[Federal Register Volume 85, Number 239 (Friday, December 11, 2020)]
[Notices]
[Pages 80472-80505]
[FR Doc No: 2020-27091]

Vol. 85

Friday,

No. 239

December 11, 2020

Part V

Securities and Exchange Commission

-----------------------------------------------------------------------

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of
Filing of Proposed Rule Change To Adopt Listing Rules Related to Board
Diversity; Notice

Federal Register / Vol. 85 , No. 239 / Friday, December 11, 2020 /
Notices

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90574; File No. SR-NASDAQ-2020-081]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt Listing Rules Related
to Board Diversity

December 4, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 1, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to adopt listing rules related to board
diversity, as described in more detail below:
    (i) To adopt Rule 5605(f) (Diverse Board Representation), which
would require Nasdaq-listed companies, subject to certain exceptions,
(A) to have at least one director who self-identifies as a female, and
(B) to have at least one director who self-identifies as Black or
African American, Hispanic or Latinx, Asian, Native American or Alaska
Native, Native Hawaiian or Pacific Islander, two or more races or
ethnicities, or as LGBTQ+, or (C) to explain why the company does not
have at least two directors on its board who self-identify in the
categories listed above;
    (ii) to adopt Rule 5606 (Board Diversity Disclosure), which would
require Nasdaq-listed companies, subject to certain exceptions, to
provide statistical information in a proposed uniform format on the
company's board of directors related to a director's self-identified
gender, race, and self-identification as LGBTQ+; and
    (iii) to update Rule 5615 and IM-5615-3 (Foreign Private Issuers)
and Rule 5810(c) (Types of Deficiencies and Notifications) to
incorporate references to proposed Rule 5605(f) and Rule 5606; and
    (iv) to make certain other non-substantive conforming changes.
    The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
I. The Diversity Imperative for Corporate Boards
    Over the past year, the social justice movement has brought
heightened attention to the commitment of public companies to diversity
and inclusion. Controversies arising from corporate culture and human
capital management challenges, as well as technology-driven changes to
the business landscape, already underscored the need for enhanced board
diversity--diversity in the boardroom is good corporate governance. The
benefits to stakeholders of increased diversity are becoming more
apparent and include an increased variety of fresh perspectives,
improved decision making and oversight, and strengthened internal
controls. Nasdaq believes that the heightened focus on corporate board
diversity by companies,\3\ investors,\4\ corporate governance
organizations,\5\ and legislators \6\ demonstrates that investor
confidence is enhanced when boardrooms are comprised of more than one
demographic group. Nasdaq has also observed recent calls from SEC
commissioners \7\ and investors \8\ for

companies to provide more transparency regarding board diversity.
---------------------------------------------------------------------------

    \3\ See Deloitte and the Society for Corporate Governance, Board
Practices Quarterly: Diversity, equity, and inclusion (Sept. 2020),
available at: https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/diversity-equity-and-inclusion.html
(finding, in a survey of over 200 companies, that ``most companies
and/or their boards have taken, or intend to take, actions in
response to recent events surrounding racial inequality and
inequity; 71% of public companies and 65% of private companies
answered this question affirmatively'').
    \4\ See ISS Governance, 2020 Global Benchmark Policy Survey,
Summary of Results 6 (Sept. 24, 2020), available at: https://www.issgovernance.com/wp-content/uploads/publications/2020-iss-policy-survey-results-report-1.pdf (finding that ``a significant
majority of investors (61 percent) indicated that boards should aim
to reflect the company's customer base and the broader societies in
which they operate by including directors drawn from racial and
ethnic minority groups'').
    \5\ See International Corporate Governance Network, ICGN
Guidance on Diversity on Boards 5 (2016), available at: https://www.icgn.org/sites/default/files/ICGN%20Guidance%20on%20Diversity%20on%20Boards%20-%20Final.pdf
(``The ICGN believes that diversity is a core attribute of a well-
functioning board which supports greater long-term value for
shareholders and companies.'').
    \6\ See, e.g., John J. Cannon et al., Sherman & Sterling LLP,
Washington State Becomes Next to Mandate Gender Diversity on Boards
(May 28, 2020), available at: https://www.shearman.com/perspectives/2020/05/washington-state-becomes-next-to-mandate-gender-diversity-on-boards; Cal. S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30,
2020) (California legislation requiring companies headquartered in
the state to have at least one director who self-identifies as a
Female and one from an Underrepresented Community).
    \7\ See Commissioner Allison Herren Lee, Regulation S-K and ESG
Disclosures: An Unsustainable Silence (Aug. 26, 2020), available at:
https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26#_ftnref15 (``There is ever-growing recognition of the
importance of diversity from all types of investors . . . [a]nd
large numbers of commenters on this [SEC] rule proposal emphasized
the need for specific diversity disclosure requirements.''); see
also Commissioner Caroline Crenshaw, Statement on the
``Modernization'' of Regulation S-K Items 101, 103, and 105 (August
26, 2020), available at: https://www.sec.gov/news/public-statement/crenshaw-statement-modernization-regulation-s-k (``As Commissioner
Lee noted in her statement, the final [SEC] rule is also silent on
diversity, an issue that is extremely important to investors and to
the national conversation. The failure to grapple with these issues
is, quite simply, a failure to modernize.''); Mary Jo White, Keynote
Address, International Corporate Governance Network Annual
Conference: Focusing the Lens of Disclosure to Set the Path Forward
on Board Diversity, Non-GAAP, and Sustainability (June 27, 2016),
available at: https://www.sec.gov/news/speech/chair-white-icgn-speech.html (``Companies' disclosures on board diversity in
reporting under our current requirements have generally been vague
and have changed little since the rule was adopted . . . Our lens of
board diversity disclosure needs to be re-focused in order to better
serve and inform investors.'').
    \8\ See Vanguard, Investment Stewardship 2019 Annual Report
(2019), available at: https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2019_investment_stewardship_annual_report.pdf (``We want companies
to disclose the diversity makeup of their boards on dimensions such
as gender, age, race, ethnicity, and national origin, at least on an
aggregate basis.''); see also State Street Global Advisors,
Diversity Strategy, Goals & Disclosure: Our Expectations for Public
Companies (Aug. 27, 2020) https://www.ssga.com/us/en/individual/etfs/insights/diversity-strategy-goals-disclosure-our-expectations-for-public-companies (announcing expectation that State Street's
portfolio companies (including US companies ``and, to the greatest
extent possible, non-US companies'') provide board level
``[d]iversity characteristics, including racial and ethnic makeup,
of the board of directors'').
---------------------------------------------------------------------------

    Nasdaq conducted an internal study of the current state of board
diversity among Nasdaq-listed companies based on public disclosures,
and found that while some companies already have made laudable progress
in diversifying their boardrooms, the national market system and the
public interest would best be served by an additional regulatory
impetus for companies to embrace meaningful and multi-dimensional
diversification of their boards. It also found that current reporting
of board diversity data was not provided in a consistent manner or on a
sufficiently widespread basis. As such, investors are not able to
readily compare board diversity statistics across companies.
    Accordingly, Nasdaq is proposing to require each of its listed
companies, subject to certain exceptions, to: (i) Provide statistical
information regarding diversity among the members of the company's
board of directors under proposed Rule 5606; and (ii) have, or explain
why it does not have, at least two ``Diverse'' directors on its board
under proposed rule 5605(f)(2). ``Diverse'' means a director who self-
identifies as: (i) Female, (ii) an Underrepresented Minority, or (iii)
LGBTQ+. Each listed company must have, or explain why it does not have,
at least one Female director and at least one director who is either an
Underrepresented Minority or LGBTQ+. Foreign Issuers (including Foreign
Private Issuers) and Smaller Reporting Companies, by contrast, have
more flexibility and may satisfy the requirement by having two Female
directors. ``Female'' means an individual who self-identifies her
gender as a woman, without regard to the individual's designated sex at
birth. ``Underrepresented Minority'' means, consistent with the
categories reported to the Equal Employment Opportunity Commission
(``EEOC'') through the Employer Information Report EEO-1 Form (``EEO-1
Report''), an individual who self-identifies as one or more of the
following: Black or African American, Hispanic or Latinx, Asian, Native
American or Alaska Native, Native Hawaiian or Pacific Islander, or Two
or More Races or Ethnicities. ``LGBTQ+'' means an individual who self-
identifies as any of the following: Lesbian, gay, bisexual, transgender
or a member of the queer community.
    Under proposed Rule 5606, Nasdaq proposes to provide each company
with one calendar year from the date that the Commission approves this
proposal (the ``Approval Date'') to comply with the requirement for
statistical information regarding diversity. Under proposed Rule
5605(f)(2), no later than two calendar years after the Approval Date,
each company must have, or explain why it does not have, one Diverse
director. Further, each company must have, or explain why it does not
have, two Diverse directors no later than: (i) Four calendar years
after the Approval Date for companies listed on the Nasdaq Global
Select or Global Market tiers; or (ii) five calendar years after the
Approval Date for companies listed on the Nasdaq Capital Market tier.
    Nasdaq undertook extensive research and analysis and has concluded
that the proposal will fulfill the objectives of the Act in that it is
designed to remove impediments to and perfect the mechanism of a free
and open market and a national market system, to prevent fraudulent and
manipulative acts and practices, and to protect investors and the
public interest. In addition to conducting its own internal analysis as
described above, Nasdaq reviewed a substantial body of third-party
research and interviewed leaders representing a broad spectrum of
market participants and other stakeholders to:
     Determine whether empirical evidence demonstrates an
association between board diversity, shareholder value, investor
protection and board decision-making;
     understand investors' interest in, and impediments to
obtaining, information regarding the state of board diversity at public
companies;
     review the current state of board diversity and
disclosure, both among Nasdaq-listed companies and more broadly within
the U.S.;
     gain a better understanding of the causes of
underrepresentation on boards;
     obtain the views of leaders representing public companies,
investment banks, corporate governance organizations, investors,
regulators and civil rights groups on the value of more diverse
corporate boards, and on various approaches to encouraging more
diversity on corporate boards; and
     evaluate the success of approaches taken by exchanges,
regulators, and governments in both the U.S. and foreign jurisdictions
to remedy underrepresentation on boards.
    While gender diversity has improved among U.S. company boards in
recent years, the pace of change has been gradual, and the U.S. still
lags behind other jurisdictions that have imposed requirements related
to board diversity. Moreover, progress toward bringing underrepresented
racial and ethnic groups into the boardroom has been even slower.
Nasdaq is unable to provide definitive estimates regarding the number
of listed companies that will be affected by the proposal due to the
inconsistent disclosures and definitions of diversity across companies
and the extremely limited disclosure of race and ethnicity
information--an information gap the proposed rule addresses. Based on
the limited information that is available, Nasdaq believes a
supermajority of listed companies have made notable strides to improve
gender diversity in the boardroom and have at least one woman on the
board. Nasdaq also believes that listed companies are diligently
working to add directors with other diverse attributes, although
consistent with other studies of U.S. companies, Nasdaq believes the
pace of progress, in this regard, is happening more gradually. While
studies suggest that current candidate selection processes may result
in diverse candidates being overlooked, Nasdaq also believes that the
lack of reliable and consistent data creates a barrier to measuring and
improving diversity in the boardroom.
    Nasdaq reviewed dozens of empirical studies and found that an
extensive body of academic research demonstrates that diverse boards
are positively associated with improved corporate governance and
financial performance. For example, as discussed in detail below in
Section II, Academic Research: The Relationship between Diversity and
Shareholder Value, Investor Protection and Decision Making, studies
have found that companies with gender-diverse boards or audit
committees are associated with: More transparent public disclosures and
less information asymmetry; better reporting discipline by management;
a lower likelihood of manipulated earnings through earnings management;
an increased likelihood of voluntarily disclosing forward-looking
information; a lower likelihood of receiving audit qualifications due
to errors, non-compliance or omission of information; and a lower
likelihood of securities fraud. In addition, studies found that having
at least one woman on the board is associated with a lower likelihood
of material weaknesses in internal control over financial reporting and
a lower likelihood of material financial restatements. Studies also
identified positive relationships between board diversity and commonly
used financial metrics, including higher returns on invested capital,
returns on equity, earnings per share, earnings before interest and
taxation margin, asset valuation multiples and credit ratings.

