressure on employers in choosing board members may change this dynamic, mandating hiring quotas would likely face strong legal challenge from groups that perceive it as unlawful reverse discrimination.

Rules and laws related to board diversity are being implemented because, although workforces have become more diverse, boards generally have not, and approaches organizations have taken in the past may need to change.  Making those changes will require balancing many considerations, including diversity goals and anti-discrimination laws. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.