NASDAQ's new progressive board diversity rules pave a path to better inclusivity: Osler lawyers

Exchange is 'revolutionary' in adding requirements or inclusivity beyond gender

NASDAQ's new progressive board diversity rules pave a path to better inclusivity: Osler lawyers
Jennifer Jeffrey and Andrew MacDougall of Osler Hoskin & Harcourt LLP

New rules compelling most NASDAQ issuers, including Canadian firms, to have at least two diverse directors on boards, including one female, will go a long way to paving a path for better inclusivity, say Osler Hoskin & Harcourt LLP lawyers Jennifer Jeffrey and Andrew MacDougall.

The new rules, approved by the Securities and Exchange Commission in August, are “truly revolutionary,” says Jeffrey, “in that it’s the first regulator in the world to mandate diversity beyond gender on public company boards.”

She points out that the introduction of the rules is to be staggered basis over the next four years, and the NASDAQ is providing additional support to help issuers recruit qualified diverse directors to their boards.

Under the new gender diversity disclosure, issuers on the NASDAQ must disclose the number of directors who self-identify as female, self-identify as male, self-identify as non-binary or do not wish to disclose their gender.

As for demographic disclosure, issuers other than foreign issuers must disclose the number of directors who fit into the following categories based on self-identification: African American or Black, Alaskan Native or Native American, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, two or more races or ethnicities, LGBTQ+, or did not disclose demographic background.

These are categories reported to the Equal Employment Opportunity Commission in the U.S. Issuers must include these categories but can add additional categories (such as disability) if they wish.

For foreign issuers, disclosure of demographic information will not be required to be broken down for each of the gender categories. However, the foreign issuer must disclose the number of directors in each of the following categories based on self-identification:

  • LGBTQ+;
  •  Underrepresented minority based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the issuer’s principal executive offices; 
  • And those who did not disclose demographic background.

NASDAQ does not provide further clarity to foreign issuers on what constitutes an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious, or linguistic identity. Issuers must include these categories but can add additional categories if they wish.

MacDougall says he had conversations with NASDAQ officials on why there is less specificity required of foreign issuers and was told that while Canada has similar diverse demographics to the United States, they are not identical. As well, foreign companies from other parts of the world who list on the NASDAQ may come from parts of the world where recognized categories of minorities may be very different from those identified in North America.

Says MacDougall: NASDAQ “deliberately recognized that there would be differences among foreign issuers with respect to this rule and provided flexibility to adjust the categories of would be an underrepresented group in that jurisdiction.”

While there are disclosure requirements for Toronto Stock Exchange (non-venture) issuers for women on boards and at the executive officer levels, MacDougall says there are generally no rules speaking to other aspects of diversity. One exception is companies subject to the Canada Business Corporations Act, which requires issuers to separately break out visible minorities, Indigenous peoples, and those with disabilities.

“But it’s important to note that we lump those minorities into just three categories,” he says. The new NASDAQ rules, at least for U.S.-based issuers, is far more granular than that.”

The new rules at NASDAQ will apply to all issuers on the exchange except for Special Purpose Acquisition Companies, asset-backed issuers and other passive issuers, limited partnerships, co-operatives, management investment companies, and issuers of securities listed under NASDAQ’s Rule 5700 Series.

As well, there are special provisions for foreign issuers and smaller reporting companies. A foreign issuer is a company incorporated or organized under the laws of any country outside of the United States and the principal executive offices located outside of the United States. A smaller reporting company is defined as an issuer that has a public float of less than US$250 million, or annual revenues of less than US$100 million and either (i) no public float or (ii) a public float of less than US$700 million.

For foreign issuers, including Canadian firms, if there are six or more board members, the issuer must disclose whether the board has at least one director who self-identifies as female, and at least one director who self-identifies as female, an underrepresented minority or is a member of the LGBTQ+ community.

Jeffrey points out that while the new rules will represent a higher hurdle to jump over in meeting diversity requirements, there is enough flexibility in how the rules are met to make it easier for companies, especially smaller ones, to get ready.

Smaller reporting companies, for example, must disclose whether the board has at least two diverse members, including at least one diverse director who self-identifies as female. The second diverse director may include an individual who self-identifies as female, LGBTQ+ or an underrepresented minority (or a combination).

With boards of five or fewer members, the issuer must disclose whether the board has at least one director who self-identifies as female, an underrepresented minority or LGBTQ+.

The requirements are being applied on a staggered basis. By Aug. 7, 2023, the board must include at least one “diverse” director who self-identifies as female, LGBTQ+, or an underrepresented minority, or the issuer must explain why it does not.

By Aug. 6, 2025, the board must satisfy the minimum diverse directors composition requirement, or the issuer must explain why it does not. For issuers listed on Nasdaq’s Capital Market, the board must include the second diverse director by Aug. 6, 2026, or the issuer must explain why it does not.

If in any calendar year an explanation as to why the board does not satisfy the minimum diverse directors composition requirement, the issuer can choose to include the disclosure in its proxy circular for that calendar year (or its Form 10-K or 20-F). Or it can post the disclosure on its website and provide a URL link to the disclosure through the Nasdaq Listing Center within one business day after posting.

Nasdaq will assess whether an issuer has a board that satisfies the applicable minimum diverse directors composition requirement or discloses why it does not. However, Nasdaq will not evaluate the merits of any explanation offered.

Newly listed issuers must satisfy NASDAQ that they comply with the diversity disclosure requirements within one year of listing on the exchange. They must also fulfill the diversity board requirements on a staggered basis within two years of listing or filing the proxy circular for their second annual meeting or explain why not. At least one diverse member must be appointed in the first year.

While it may take a few years for the rules to seep deep into the composition of boards, both MacDougall and Jeffrey say broadening the regulations to include more types of diversity helps drive inclusivity. Says Jeffrey: “It will likely mean better boards because they will consist of more diversity of thought and opinion.”

MacDougall adds: “It really reinforces the importance of encouraging diversity across multiple dimensions and across multiple characteristics that will add to the fundamental principles of good governance.”

He also notes that the new rules have prompted NASDAQ to help issuers prepare for compliance through offering access to free board recruiting services. It has partnerships with Equilar, Athena Alliance and Boardlist to help companies search for highly qualified, diverse and “board-ready” candidates.

Firms who want to list on exchanges such as NASDAQ should not be afraid of the requirements, and embrace it as a new opportunity, MacDougall says.

In Canada, Jeffrey points out, there are several organizations, such as Women in Capital Markets, that can help get those from underrepresented or diverse backgrounds “board ready.” However, both lawyers say that firms will have to broaden their network when looking for candidates that will increase inclusivity in the long run.

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