    Nasdaq believes there are additional compelling reasons to support
the diversification of company boards beyond a link to improved
corporate governance and financial performance:
     Investors are calling in greater numbers for
diversification of boardrooms. Vanguard, State Street Advisors,
BlackRock, and the NYC Comptroller's Office include board diversity
expectations in their engagement and proxy voting guidelines.\9\ The
heightened investor focus on corporate diversity and inclusion efforts
demonstrates that investor confidence is undermined when a company's
boardroom is homogenous and when transparency about such efforts is
lacking. Investors frequently lack access to information about
corporate board diversity that could be material to their decision
making, and they might divest from companies that fail to take into
consideration the demographics of their corporate stakeholders when
they refresh their boards. Nasdaq explores these investor sentiments in
Section III, Current State of Board Diversity and Causes of
Underrepresentation on Boards.
---------------------------------------------------------------------------

    \9\ Vanguard announced in 2020 it would begin asking companies
about the race and ethnicity of directors. See Vanguard, Investment
Stewardship 2020 Annual Report (2020), available at: https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2020_investment_stewardship_annual_report.pdf. Starting
in 2020, State Street Global Advisors will vote against the entire
nominating committee of companies that do not have at least one
woman on their boards and have not addressed questions on gender
diversity within the last three years. See State Street Global
Advisors, Summary of Material Changes to State Street Global
Advisors' 2020 Proxy Voting and Engagement Guidelines (2020),
available at: https://www.ssga.com/library-content/pdfs/global/proxy-voting-and-engagement-guidelines.pdf. Beginning in 2018,
BlackRock stated in proxy voting guidelines they ``would normally
expect to see at least 2 women directors on every board.'' See
BlackRock Investment Stewardship, Corporate governance and proxy
voting guidelines for U.S. securities (Jan. 2020), available at:
https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf. The NYC Comptroller's
Office in 2019 asked companies to adopt policies to ensure women and
people of color are on the initial list for every open board seat.
See Scott M. Stringer, Remarks at the Bureau of Asset Management
`Emerging Managers and MWBE Managers Conference (Oct. 11, 2019),
available at: https://comptroller.nyc.gov/wp-content/uploads/2019/10/10.11.19-SMS-BAM-remarks_distro.pdf.
---------------------------------------------------------------------------

     Nasdaq believes, consistent with SEC disclosure
requirements in other contexts,\10\ that management's vision on key
issues impacting the company should be communicated with investors in a
clear and straightforward manner. Indeed, transparency is the bedrock
of federal securities laws regarding disclosure, and this sentiment is
reflected in the broad-based support for uniform disclosure
requirements regarding board diversity that Nasdaq observed during the
course of its outreach to the industry. In addition, organizational
leaders representing every category of corporate stakeholders Nasdaq
spoke with (including business, investor, governance, regulatory and
civil rights communities) were overwhelmingly in favor of diversifying
boardrooms. Nasdaq summarizes the findings of its stakeholder outreach
in Section IV, Stakeholder Perspectives.
---------------------------------------------------------------------------

    \10\ See Commission Guidance Regarding Management's Discussion
and Analysis of Financial Condition and Results of Operations, 68 FR
75,056 (Dec. 29, 2003) (``We believe that management's most
important responsibilities include communicating with investors in a
clear and straightforward manner. MD&A is a critical component of
that communication. The Commission has long sought through its
rules, enforcement actions and interpretive processes to elicit MD&A
that not only meets technical disclosure requirements but generally
is informative and transparent.''); see also Management's Discussion
and Analysis, Selected Financial Data, and Supplementary Financial
Information, Release No. 33-10890 (Nov. 19, 2020) (citing the 2003
MD&A Interpretative Release and stating that the purpose of the MD&A
section is to enable investors to see a company ``through the eyes
of management'').
---------------------------------------------------------------------------

     Legislators at the federal and state level increasingly
are taking action to encourage or mandate corporations to diversify
their boards and improve diversity disclosures. Congress currently is
considering legislation requiring each SEC-registered company to
provide board diversity statistics and disclose whether it has a board
diversity policy. To date, eleven states have passed or proposed
legislation related to board diversity.\11\ SEC regulations require
companies to disclose whether diversity is considered when identifying
director nominees and, if so, how. Nasdaq explores various state and
federal initiatives in Section V, U.S. Regulatory Framework and Section
VI, Nasdaq Proposal.
---------------------------------------------------------------------------

    \11\ See Michael Hatcher and Weldon Latham, States are Leading
the Charge to Corporate Boards: Diversify!, Harv. L. Sch. Forum on
Corp. Governance (May 12, 2020), available at: https://corpgov.law.harvard.edu/2020/05/12/states-are-leading-the-charge-to-corporate-boards-diversify/.
---------------------------------------------------------------------------

    In considering the merits and shaping the substance of the proposed
listing rule, Nasdaq also sought and received valuable input from
corporate stakeholders. During those discussions, Nasdaq found
consensus across every constituency in the inherent value of board
diversity. Business leaders also expressed concern that companies--and
particularly smaller companies--would prefer an approach that allows
flexibility to comply in a manner that fits their unique circumstances
and stakeholders. Nasdaq recognizes that the operations, size, and
current board composition of each Nasdaq-listed company are unique, and
Nasdaq therefore endeavored to provide a regulatory impetus to enhance
board diversity that balances the need for flexibility with each
company's particular circumstances.
    The Exchange also considered the experience of its parent company,
Nasdaq, Inc., as a public company.12 In 2002, Nasdaq, Inc.
met the milestone of welcoming its first woman, Mary Jo White, who
later served as SEC Chair, to its board of directors. In her own words,
``I was the first and only woman to serve on the board when I started,
but, happily, I was joined by another woman during my tenure . . . And
then there were two. Not enough, but better than one.'' \13\ In 2019,
Nasdaq, Inc. also welcomed its first Black director. As a Charter
Pledge Partner of The Board Challenge, Nasdaq supports The Board
Challenge's goal of ``true and full representation on all boards of
directors.'' \14\
---------------------------------------------------------------------------

    \12\ While the Exchange recognizes that it is only one part of
an ecosystem in which multiple stakeholders are advocating for board
diversity, that part is meaningful: The United Nations Sustainable
Stock Exchanges Initiative, of which Nasdaq, Inc., is an official
supporter, recognized that ``[s]tock exchanges are uniquely
positioned to influence their market in a way few other actors
can.'' See United Nations Sustainable Stock Exchanges Initiative,
How Stock Exchanges Can Advance Gender Equality 2 (2017), available
at: https://sseinitiative.org/wp-content/uploads/2019/12/How-stock-exchanges-can-advance-gender-equality.pdf.
    \13\ See Mary Jo White, Completing the Journey: Women as
Directors of Public Companies (Sept. 16, 2014), available at:
https://www.sec.gov/news/speech/2014-spch091614-mjw#.VBiLMhaaXDo.
    \14\ See The Board Challenge, https://theboardchallenge.org/.
See also Nasdaq, Inc., Notice of 2020 Annual Meeting of Shareholders
and Proxy Statement 52 (Mar. 31, 2020), available at: https://ir.nasdaq.com/static-files/ce5519d4-3a0b-48ac-8441-5376ccbad4e5
(Nasdaq, Inc. believes that ``[d]iverse backgrounds lead to diverse
perspectives. We are committed to ensuring diverse backgrounds are
represented on our board and throughout our organization to further
the success of our business and best serve the diverse communities
in which we operate.'').
---------------------------------------------------------------------------

    As a self-regulatory organization, Nasdaq also is cognizant of its
role in advancing diversity within the financial industry, as outlined
in the Commission's diversity standards issued pursuant to Section 342
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (``Standards'').15 Authored jointly by the Commission
and five other financial regulators, the Standards seek to provide a
framework for exchanges and financial services organizations ``to
create and strengthen

[their] diversity policies and practices.'' Through these voluntary
Standards, the Commission and other regulators ``encourage each entity
to use the[ ] Standards in a manner appropriate to its unique
characteristics.'' \16\ To that end, the proposed rule leverages the
Exchange's unique ability to influence corporate governance in
furtherance of the goal of Section 342, which is to address the lack of
diversity in the financial services industry.\17\ Finally, while the
Exchange recognizes the importance of maximizing shareholder value, its
role as a listing venue is to establish and enforce substantive
standards that promote investor protection. As a self-regulatory
organization, the Exchange must demonstrate to the Commission that any
proposed rule is consistent with Section 6(b) of the Act because, among
other things, it is designed to protect investors, promote the public
interest, prevent fraudulent and manipulative acts and practices, and
remove impediments to the mechanism of a free and open market. The
Exchange must also balance promoting capital formation, efficiency, and
competition, among other things, alongside enhancing investor
confidence.
---------------------------------------------------------------------------

