Over the last few weeks, we have seen a flurry of activity concerning diversity in the boardroom. The Nasdaq Stock Market LLC (Nasdaq) proposed to the Securities and Exchange Commission (SEC) a new diversity rule and proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis each announced expanded diversity proxy voting guidelines. These developments continue a trend of increased investor focus on board diversity.

Nasdaq Proposes Diversity Requirement

Nasdaq filed a proposal this week that, if approved by the SEC (subject to certain exceptions), would ultimately require boards of Nasdaq-listed companies to have at least two diverse directors, consisting of at least one director whose self-identified gender is female and at least one director who self-identifies as either an underrepresented minority or LGBTQ+ (in each case as defined in the proposal).

If approved by the SEC, all Nasdaq-listed companies would be required to disclose certain statistical information regarding the diversity of their boards within one year of approval by the SEC (the Effective Date) and have at least one diverse director within two years of the Effective Date. Additionally, companies listed on the Nasdaq Global Select or Global Market tiers would be required to have at least two diverse directors within four years of the Effective Date and companies listed on the Nasdaq Capital Market would have to meet the same requirement within five years of the Effective Date. Companies failing to meet applicable requirements would have to provide to Nasdaq an explanation of their non-compliance. According to Nasdaq’s study, currently, more than 75% of its listed companies would not meet the requirements set forth under the proposed rule.

It is unclear whether the SEC will approve the proposed rule and if other national securities exchanges such as the New York Stock Exchange will follow suit.

ISS Issues New Racial/Ethnic Proxy Voting Guideline

ISS announced in November a new proxy voting guideline concerning racial and/or ethnic diversity. For the 2021 proxy season, ISS will highlight boards of Russell 3000 or S&P 1500 companies with no apparent racial and/or ethnic diversity. Beginning with the 2022 proxy season, ISS will generally vote against or withhold votes from chairs of nominating committees (or other directors on a case-by-case basis) of such companies whose boards have no apparent racially or ethnically diverse members. However, exceptions are possible if the board was racially or ethnically diverse at the time of the preceding annual meeting and the board makes a firm commitment to appoint a racially or ethnically diverse member within a year. Notably, ISS will only consider aggregate diversity statistics provided by the board if those statistics are specific to racial and/or ethnic diversity.

ISS Gender Diversity Proxy Voting Guideline Effective for 2021

As a reminder, beginning with the 2021 proxy season, ISS will generally vote against or withhold votes from chairs of nominating committees (or other directors on a case-by-case basis) of Russell 3000 or S&P 1500 companies where there are no women serving on the board, though exceptions are possible if a woman served on the board at the preceding annual meeting and the board makes a firm commitment to appoint a woman within a year.

Glass Lewis Issues Expanded Diversity Proxy Voting Guideline

Glass Lewis also announced in November an expanded diversity proxy voting guideline. Under the revised guideline, Glass Lewis in 2021 will note as a concern boards who have fewer than two female members and, beginning with the 2022 proxy season, Glass Lewis will generally recommend voting against chairs of nominating committees whose boards have fewer than two women or, for boards consisting of six or fewer members, one woman, and, in each case, Glass Lewis may refrain from such recommendation where the board has provided sufficient rationale or disclosed a plan to address the lack of diversity on the board.

Furthermore, for the 2021 proxy season and beyond, Glass Lewis will begin tracking the quality of a company’s proxy statement disclosures concerning the following matters:

  1. The board’s current percentage of racial/ethnic diversity.
  2. Whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity.
  3. Whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (i.e., “Rooney Rule”).
  4. Board skills disclosure.

These assessments will be included in proxy reports for S&P 500 companies beginning in 2021 and may be a contributing factor in Glass Lewis’ voting recommendations when other board-related concerns exist.

If you have any questions regarding any of the topics covered in this blog post, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.

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