By Amanda Maine, J.D.
The Council of Institutional Investors (CII) has written to the SEC in support of Nasdaq’s proposed board diversity rule, including recently filed amendments to Nasdaq’s original proposal. According to CII, the proposed rule and amendments reflect CII’s commitment to board diversity and to company disclosure and transparency. The amendments to the original proposal do not change CII’s analysis of Nasdaq’s proposed rule, which CII had endorsed in a December 2020 letter to the SEC.
Proposed board diversity rule. Nasdaq filed its initial rule proposal on December 1, 2020. Under that proposal, companies listed on Nasdaq would be required to (subject to certain exceptions): (1) provide statistical information regarding diversity among the members of the company’s board of directors; and (2) have at least two "diverse" directors on its board or give reasons why it does not have two diverse directors. CII wrote to the SEC expressing its general support for the proposed diversity board rule, providing analysis to back up its support for board diversity.
The proposal also drew support from other industry groups, including the U.S. Chamber of Commerce, which praised the proposal but also urged that the interests of smaller companies such as emerging growth companies and startups be taken into account and be allowed flexibility in implementing the proposed rule.
Opposition to proposed rule. Nasdaq’s proposed rule drew ire from Republican members of the Senate Banking Committee, however. In a letter to Acting SEC Chair Allison Herren Lee, the senators urged the Commission to block the proposed rule, stating that the rule interferes with a board’s duty to follow its legal obligations to govern in the best interest of the corporation and its shareholders. The letter also asserted that the rule would impose unnecessary regulatory costs on companies, which would decrease the incentive for companies to go public in the U.S.
Amendments to proposed rule. Nasdaq has filed amendments to its original proposed rule. The amendments would add a defined term for "two or more races or ethnicities"; modify the application of the proposed rule to foreign private issuers; provide a lower diversity objective for companies with five or fewer members on their board; provide grace periods for boards that no longer meet the proposed criteria due to a board vacancy; modify effective dates and transition periods; and provide additional justification and support for the proposed rule.
CII steadfast in support. In its follow-up letter to the SEC on Nasdaq’s proposed board diversity rule, CII outlined its own polices that support board diversity and transparency in public company disclosures. Regarding board diversity, CII declared that a diverse board has benefits that can enhance corporate financial performance, and boards should take into account considerations such as background, experience, age, race, gender, ethnicity, and culture. CII also stated that its policies on company disclosure encourage materiality; advocate empirical evidence supporting the connection between disclosures and long-term shareholder value; and embrace increased transparency, comparability, reliability, and accuracy.
With these policies in mind, CII reiterated its support of Nasdaq’s proposed rule change, including the new amendments. While acknowledging that Nasdaq’s proposed definition of diversity is narrower than CII’s own policy, it still believes that the amendments would improve transparency and comparability of disclosure across companies. Investors, CII proclaimed, can use this transparency and comparability to make better-informed investment and voting decisions.
CII also stated that the proposed amendments sufficiently encompass the organization’s views on company disclosures. Supported by a pair of lengthy footnotes in its letter, CII said that the proposed diversity disclosures would protect investors who view information related to board diversity as material to their investment decisions. "There is an extensive body of empirical research demonstrating that diverse boards are positively associated with improved corporate governance and company performance," according to CII, citing Nasdaq’s own reasoning for the proposed rule change.
In addition, CII agreed with Nasdaq that the proposed rule change would result in a "de minimis time and economic burden" on companies to collect and disclose diversity statistical data, but that this burden would be counterbalanced by the benefits the information would provide to the company’s investors.
For these reasons, as well as the reasons outlined in its initial letter of support, CII urged the Commission to approve Nasdaq’s proposal, including the amendments.