    \15\ See Final Interagency Policy Statement Establishing Joint
Standards for Assessing the Diversity Policies and Practices of
Entities Regulated by the Agencies, 80 FR 33,016 (June 10, 2015).
    \16\ Id. at 33,023.
    \17\ 156 Cong. Rec. H5233-61 (June 30, 2010).
---------------------------------------------------------------------------

    With these objectives in mind, Nasdaq believes that a listing rule
designed to enhance transparency related to board diversity will
increase consistency and comparability of information across Nasdaq-
listed companies, thereby increasing transparency and decreasing
information collection costs. Nasdaq further believes that a listing
rule designed to encourage listed companies to increase diverse
representation on their boards will result in improved corporate
governance, thus strengthening the integrity of the market, enhancing
capital formation, efficiency, and competition, and building investor
confidence. To the extent a company chooses not to meet the diversity
objectives of Rule 5605(f)(2), Nasdaq believes that the proposal will
provide investors with additional transparency through disclosure
explaining the company's reasons for not doing so. For example, the
company may choose to disclose that it does not meet the diversity
objectives of Rule 5605(f)(2) because it is subject to an alternative
standard under state or foreign laws and has chosen to meet that
standard instead, or has a board philosophy regarding diversity that
differs from the diversity objectives set forth in Rule 5605(f)(2).
Nasdaq believes that such disclosure will improve the quality of
information available to investors who rely on this information to make
informed investment and voting decisions, thereby promoting capital
formation and efficiency.
    Nasdaq observed that studies suggest that certain groups may be
underrepresented on boards because the traditional director nomination
process is limited by directors looking within their own social
networks for candidates with previous C-suite experience.18
Leaders from across the spectrum of stakeholders with whom Nasdaq spoke
reinforced the notion that if companies recruit by skill set and
expertise rather than title, they will find there is more than enough
diverse talent to satisfy demand. In order to assist companies that
strive to meet the diversity objectives of Rule 5605(f)(2), Nasdaq is
proposing to provide listed companies that have not yet met its
diversity objectives with free access to a network of board-ready
diverse candidates and a tool to support board evaluation, benchmarking
and refreshment. Nasdaq is contemporaneously submitting a rule filing
to the Commission regarding the provision of such services. Nasdaq also
plans to publish FAQs on its Listing Center to provide guidance to
companies on the application of the proposed rules, and to establish a
dedicated mailbox for companies and their counsel to email additional
questions to Nasdaq regarding the application of the proposed rule.
Nasdaq believes that these services will help to ease the compliance
burden on companies whether they choose to meet the listing rule's
diversity objectives or provide an explanation for not doing so.
---------------------------------------------------------------------------

    \18\ See infra Section III.
---------------------------------------------------------------------------

II. Academic Research: The Relationship Between Diversity and
Shareholder Value, Investor Protection and Decision Making

    A company's board of directors plays a critical role in formulating
company strategy; appointing, advising and overseeing management; and
protecting investors. Nasdaq has recognized the importance of varied
perspectives on boards since 2003, when the Exchange adopted a listing
rule intended to enhance investor confidence by requiring listed
companies, subject to certain exceptions and cure periods, to have a
majority independent board.\19\ Accompanying the rule are interpretive
materials recognizing that independent directors ``play an important
role in assuring investor confidence. Through the exercise of
independent judgment, they act on behalf of investors to maximize
shareholder value in the Companies they oversee and guard against
conflicts of interest.'' \20\
---------------------------------------------------------------------------

    \19\ See Nasdaq Stock Market Rulebook, Rules 5605(b), 5615(a),
and 5605(b)(1)(A).
    \20\ Id., IM-5605-1 (emphasis added).
---------------------------------------------------------------------------

a. Diversity and Shareholder Value
    There is a significant body of research suggesting a positive
association between diversity and shareholder value.\21\ In the words
of SEC Commissioner Allison Herren Lee: ``to the extent one seeks
economic support for diversity and inclusion (instead of requiring
economic support for the lack of diversity and exclusion), the evidence
is in.'' \22\
---------------------------------------------------------------------------

    \21\ Some companies recently have expressed the belief that a
company must consider the impact of its activities on a broader
group of stakeholders beyond shareholders. See Business Roundtable,
Statement on the Purpose of a Corporation (Aug. 19, 2019), available
at: https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf. Commentators
articulated this view as early as 1932. See E. Merrick Dodd, Jr.,
For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145,
1153 (1932).
    \22\ See Commissioner Allison Herren Lee, Diversity Matters,
Disclosure Works, and the SEC Can Do More: Remarks at the Council of
Institutional Investors Fall 2020 Conference (September 22, 2020),
available at: https://www.sec.gov/news/speech/lee-cii-2020-conference-20200922.
---------------------------------------------------------------------------

    The Carlyle Group (2020) found that its portfolio companies with
two or more diverse directors had average earnings growth of 12.3% over
the previous three years, compared to 0.5% among portfolio companies
with no diverse directors, where diverse directors were defined as
female, Black, Hispanic or Asian.\23\ ``After controlling for industry,
fund, and vintage year, companies with diverse boards generate earnings
growth that's five times faster, on average, with each diverse board
member associated with a 5% increase in annualized earnings growth.''
\24\
---------------------------------------------------------------------------

    \23\ See Jason M. Thomas and Megan Starr, The Carlyle Group,
Global Insights: From Impact Investing to Investing for Impact 5
(Feb. 24, 2020), available at: https://www.carlyle.com/sites/default/files2020-02/From%20Impact%20Investing%20to%20Investing%20for%20Impact_022420.pdf
(analyzing Carlyle U.S. portfolio company data, February 2020).
    \24\ Id.
---------------------------------------------------------------------------

    Several other studies also found a positive association between
diverse boards and company performance. FCLTGlobal (2019) found that
``the most diverse boards (top 20 percent) added 3.3 percentage points
to [return on invested capital], as compared to their least diverse
peers (bottom 20 percent).'' \25\ McKinsey (2015) found

that ``companies in the top quartile for racial/ethnic diversity were
35 percent more likely to have financial returns above their national
industry median.'' \26\ Carter, Simkins and Simpson (2003) found among
Fortune 1000 companies ``statistically significant positive
relationships between the presence of women or minorities on the board
and firm value.'' \27\ Bernile, Bhagwat and Yonker (2017) found that
greater diversity on boards--including gender, ethnicity, educational
background, age, financial expertise and board experience--is
associated with increased operating performance, higher asset valuation
multiples, lower stock return volatility, reduced financial leverage,
increased dividend payouts to shareholders, higher investment in R&D
and better innovation.\28\ The authors observed that ``[t]his is in
line with the results in Carter, Simkins, and Simpson (2003), which
show a positive association between local demographic diversity and
firm value.'' \29\
---------------------------------------------------------------------------

    \25\ See FCLTGlobal, The Long-term Habits of a Highly Effective
Corporate Board 11 (March 2019), available at: https://www.fcltglobal.org/wp-content/uploads/long-term-habits-of-highly-effective-corporate-boards.pdf (analyzing 2017 MSCI ACWI
constituents from 2010 to 2017 using Bloomberg data).
    \26\ See Vivian Hunt et al., McKinsey & Company, Diversity
Matters (February 2, 2015), available at: https://www.mckinsey.com/
~/media/mckinsey/business%20functions/organization/our%20insights/
why%20diversity%20matters/diversity%20matters.pdf (analyzing 366
public companies in the United Kingdom, Canada, the United States,
and Latin America in industries for the years 2010 to 2013, using
the ethnic and racial categories African ancestry, European
ancestry, Near Eastern, East Asian, South Asian, Latino, Native
American, and other).
    \27\ See David A. Carter et al., Corporate Governance, Board
Diversity, and Firm Value. 38(1) Fin. Rev. 33 (analyzing 638 Fortune
1000 firms in 1997, measuring firm value by Tobin's Q, with board
diversity defined as the percentage of women, African Americans,
Asians and Hispanics on the board of directors).
    \28\ See Gennaro Bernile et al., Board Diversity, Firm Risk, and
Corporate Policies (March 6, 2017), available at: https://ssrn.com/abstract=2733394 (analyzing 21,572 firm-year observations across
non-financial, non-utility firms for the years 1996 to 2014, based
on the ExecuComp, RiskMetrics, Compustat and CRSP databases).
    \29\ Id. at 32.
---------------------------------------------------------------------------

    Several studies have found a positive association between gender
diversity and financial performance. Credit Suisse (2014) found
companies with at least one woman on the board had an average sector-
adjusted return on equity (``ROE'') of 12.2%, compared to 10.1% for
companies with no female directors, and average sector-adjusted ROEs of
14.1% and 11.2%, respectively, for the previous nine years.\30\ MSCI
(2016) found that U.S. companies with at least three women on the board
in 2011 experienced median gains in ROE of 10% and earnings per share
(``EPS'') of 37% over a five year period, whereas companies that had no
female directors in 2011 showed median changes of -1% in ROE and -8% in
EPS over the same five-year period.\31\ Catalyst (2011) found that the
ROE of Fortune 500 companies with at least three women on the board (in
at least four of five years) was 46% higher than companies with no
women on the board, and return on sales and return on invested capital
was 84% and 60% higher, respectively.\32\
---------------------------------------------------------------------------

    \30\ See Credit Suisse, The CS Gender 3000: Women in Senior
Management 16 (Sept. 2014), available at: https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/the-cs-gender-3000-women-in-senior-management.pdf
(analyzing 3,000 companies across 40 countries from the period from
2005 to 2013).
    \31\ See Meggin Thwing Eastman et al., MSCI, The tipping point:
Women on boards and financial performance 3 (December 2016),
available at: https://www.msci.com/documents/10199/fd1f8228-cc07-4789-acee-3f9ed97ee8bb (analyzing of U.S. companies that were
constituents of the MSCI World Index for the entire period from July
1, 2011 to June 30, 2016).
    \32\ See Harvey M. Wagner, Catalyst, The Bottom Line: Corporate
Performance and Women's Representation on Boards (2004-2008) (March
1, 2011), available at: https://www.catalyst.org/research/the-bottom-line-corporate-performance-and-womens-representation-on-boards-2004-2008/ (analyzing gender diversity data from Catalyst's
annual Fortune 500 Census of Women Board Directors report series for
the years 2005 to 2009, and corresponding financial data from S&P's
Compustat database for the years 2004 to 2008).
---------------------------------------------------------------------------

    Credit Suisse (2016) found an association between LGBTQ+ diversity
and stock performance, finding that a basket of 270 companies
``supporting and embracing LGBT employees'' outperformed the MSCI ACWI
index by an average of 3.0% per year over the past 6 years.\33\
Further, ``[a]gainst a custom basket of companies in North America,
Europe and Australia, the LGBT 270 has outperformed by 140 bps
annually.'' \34\ Nasdaq acknowledges that this study focused on LGBTQ+
employees as opposed to directors, and that there is a lack of
published research on the issue of LGBTQ+ representation on boards.
However, Out Leadership (2019) suggests that the relationship between
board gender diversity and corporate performance may extend to LGBTQ+
diversity:
---------------------------------------------------------------------------

    \33\ See Credit Suisse ESG Research, LGBT: The value of
diversity 1 (April 15, 2016), available at: https://research-doc.credit-suisse.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=807075590&extdocid=807075590_1_eng_pdf&serialid=evu4wXNcHexx7kusNLaZQphUkT9naxi1PvptZQvPjr1k%3d.
    \34\ Id.

    While the precise reason for the positive correlation between
gender diversity and better corporate performance is unknown, many
of the reasons that gender diversity is considered beneficial are
also applicable to LGBT+ diversity. LGBT+ diversity in the boardroom
may create a dynamic that enables better decisionmaking, and it
brings to the boardroom the perspective of a community that is a
critical component of the company's consumer population and
organizational talent.\35\
---------------------------------------------------------------------------

    \35\ See Quorum, Out Leadership's LGBT+ Board Diversity and
Disclosure Guidelines 3 (2019), available at: https://outleadership.com/content/uploads/2019/01/OL-LGBT-Board-Diversity-Guidelines.pdf.

    McKinsey (2020) found ``a positive, statistically significant
correlation between company financial outperformance and [board]
diversity, on the dimensions of both gender and ethnicity,'' with
companies in the top quartile for board gender diversity ``28 percent
more likely than their peers to outperform financially,'' and a
statistically significant correlation between board gender diversity
and outperformance on earnings before interest and taxation margin.\36\
Moody's (2019) found that greater board gender diversity is associated
with higher credit ratings, with women accounting for an average of 28%
of board seats at Aaa-rated companies but less than 5% of board seats
at Ca-rated companies.\37\
---------------------------------------------------------------------------

    \36\ See McKinsey & Company, Diversity wins: How inclusion
matters 13 (May 2020), available at: https://www.mckinsey.com/~/
media/McKinsey/Featured%20Insights/Diversity%20and%20Inclusion/
Diversity%20wins%20How%20inclusion%20matters/Diversity-wins-How-
inclusion-matters-vF.pdf (analyzing 1,039 companies across 15
countries for the period from December 2018 to November 2019).
    \37\ See Moody's Investors Service, Gender diversity is
correlated with higher ratings, but mandates pose short-term risk 2
(Sept. 11, 2019), available at: https://www.moodys.com/research/Moodys-Corporate-board-gender-diversity-associated-with-higher-credit-ratingsPBC_1193768 (analyzing 1,109 publicly traded North
American companies rated by Moody's).
---------------------------------------------------------------------------

    While the overwhelming majority of studies on the association
between economic performance and board diversity, including gender
diversity, present a compelling case that board diversity is positively
associated with financial performance, the results of some other
studies on gender diversity are mixed. For example, Pletzer et al.
(2015) found that board gender diversity alone has a ``small and non-
significant'' relationship with a company's financial performance.\38\
Post and Byron (2014) found a ``near zero'' relationship with a
company's market performance, but a positive relationship with a
company's

accounting returns.\39\ Carter, D'Souza, Simkins and Simpson (2010)
found that ``[w]hen Tobin's Q is used as the measure of financial
performance, we find no relationship to gender diversity or ethnic
minority diversity, neither positive nor negative.'' \40\ A study
conducted by Campbell and Minguez-Vera (2007) ``suggests, at a minimum,
that increased gender diversity can be achieved without destroying
shareholder value.'' \41\ Adams and Ferreira (2009) found that ``gender
diversity has beneficial effects in companies with weak shareholder
rights, where additional board monitoring could enhance firm value, but
detrimental effects in companies with strong shareholder rights.'' \42\
Carter et al. (2010) \43\ and the U.S. Government Accountability Office
(``GAO'') (2015) \44\ concluded that the mixed nature of various
academic studies may be due to differences in methodologies, data
samples and time periods.
---------------------------------------------------------------------------

    \38\ See Jan Luca Pletzer et al., Does Gender Matter? Female
Representation on Corporate Boards and Firm Financial Performance--A
Meta-Analysis 1, PLOS One (June 18, 2015); see also Alice H. Eagly
(2016), When Passionate Advocates Meet Research on Diversity, Does
the Honest Broker Stand a Chance?, 72 J. Social Issues 199 (2016),
available at https://doi.org/10.1111/josi.12163 (concluding that the
``research findings are mixed, and repeated meta[hyphen]analyses
have yielded average correlational findings that are null or
extremely small'' with respect to board gender diversity and company
performance).
    \39\ See Corinne Post and Kris Byron, Women on Boards and Firm
Financial Performance: A Meta-Analysis 1 (2014). In 2016, the same
authors, based on a review of the results for 87 studies, ``found
that board gender diversity is weakly but significantly positively
correlated with [corporate social responsibility],'' although they
noted that ``a significant correlational relationship does not prove
causality.'' See Corinne Post and Kris Byron, Women on Boards of
Directors and Corporate Social Performance: A Meta[hyphen]Analysis,
24(4) Corp. Governance: An Int'l Rev. 428 (July 2016), available at
http://dx.doi.org/10.1111/corg.12165.
    \40\ See David A. Carter et al., The Gender and Ethnic Diversity
of US Boards and Board Committees and Firm Financial Performance,
18(5) Corp. Governance 396, 410 (2010) (analysis of 541 S&P 500
companies for the years 1998-2002).
    \41\ See Kevin Campbell and Antonio Minguez-Vera, Gender
Diversity in the Boardroom and Firm Financial Performance, 83(3) J.
Bus. Ethics 13 (Feb. 2008) (analyzing 68 non-financial companies
listed on the continuous market in Madrid during the period from
January 1995 to December 2000, measuring firm value by an
approximation of Tobin's Q defined as the sum of the market value of
stock and the book value of debt divided by the book value of total
assets).
    \42\ See Renee B. Adams and Daniel Ferreira, Women in the
boardroom and their impact on governance and performance, 94 J. Fin.
Econ. 291 (2009) (analyzing 1,939 S&P 500, S&P MidCaps, and S&P
SmallCap companies for the period 1996 to 2003, measuring company
performance by a proxy for Tobin's Q (the ratio of market value to
book value) and return on assets).
    \43\ See Carter et al., supra note 40, at 400 (observing that
the different ``statistical methods, data, and time periods
investigated vary greatly so that the results are not easily
comparable.'').
    \44\ See United States Government Accountability Office, Report
to the Ranking Member, Subcommittee on Capital Markets and
Government Sponsored Enterprises, Committee on Financial Services,
House of Representatives, Corporate Boards: Strategies to Address
Representation of Women Include Federal Disclosure Requirements 5
(Dec. 2015) (the ``GAO Report''), available at: https://www.gao.gov/assets/680/674008.pdf (``Some research has found that gender diverse
boards may have a positive impact on a company's financial
performance, but other research has not. These mixed results depend,
in part, on differences in how financial performance was defined and
what methodologies were used'').
---------------------------------------------------------------------------

    While there are studies drawing different conclusions, Nasdaq
believes that there is a compelling body of credible research on the
association between economic performance and board diversity. At a
minimum, Nasdaq believes that the academic studies support the
conclusion that board diversity does not have adverse effects on
company financial performance. This is not the first time Nasdaq has
considered whether, on balance, various studies finding mixed results
related to board composition and company performance are a sufficient
rationale to propose a listing rule. For example, in 2003,
notwithstanding the varying findings of studies at the time regarding
the relationship between company performance and board
independence,\45\ Nasdaq adopted listing rules requiring a majority
independent board that were ``intended to enhance investor confidence
in the companies that list on Nasdaq.'' \46\ In its Approval Order, the
SEC stated that ``[t]he Commission has long encouraged exchanges to
adopt and strengthen their corporate governance listing standards in
order to, among other things, enhance investor confidence in the
securities markets.'' \47\
---------------------------------------------------------------------------

    \45\ See, e.g., Benjamin E. Hermalin and Michael S. Weisbach,
The Effects of Board Composition and Direct Incentives on Firm
Performance, 20 Fin. Mgmt. 101, 111 (1991) (finding that ``there
appears to be no relation between board composition and
performance''); Sanjai Bhagat and Bernard Black, The Uncertain
Relationship Between Board Composition and Firm Performance, 54(3)
Bus. Law. 921, 950 (1999) (``At the very least, there is no
convincing evidence that increasing board independence, relative to
the norms that currently prevail among large American firms, will
improve firm performance. And there is some evidence suggesting the
opposite--that firms with supermajority-independent boards perform
worse than other firms, and that firms with more inside than
independent directors perform about as well as firms with majority-
(but not supermajority-) independent boards.'').
    \46\ See Order Approving Proposed Rule Changes, 68 FR 64,154,
64,161 (Nov. 12, 2003) (approving SR-NASD-2002-77, SR-NASD-2002-80,
SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141).
    \47\ Id. at 64,176.
---------------------------------------------------------------------------

    Along the same lines, even without clear consensus among studies
related to board diversity and company performance, the heightened
focus on corporate board diversity by investors demonstrates that
investor confidence is undermined when data on board diversity is not
readily available and when companies do not explain the reasons for the
apparent absence of diversity on their boards. Therefore, Nasdaq
believes that the proposal will enhance investor confidence that all
listed companies are considering diversity in the context of selecting
directors, either by including at least two Diverse directors on their
boards or by explaining their rationale for not meeting that objective.
Further, Nasdaq believes that the proposal is consistent with the Act
because it will not negatively impact capital formation, competition or
efficiency among its public companies, and will promote investor
protection and the public interest.\48\
---------------------------------------------------------------------------

    \48\ See also Lee, supra note 22 (``I could never quite buy in
to the view that some 40 percent of the population in our country
(if we're talking about minorities) or over half the country (if
we're talking about women) must rationalize their inclusion in
corporate boardrooms and elsewhere in economic terms instead of the
reverse. How can one possibly justify--in economic terms--the
systematic exclusion of a major portion of our talent base from the
corporate pool?'').
---------------------------------------------------------------------------

b. Diversity and Investor Protection
    There is substantial evidence that board diversity enhances the
quality of a company's financial reporting, internal controls, public
disclosures and management oversight. In reaching this conclusion,
Nasdaq evaluated the results of more than a dozen studies spanning more
than two decades that found a positive association between gender
diversity and important investor protections, and the assertions by
some academics that such findings may extend to other forms of
diversity, including racial and ethnic diversity. The findings of the
studies reviewed by Nasdaq are summarized below.
    Adams and Ferreira (2009) found that women are ``more likely to sit
on'' the audit committee,\49\ and a subsequent study by Srinidhi, Gul
and Tsui (2011) found that companies with women on the audit committee
are associated with ``higher earnings quality'' and ``better reporting
discipline by managers,'' \50\ leading the authors to conclude that
``including female directors on the board and the audit committee are
plausible ways of improving the firm's reporting discipline and
increasing

investor confidence in financial statements.'' \51\
---------------------------------------------------------------------------

    \49\ See Adams and Ferreira, supra note 42, at 292.
    \50\ See Bin Srinidhi et al., Female Directors and Earnings
Quality, 28(5) Contemporary Accounting Research 1610, 1612-16
(Winter 2011) (analyzing 3,132 firm years during the period from
2001 to 2007 based on S&P COMPUSTAT, Corporate Library's Board
Analyst, and IRRC databases; ``choos[ing] the accruals quality as
the metric that best reflects the ability of current earnings to
reflect future cash flows'' (noting that it ``best predicts the
incidence and magnitude of fraud relative to other commonly used
measures of earnings quality'') and analyzing surprise earnings
results that exceeded previous earnings or analyst forecasts,
because ``managers of firms whose unmanaged earnings fall marginally
below the benchmarks have [an] incentive to manage earnings upwards
so as to meet or beat previous earnings'').
    \51\ Id. at 1612.
---------------------------------------------------------------------------

    A study conducted in 2016 by Pucheta[hyphen]Mart[iacute]nez et al.
concluded that gender diversity on the audit committee ``improves the
quality of financial information.'' \52\ They found that ``the
percentage of females on [audit committees] reduces the probability of
[audit] qualifications due to errors, non-compliance or the omission of
information,'' \53\ and found a positive association between gender
diverse audit committees and disclosing audit reports with
uncertainties and scope limitations. This suggests that gender diverse
audit committees ``ensure that managers do not seek to pressure
auditors into issuing a clean opinion instead of a qualified opinion''
when any uncertainties or scope limitations are identified.\54\
---------------------------------------------------------------------------

    \52\ See Maria Consuelo Pucheta[hyphen]Mart[iacute]nez et al.,
Corporate governance, female directors and quality of financial
information. 25(4) Bus. Ethics: A European Rev. 363, 378 (2016)
(analyzing a sample of non-financial companies listed on the Madrid
Stock Exchange during 2004-2011).
    \53\ Id. at 363.
    \54\ Id. at 368.
---------------------------------------------------------------------------

    More recently, a study by Gull in 2018 found that the presence of
female audit committee members with business expertise is associated
with a lower magnitude of earnings management,\55\ and a study
conducted in 2019 by Bravo and Alcaide-Ruiz found a positive
association between women on the audit committee with financial or
accounting expertise and the voluntary disclosure of forward-looking
information.\56\ Bravo and Alcaide-Ruiz concluded that ``female [audit
committee] members with financial expertise play an important role in
influencing disclosure strategies that provide forward-looking
information containing projections and financial data useful for
investors.'' \57\
---------------------------------------------------------------------------

    \55\ See Ammar Gull et al., Beyond gender diversity: How
specific attributes of female directors affect earnings management,
50(3) British Acct. Rev. 255 (Sept. 2017), available at: https://ideas.repec.org/a/eee/bracre/v50y2018i3p255-274.html (analyzing 394
French companies belonging to the CAC All-Shares index listed on
Euronext Paris from 2001 to 2010, prior to the implementation of
France's gender mandate law that required women to comprise 20% of a
company's board of directors by 2014 and 40% by 2016).
    \56\ See Francisco Bravo and Maria Dolores Alcaide-Ruiz, The
disclosure of financial forward-looking information, 34(2) Gender in
Mgmt. 140, 142-44 (2019) (analyzing companies included in the S&P
100 Index in 2016, ``focus[ing] on the disclosure of financial
forward-looking information (which is likely to require financial
expertise), such as earnings forecasts, expected revenues,
anticipated cash flows or any other financial indicator'').
    \57\ Id. at 150.
---------------------------------------------------------------------------

    While the above studies demonstrate a positive association between
gender diverse audit committees and the quality of a company's
earnings, financial information and public disclosures, other studies
found a positive association between board gender diversity and
important investor protections regardless of whether or not women are
on the audit committee.
    Abbott, Parker & Persley (2012) found, within a sample of non-
Fortune 1000 companies, ``a significant association between the
presence of at least one woman on the board and a lower likelihood of
[a material financial] restatement.'' \58\ Their findings are
consistent with a subsequent study by Wahid (2017), which concluded
that ``gender-diverse boards commit fewer financial reporting mistakes
and engage in less fraud.'' \59\ Specifically, companies with female
directors have ``fewer irregularity-type [financial] restatements,
which tend to be indicative of financial manipulation.'' \60\ Wahid
suggested that the implications of her study extend beyond gender
diversity:
---------------------------------------------------------------------------

    \58\ See Lawrence J. Abbott et al., Female Board Presence and
the Likelihood of Financial Restatement, 26(4) Accounting Horizons
607, 626 (2012) (analyzing a sample of 278 pre-SOX annual financial
restatements and 187 pre-SOX quarterly financial restatements of
U.S. companies from January 1, 1997 through June 30, 2002 identified
by the U.S. General Accounting Office restatement report 03-138
(which only included ``material misstatements of financial
results''), and 75 post-SOX annual financial restatements from July
1, 2002, to September 30, 2005 identified by U.S. General Accounting
Office restatement report 06-678 (which only included ``restatements
that were being made to correct material misstatements of previously
reported financial information''), consisting almost exclusively of
non-Fortune 1000 companies).
    \59\ See Aida Sijamic Wahid, The Effects and the Mechanisms of
Board Gender Diversity: Evidence from Financial Manipulation, J.
Bus. Ethics (forthcoming) (Dec. 2017) Rotman School of Management
Working Paper No. 2930132 at 1, available at: https://ssrn.com/abstract=2930132 (analyzing 6,132 U.S. public companies during the
period from 2000 to 2010, for a total of 38,273 firm-year
observations).
    \60\ Id. at 23.

    If you're going to introduce perspectives, those perspectives
might be coming not just from male versus female. They could be
coming from people of different ages, from different racial
backgrounds . . . [and] [i]f we just focus on one, we could be
essentially taking away from other dimensions of diversity and
decreasing perspective.\61\
---------------------------------------------------------------------------

    \61\ See Barbara Shecter, Diverse boards tied to fewer financial
`irregularities,' Canadian study finds. Financial Post (Feb. 5,
2020), https://business.financialpost.com/news/fp-street/diverse-boards-tied-to-fewer-financial-irregularities-canadian-study-finds
(last accessed Nov. 27, 2020).

    Cumming, Leung and Rui (2015) also examined the relationship
between gender diversity and fraud, and found that the presence of
women on boards is associated with a lower likelihood of securities
fraud; indeed, they found ``strong evidence of a negative and
diminishing effect of women on boards and the probability of being in
our fraud sample.'' \62\ The authors suggested that ``other forms of
board diversity, including but not limited to gender diversity, may
likewise reduce fraud.'' \63\
---------------------------------------------------------------------------

    \62\ See Douglas J. Cumming et al., Gender Diversity and
Securities Fraud, Academy of Management Journal 34 (forthcoming)
(Feb. 2, 2015), available at https://ssrn.com/abstract=2562399
(analyzing China Securities Regulatory Commission data from 2001 to
2010, including 742 companies with enforcement actions for fraud,
and 742 non-fraudulent companies for a control group).
    \63\ Id. at 33.
---------------------------------------------------------------------------

    Chen, Eshleman and Soileau (2016) suggested that the relationship
between gender diversity and higher earnings quality observed by
Srinidhi, Gul and Tsui (2011) is ultimately driven by reduced
weaknesses in internal control over financial reporting, noting that
``prior literature has established a negative relationship between
internal control weaknesses and earnings quality.'' \64\ The authors
found that having at least one woman on the board (regardless of
whether or not she is on the audit committee) ``may lead to [a] reduced
likelihood of material weaknesses [in internal control over financial
reporting].'' \65\
---------------------------------------------------------------------------

    \64\ See Yu Chen et al., Board Gender Diversity and Internal
Control Weaknesses, 33 Advances in Acct. 11 (2016) (analyzing a
sample of 4267 [filig]rm-year observations during the period from
2004 to 2013, beginning ``the first year internal control weaknesses
were required to be disclosed under section 404 of SOX'').
    \65\ Id. at 18.
---------------------------------------------------------------------------

    Board gender diversity also was found to be positively associated
with more transparent public disclosures. Gul, Srinidhi & Ng (2011)
concluded that ``gender diversity improves stock price informativeness
by increasing voluntary public disclosures in large firms and
increasing the incentives for private information collection in small
firms.'' \66\ Abad et al. (2017) concluded that companies with gender
diverse boards are associated with lower levels of information
asymmetry, suggesting that increasing board gender diversity is
associated with ``reducing the risk of

informed trading and enhancing stock liquidity.'' \67\
---------------------------------------------------------------------------

    \66\ See Ferdinand A. Gul et al., Does board gender diversity
improve the informativeness of stock prices?, 51(3) J. Acct. & Econ.
314 (April 2011) (analyzing 4,084 firm years during the period from
2002 to 2007, excluding companies in the utilities and financial
industries, measuring public information disclosure using
``voluntary continuous disclosure of `other' events in 8K reports''
and measuring stock price informativeness by ``idiosyncratic
volatility,'' or volatility that cannot be explained to systematic
factors and can be diversified away).
    \67\ See David Abad et al., Does Gender Diversity on Corporate
Boards Reduce Information Asymmetry in Equity Markets? 20(3) BRQ
Business Research Quarterly 192, 202 (July 2017) (analyzing 531
company-year observations from 2004 to 2009 of non-financial
companies traded on the electronic trading platform of the Spanish
Stock Exchange (SIBE)).
---------------------------------------------------------------------------

    Other studies have found that diverse boards are better at
overseeing management. Adams and Ferreira (2009) found ``direct
evidence that more diverse boards are more likely to hold CEOs
accountable for poor stock price performance; CEO turnover is more
sensitive to stock return performance in firms with relatively more
women on boards.'' \68\ Lucas-Perez et al. (2014) found that board
gender diversity is positively associated with linking executive
compensation plans to company performance,\69\ which may be an
effective mechanism to deter opportunistic behavior by management and
align their interests with shareholders.\70\ A lack of diversity has
been found to have the opposite effect. Westphal and Zajac (1995) found
that ``increased demographic similarity between CEOs and the board is
likely to result in more generous CEO compensation contracts.'' \71\
---------------------------------------------------------------------------

    \68\ See Adams and Ferreira, supra note 42, at 292.
    \69\ See Maria Encarnacion Lucas-Perez et al., Women on the
Board and Managers' Pay: Evidence from Spain, 129 J. Bus. Ethics 285
(April 2014).
    \70\ Id.
    \71\ See James D. Westphal and Edward J. Zajac, Who Shall
Govern? CEO/Board Power, Demographic Similarity, and New Director
Selection, 40(1) Admin. Sci. Q. 60, 77 (March 1995).
---------------------------------------------------------------------------

c. Diversity and Decision Making
    Wahid (2017) suggests that ``at a minimum, gender diversity on
corporate boards has a neutral effect on governance quality, and at
best, it has positive consequences for boards' ability to monitor firm
management.'' \72\ Nasdaq reviewed studies suggesting that board
diversity can indeed enhance a company's ability to monitor management
by reducing ``groupthink'' and improving decision making.
---------------------------------------------------------------------------

    \72\ See Wahid, supra note 59, at 5.
---------------------------------------------------------------------------

    In 2009, the Commission, in adopting rules requiring proxy
disclosure describing whether a company considers diversity in
identifying director nominees, recognized the impact of diversity on
decision making and corporate governance:

    A board may determine, in connection with preparing its
disclosure, that it is beneficial to disclose and follow a policy of
seeking diversity. Such a policy may encourage boards to conduct
broader director searches, evaluating a wider range of candidates
and potentially improving board quality. To the extent that boards
branch out from the set of candidates they would ordinarily
consider, they may nominate directors who have fewer existing ties
to the board or management and are, consequently, more independent.
To the extent that a more independent board is desirable at a
particular company, the resulting increase in board independence
could potentially improve governance. In addition, in some companies
a policy of increasing board diversity may also improve the board's
decision making process by encouraging consideration of a broader
range of views.\73\
---------------------------------------------------------------------------

    \73\ See Proxy Disclosure Enhancements, 74 FR 68,334, 68,355
(Dec. 23, 2009).

    Nasdaq agrees with the Commission's suggestion that board diversity
improves board quality, governance and decision making. Nasdaq is
concerned that boards lacking diversity can inadvertently suffer from
``groupthink,'' which is ``a dysfunctional mode of group decision
making characterized by a reduction in independent critical thinking
and a relentless striving for unanimity among members.'' \74\ The
catastrophic financial consequences of groupthink became evident in the
2008 global financial crisis, after which the IMF's Independent
Evaluation Office concluded that ``[t]he IMF's ability to correctly
identify the mounting risks [as the crisis developed] was hindered by a
high degree of groupthink.'' \75\
---------------------------------------------------------------------------

    \74\ See Daniel P. Forbes and Frances J. Milliken, Cognition and
Corporate Governance: Understanding Boards of Directors as Strategic
Decision-Making Groups, 24(3) Acad. Mgmt. Rev. 489, 496 (Jul. 1999).
    \75\ See International Monetary Fund, IMF Performance in the
Run-Up to the Financial and Economic Crisis (August 2011), available
at: https://www.elibrary.imf.org/view/IMF017/11570-9781616350789/11570-9781616350789/ch04.xml?language=en&redirect=true (``The
evaluation found that incentives were not well aligned to foster the
candid exchange of ideas that is needed for good surveillance--many
staff reported concerns about the consequences of expressing views
contrary to those of supervisors, [m]anagement, and country
authorities.'').
---------------------------------------------------------------------------

    Other studies suggest that increased diversity reduces groupthink
and leads to robust dialogue and better decision making. Dallas (2002)
observed that ``heterogeneous groups share conflicting opinions,
knowledge, and perspectives that result in a more thorough
consideration of a wide range of interpretations, alternatives, and
consequences.'' \76\ Bernile et al. (2017) found that ``diversity in
the board of directors reduces stock return volatility, which is
consistent with diverse backgrounds working as a governance mechanism,
moderating decisions, and alleviating problems associated with
`groupthink.''' \77\ Dhir (2015) concluded that gender diversity may
``promote cognitive diversity and constructive conflict in the
boardroom.'' \78\ After interviewing 23 directors about their
experience with Norway's board gender mandate, he observed:
---------------------------------------------------------------------------

    \76\ See Lynne L. Dallas, Does Corporate Law Protect the
Interests of Shareholders and Other Stakeholders?: The New
Managerialism and Diversity on Corporate Boards of Directors, 76
Tul. L. Rev. 1363, 1391 (June 2002).
    \77\ See Bernile et al., supra note 28, at 38.
    \78\ See Aaron A. Dhir, Challenging Boardroom Diversity:
Corporate Law, Governance, and Diversity 150 (2015) (emphasis
removed) (sample included 23 directors of Norwegian corporate
boards, representing an aggregate of 95 board appointments at more
than 70 corporations).

    First, many respondents contended that gender diversity promotes
enhanced dialogue. Interviewees frequently spoke of their belief
that heterogeneity has resulted in: (1) Higher quality boardroom
discussions; (2) broader discussions that consider a wide range of
angles or viewpoints; (3) deeper or more thorough discussions; (4)
more frequent and lengthier discussions; (5) better informed
discussions; (6) discussions that are more frequently brought inside
the boardroom (as opposed to being held in spaces outside the
boardroom, either exclusively or in addition to inside the
boardroom); or (7) discussions in which items that directors
previously took for granted are drawn out and addressed--where the
implicit becomes explicit. Second, and intimately related, many
interviewees indicated that diversification has led to (or has the
potential to lead to) better decision making processes and/or final
decisions.\79\
---------------------------------------------------------------------------

    \79\ Id. at 124 (emphasis removed).

    Investors also have emphasized the importance of diversity in
decision making. A group of institutional investors charged with
overseeing state investments and the retirement savings of public
employees asserted that ``board members who possess a variety of
viewpoints may raise different ideas and encourage a full airing of
dissenting views. Such a broad pool of talent can be assembled when
potential board candidates are not limited by gender, race, or
ethnicity.'' \80\
---------------------------------------------------------------------------

    \80\ See Petition for Amendment of Proxy Rule (March 31, 2015),
available at: https://www.sec.gov/rules/petitions/2015/petn4-682.pdf.
---------------------------------------------------------------------------

    Nasdaq believes that cognitive diversity is particularly important
on boards because in their advisory role, especially related to
corporate strategy, ``the `output' that boards produce is entirely
cognitive in nature.'' \81\ While in 1999, Forbes and Milliken
characterized boards as ``large, elite, and episodic decision making
groups that face complex tasks pertaining to strategic-issue
processing,'' \82\ over the past two decades, their role has evolved;
boards are now more active, frequent advisors on areas such as
cybersecurity, social media, and environmental, social and governance
(``ESG'') issues such as climate change and racial and gender

inequality. Nasdaq believes that boards comprised of directors from
diverse backgrounds enhance investor confidence by ensuring that board
deliberations include the perspectives of more than one demographic
group, leading to more robust dialogue and better decision making.
---------------------------------------------------------------------------

    \81\ See Forbes and Milliken, supra note 74, at 492.
    \82\ Id.
---------------------------------------------------------------------------

III. Current State of Board Diversity and Causes of Underrepresentation
on Boards

    While the above studies suggest a positive association between
board diversity, company performance, investor protections, and
decision making, there is a noticeable lack of diversity among U.S.
public companies. Nasdaq is a global organization and operates in many
countries around the world that already have implemented diversity-
focused directives. In fact, Nasdaq-listed companies in Europe already
are subject to diversity requirements.\83\ This first-hand experience
provides Nasdaq with a unique perspective to incorporate global best
practices into its proposal to advance diversity on U.S. corporate
boards. Given that the U.S. ranks 53rd in board gender diversity,
according to the World Economic Forum in its 2020 Global Gender Gap
Report, Nasdaq believes advancing board diversity in the U.S. is a
critical business and market imperative. This same report also found
that ``American women still struggle to enter the very top business
positions: only 21.7% of corporate managing board members are women.''
\84\ As of 2019, women directors held 19% of Russell 3000 seats (up
from 16% in 2018).\85\ In comparison, women hold more than 30% of board
seats in Norway, France, Sweden and Finland.\86\ At the current pace,
the U.S. GAO estimates that it could take up to 34 years for U.S.
companies to achieve gender parity on their boards.\87\
---------------------------------------------------------------------------

    \83\ On Nasdaq's Nordic and Baltic exchanges, large companies
must comply with EU Directive 2014/95/EU (the ``EU Directive''), as
implemented by each member state, which requires companies to
disclose a board diversity policy with measurable objectives
(including gender), or explain why they do not have such a policy.
On Nasdaq Vilnius, companies are also required to comply with the
Nasdaq Corporate Governance Code for Listed Companies or explain why
they do not, which requires companies to consider diversity and seek
gender equality on the board. Similarly, on Nasdaq Copenhagen,
companies are required to comply with the Danish Corporate
Governance Recommendations or explain why they do not, which
requires companies to adopt and disclose a diversity policy that
considers gender, age and international experience. On Nasdaq
Iceland, listed companies must have at least 40% women on their
board (a government requirement) and comply with the EU Directive.
    \84\ See World Economic Forum, Global Gender Gap Report 2020 33
(2019), available at: http://www3.weforum.org/docs/WEF_GGGR_2020.pdf.
    \85\ See Kosmas Papadopoulos, ISS Analytics, U.S. Board
Diversity Trends in 2019 4-5 (May 31, 2019), available at: https://www.issgovernance.com/file/publications/ISS_US-Board-Diversity-Trends-2019.pdf.
    \86\ See Deloitte, Women in the Boardroom: A global perspective
(6th ed. 2019), available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Risk/gx-risk-women-in-the-boardroom-sixth-edition.pdf.
    \87\ See GAO Report, supra note 44.
---------------------------------------------------------------------------

    Progress toward greater racial and ethnic diversity in U.S. company
boardrooms has been even slower. Over the past ten years, the
percentage of African American/Black directors at Fortune 500 companies
has remained between 7 and 9%, while the percentage of women directors
has grown from 16 to 23%.\88\ In 2019, only 10% of board seats at
Russell 3000 companies were held by racial minorities, reflecting an
incremental increase from 8% in 2008.\89\ Among Fortune 500 companies
in 2018, there were fewer than 20 directors who publicly self-
identified as LGBT+, and only nine companies reported considering
sexual orientation and/or gender identity when identifying director
nominees.\90\
---------------------------------------------------------------------------

    \88\ See Russell Reynolds, Ethnic & Gender Diversity on US
Public Company Boards 6 (September 8, 2020).
    \89\ See Papadopoulous, supra note 85, at 5.
    \90\ See Out Leadership, supra note 35.
---------------------------------------------------------------------------

    Women and minority directors combined accounted for 34% of Fortune
500 board seats in 2018.\91\ While women of color represent 18% of the
U.S. population, they held only 4.6% of Fortune 500 board seats in
2018.\92\ Male underrepresented minorities held 11.5% of board seats at
Fortune 500 companies in 2018, compared to 66% of board seats held by
Caucasian/White men. Overall in 2018, 83.9% of board seats among
Fortune 500 companies were held by Caucasian/White individuals (who
represent 60.1% of the U.S. population), 8.6% by African American/Black
individuals (who represent 13% of the U.S. population), 3.8% by
Hispanic/Latino(a) individuals (who represent 19% of the U.S.
population) and 3.7% by Asian/Pacific Islander individuals (who
represent 6% of the U.S. population).\93\ In its analysis of Russell
3000 companies, 2020 Women on Boards concluded that ``larger companies
do better with their diversity efforts than smaller companies.'' \94\
---------------------------------------------------------------------------

    \91\ See Deloitte, Missing Pieces Report: The 2018 Board
Diversity Census of Women and Minorities on Fortune 500 Boards 9
(2018), available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-cbe-missing-pieces-report-2018-board-diversity-census.pdf.
    \92\ See Catalyst, Too Few Women of Color on Boards: Statistics
and Solutions (Jan. 31, 2020), https://www.catalyst.org/research/women-minorities-corporate-boards/.
    \93\ See Deloitte, Missing Pieces Report, supra note 91; United
States Census Bureau, QuickFacts, available at: https://www.census.gov/quickfacts/fact/table/US/PST045219.
    \94\ See 2020 Women On Boards Gender Diversity Index 4 (2019),
available at: https://2020wob.com/wp-content/uploads/2019/10/2020WOB_Gender_Diversity_Index_Report_Oct2019.pdf.
---------------------------------------------------------------------------

    Based on the limited information that is available, Nasdaq believes
a supermajority of listed companies have made notable strides to
improve gender diversity in the boardroom and have at least one woman
on the board. Nasdaq also believes that listed companies are diligently
working to add directors with other diverse attributes, although
consistent with other studies of U.S. companies, Nasdaq believes the
pace of progress, in this regard, is happening more gradually. Thus,
and for the reasons discussed in this Section II.A.1.III, Nasdaq has
concluded that a regulatory approach to encouraging greater diversity
and data transparency would be beneficial.
    Nasdaq reviewed academic studies on the causes of
underrepresentation on boards and the approaches taken by other
jurisdictions to remedy underrepresentation. Those studies suggest that
the traditional director candidate selection process may create
barriers to considering qualified diverse candidates for board
positions. Dhir (2015) explains that ``[t]he presence of unconscious
bias in the board appointment process, coupled with closed social
networks, generates a complex set of barriers for diverse directors;
these are the `phantoms' that prevent entry.'' \95\ In 2011, the Davies
Review found that ``informal networks influential in board
appointments'' contribute to the underrepresentation of women in the
boardrooms of U.K. listed companies.\96\ In 2017, the Parker Review
acknowledged that ``as is the case with gender, people of colour within
the UK have historically not had the same opportunities as many
mainstream candidates to develop the skills, networks and senior
leadership experience desired in a FTSE Boardroom.'' \97\ In 2020, the
United Kingdom Financial Reporting Council commissioned a report to
analyze barriers to LGBTQ+ inclusion and promotion in the workplace.
Leaders who self-identified as LGBTQ+ expressed concerns about the
current

board nomination process, which includes ``relying on personal
recommendations without transparent competition or due process [and]
informal `interviewing' outside the selection process.'' \98\
---------------------------------------------------------------------------

    \95\ See Dhir, supra note 78, at 47.
    \96\ See Women on Boards 17 (Feb. 2011), available at: https://ftsewomenleaders.com/wp-content/uploads/2015/08/women-on-boards-review.pdf.
    \97\ See Sir John Parker, A Report into the Ethnic Diversity of
UK Boards 38 (Oct. 12, 2017), available at: https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2017-report-final.pdf.
    \98\ See Catriona Hay et al., The Financial Reporting Council,
Building more open business 25 (2020), available at: https://www.frc.org.uk/getattachment/19f3b216-bd45-4d46-af2f-f191f5bf4a07/The-Good-Side-x-Financial-Reporting-Council-1811-AMENDED.pdf.
---------------------------------------------------------------------------

    These concerns are not unique to the United Kingdom. The U.S. GAO
(2015) found that women's representation on corporate boards may be
hindered by directors' tendencies to ``rely on their personal networks
to identify new board candidates.'' \99\ Vell (2017) found that ``92%
of board seats [of public U.S. and Canadian technology companies] are
filled through networking, and women have less access to these
networks.'' \100\ Deloitte and the Society for Corporate Governance
(2019) found that this is also common in other industries including
media, communications, energy, consumer products, financial services
and life sciences.\101\ They observed that although 94% of companies
surveyed were looking to increase diversity among their boards, 77% of
those boards looked to referrals from current directors when
identifying diverse director candidates, suggesting that ``networking
is still key to board succession.'' \102\ Dhir (2015), in a qualitative
study of Norwegian directors, observed that ``[b]oard seats tend to be
filled by directors engaging their networks, and the resulting
appointees tend to be of the same socio-demographic background.'' \103\
---------------------------------------------------------------------------

    \99\ See GAO Report, supra note 44, at 15.
    \100\ See Vell Executive Search, Women Board Members in Tech
Companies: Strategies for Building High Performing Diverse Boards 6
(2017), available at: https://www.vell.com/images/pdf/VELL%20Report%20Women%20Board%20Members%20on%20Tech%20Boards%202017%203%2029.pdf.
    \101\ See Deloitte and the Society of Corporate Governance,
Board Practices Report: Common threads across boardrooms 5 (2019),
available at: https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/1202241_2018_Board_Practices_Report_FINAL.pdf.
    \102\ Id. at 6.
    \103\ See Dhir, supra note 78, at 52.
---------------------------------------------------------------------------

    Another contributing factor may be the traditional experience
sought in director nominees. Rhode & Packel (2014) observed that:

    One of the most common reasons for the underrepresentation of
women and minorities on corporate boards is their
underrepresentation in the traditional pipeline to board service.
The primary route to board directorship has long been through
experience as a CEO of a public corporation. . . . Given the low
representation of women and minorities in top executive positions,
their talents are likely to be underutilized if selection criteria
are not broadened.\104\
---------------------------------------------------------------------------

    \104\ See Deborah Rhode and Amanda K. Packel, Diversity on
Corporate Boards: How Much Difference Does Difference Make?, 39(2)
Del. J. Corp. L. 377, 402-403 (2014); see also Dhir, supra note 78,
at 39 (``[T]here is an apparent preference for either CEOs (whether
current or retired) or senior management who have experience at the
helm of a particular business stream or unit. . . . The fact that
far fewer women than men have been CEOs has a potentially
devastating effect on access to the boardroom, which in turn can
have an effect on the number of women who rise to the level of CEO
and to the executive suite.'').

    Hillman et al. (2002) found that while white male directors of
public companies were more likely to have current or former experience
as a CEO, senior manager or director, African-American and white women
directors were more likely to have specialized expertise in law,
finance, banking, public relations or marketing, or community influence
from positions in politics, academia or clergy.\105\ Dhir (2015)
suggests that ``[c]onsidering persons from other, non-management pools,
such as academia, legal and accounting practice, the not-for-profit
sector and politics, may help create a broader pool of diverse
candidates.'' \106\ Directors surveyed by the U.S. GAO also
``suggested, for example, that boards recruit high performing women in
other senior executive level positions, or look for qualified female
candidates in academia or the nonprofit and government sectors. . . .
[I]f boards were to expand their director searches beyond CEOs more
women might be included in the candidate pool.'' \107\
---------------------------------------------------------------------------

    \105\ See Amy J. Hillman et al., Women and Racial Minorities in
the Boardroom: How Do Directors Differ?, 28(6) J. Mgmt. 747, 749,
754 (2002).
    \106\ See Dhir, supra note 78, at 42.
    \107\ See GAO Report supra note 44, at 18.
---------------------------------------------------------------------------

    Investors have begun calling for greater transparency surrounding
ethnic diversity on company boards, and in the past several months as
the U.S. has seen an uprising in the racial justice movement, there has
been an increase in the number of African Americans appointed to
Russell 3000 corporate boards.\108\ In a five-month span, 130 directors
appointed were African American, in comparison to the 38 African
American directors who were appointed in the preceding five
months.\109\ Although tracking the acceleration in board diversity is
feasible for some Russell 3000 companies, many of the companies do not
disclose the racial makeup of the board, making it impossible to more
broadly assess the impact of recent events on board diversity.
---------------------------------------------------------------------------

    \108\ See Leslie P. Norton, The Number of Black Board Members
Surged After George Floyd's Death, Barron's, Oct. 27, 2020,
available at: https://www.barrons.com/articles/after-george-floyds-death-the-number-of-black-board-members-surges-51603809011.
    \109\ Id.
---------------------------------------------------------------------------

IV. Stakeholder Perspectives

    To gain a better understanding of the current state of board
diversity, benefits of diversity, causes of underrepresentation on
boards and potential remedies to address underrepresentation, Nasdaq
spoke with leaders representing a broad spectrum of market participants
and other stakeholders. Nasdaq sought their perspectives to inform its
analysis of whether the proposed rule changes would promote the public
interest and protection of investors without unduly burdening
competition or conflicting with existing securities laws. The group
included representatives from the investor, regulatory, investment
banking, venture capital and legal communities. Nasdaq also spoke with
leaders of civil rights and corporate governance organizations, and
organizations representing the interests of private and public
companies, including Nasdaq-listed companies. Specifically, Nasdaq
obtained their views on:
     The current state of board diversity in the U.S.;
     the inherent value of board diversity;
     increasing pressure from legislators and investors to
improve diverse representation on boards and board diversity
disclosure;
     whether a listing rule related to board diversity is in
the public interest;
     how to define a ``diverse'' director; and
     the benefits and challenges of various approaches to
improving board diversity disclosures and increasing diverse
representation on boards, including mandates and disclosure-based
models.
    The discussions revealed strong support for disclosure requirements
that would standardize the reporting of board diversity statistics. The
majority of organizations also were in agreement that companies would
benefit from a regulatory impetus to drive meaningful and systemic
change in board diversity, and that a disclosure-based approach would
be more palatable to the U.S. business community than a mandate. While
many organizations recognized that mandates can accelerate the rate of
change, they expressed that a disclosure-based approach is less
controversial and would spur companies to take action and achieve the
same results. Business leaders also

expressed concern that smaller companies would require flexibility and
support to comply with any time-sensitive requirements to add diverse
directors. Some stakeholders highlighted additional challenges that
smaller companies, and companies in certain industries, may face
finding diverse board members. Leaders from across the spectrum of
stakeholders that Nasdaq surveyed reinforced the notion that if
companies recruit by skill set and expertise rather than title, then
they will find there is more than enough diverse talent to satisfy
demand. Leaders from the legal community emphasized that any proposed
rule that imposed additional burdens beyond, or is inconsistent with,
existing securities laws--by, for example, requiring companies to adopt
a diversity policy or include disclosure solely in their proxy
statements--would present an additional burden and potentially more
legal liability for listed companies.

V. U.S. Regulatory Framework

    As detailed above, diversity has been the topic of a growing number
of studies over the past decade and, in recent years, some investors
have been increasingly advocating for greater diversity among directors
of public companies.\110\ Over the past year, the social justice
movement has underscored the importance of having diverse perspectives
and representation at all levels of decision-making, including on
public company boards. In recent years, diversity has become
increasingly important to the public, including institutional
investors, pension funds and other stakeholders who believe that board
diversity enhances board performance and is an important factor in the
voting decisions of some investors.\111\ Legislators increasingly are
taking action to encourage corporations to diversify their boards and
improve diversity disclosures.\112\
---------------------------------------------------------------------------

    \110\ In 2009, when the Commission proposed enhancements to
proxy disclosures, including addressing board diversity disclosures,
the Commission received over 130 comment letters related to its
proposal, including from corporations, pension funds, professional
associations, trade unions, accounting firms, law firms,
consultants, academics, individual investors and other interested
parties. See Proxy Disclosure Enhancements, 74 FR at 68,335; see
also David A. Katz and Laura McIntosh, Raising the Stakes for Board
Diversity, Law.com (July 22, 2020), available at: https://www.law.com/newyorklawjournal/2020/07/22/raising-the-stakes-for-board-diversity/?slreturn=20201017021522; Office of the Illinois
State Treasurer, The Investment Case For Board Diversity: A Review
of the Academic and Practitioner Research on the Value of Gender and
Racial/Ethnic Board Diversity for Investors 7 (Oct. 2020), available
at: https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/il%20treasurer%20white%20paper%20-%20the%20investment%20case%20for%20board%20diversity%20(oct%202020).p
df.
    \111\ See Comments on Proposed Rule: Proxy Disclosure and
Solicitation Enhancements, available at: https://www.sec.gov/comments/s7-13-09/s71309.shtml. See also CGLytics, Diversity on the
Board? Metrics Used by Fortune 100 Companies (June 29, 2020),
available at: https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/; Office of the Illinois State
Treasurer, supra note 110.
    \112\ For example, California requires companies headquartered
in the state to have at least one director who self-identifies as a
Female and one director from an Underrepresented Community. See Cal.
S.B. 826 (Sept. 30, 2018); Cal. A.B. 979 (Sept. 30, 2020).
Washington requires companies headquartered in the state to have at
least 25% women on the board by 2022 or provide certain disclosures.
See Wash. Subst. S.B. 6037 (June 11, 2020). At least eleven states
have proposed diversity-related requirements. See Hatcher and
Latham, supra note 11.
---------------------------------------------------------------------------

a. SEC Diversity Disclosure Requirements--Background

    In 2009, the Commission sought comment on whether to amend Item
407(c)(2)(vi) of Regulation S-K to require disclosure of whether a
nominating committee considers diversity when selecting a director for
a position on the board.\113\ The Commission received more than 130
comment letters on its proposal. According to a University of Dayton
Law Review analysis of those comment letters, most were submitted by
groups with a specific interest in diversity, or by institutional
investors, including mutual funds, pension funds, and socially
responsible investment funds.\114\ Further, the analysis showed that 56
commenters addressed the issue of diversity disclosures, and only 5 of
those 56 commenters did not favor such disclosure.\115\ Twenty-seven of
the 56 mentioned gender diversity, 18 mentioned racial diversity, and
13 mentioned ethnic diversity. However, neither the proposed rule nor
the final rule defined diversity.\116\
---------------------------------------------------------------------------

    \113\ See Proxy Disclosure and Solicitation Enhancements, 74 FR
35,076, 35,084 (July 17, 2009) (proposed rule).
    \114\ See Thomas Lee Hazen and Lissa Lamkin Broome, Board
Diversity and Proxy Disclosure, 37:1 Univ. Dayton L. Review 41, 51,
n. 82 (citing the comment letters).
    \115\ In the five comments that opposed diversity disclosure,
three stated that diversity was an important value. See Comments on
Proposed Rule, supra note 111; see also Hazen and Broome, supra note
114, at 54 n.88 (citing the 56 comment letters).
    \116\ See Hazen and Broome, supra note 114, at 53 n. 84-86.
---------------------------------------------------------------------------

    Ten years after its adoption of board diversity disclosure rules,
the Commission revisited the rules by establishing new Compliance and
Disclosure Interpretations (``C&DI''). However, the Commission did not
provide a definition of diversity, and therefore issuers currently are
not required to disclose the race, ethnicity or gender of their
directors or nominees.
    Currently, Item 401(e)(1) of Regulation S-K requires a company to
``briefly discuss the specific experience, qualifications, attributes
or skills that led to the conclusion that the person should serve as a
director.'' \117\ The C&DI clarifies that if a board considered a
director's self-identified diversity characteristics (e.g., race,
gender, ethnicity, religion, nationality, disability, sexual
orientation or cultural background) during the nomination process, and
the individual consents to disclose those diverse characteristics, the
Commission ``would expect that the company's discussion required by
Item 401 would include, but not necessarily be limited to, identifying
those characteristics and how they were considered.'' \118\
---------------------------------------------------------------------------

    \117\ See 17 CFR 229.401(e)(1).
    \118\ See Securities and Exchange Commission, Regulation S-K
Compliance & Disclosure Interpretations (Sept. 21, 2020), available
at: https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
---------------------------------------------------------------------------

    Rather than providing a specific definition of diversity, the C&DI
provides a non-exhaustive list of examples of diverse characteristics
that a company could consider for purposes of Item 401(e)(1), including
``race, gender, ethnicity, religion, nationality, disability, sexual
orientation, or cultural background.'' \119\ Additionally, the
Commission stated that any description of a company's diversity policy
would be expected to include ``a discussion of how the company
considers the self-identified diversity attributes of nominees as well
as any other qualifications its diversity policy takes into account,
such as diverse work experiences, military service, or socio-economic
or demographic characteristics.'' \120\
---------------------------------------------------------------------------

    \119\ Id.
    \120\ Id.
---------------------------------------------------------------------------

    Item 407(c)(2)(vi) of Regulation S-K requires proxy disclosure
regarding whether diversity is considered when identifying director
nominees and, if so, how. In addition, if the board or nominations
committee has adopted a diversity policy, the company must describe how
the policy is implemented and its effectiveness is assessed.\121\ When
adopting Item 407(c)(2)(vi), the Commission explained:
---------------------------------------------------------------------------

    \121\ See 17 CFR 229.407(c)(2)(vi).

    We recognize that companies may define diversity in various
ways, reflecting different perspectives. For instance, some
companies may conceptualize diversity expansively to

include differences of viewpoint, professional experience,
education, skill and other individual qualities and attributes that
contribute to board heterogeneity, while others may focus on
diversity concepts such as race, gender and national origin. We
believe that for purposes of this disclosure requirement, companies
should be allowed to define diversity in ways that they consider
appropriate. As a result we have not defined diversity in the
amendments.\122\
---------------------------------------------------------------------------

    \122\ See Proxy Disclosure Enhancements, 74 FR at 68,344.
---------------------------------------------------------------------------

    Moreover, Item 407(c)(2)(vi) does not require companies to adopt a
formal policy and does not require them to explain why they have not.
It also does not require public disclosure of board-level diversity
statistics.

b. Complaints Surrounding Current Diversity Disclosure Requirements

    Given the broad latitude afforded to companies by the Commission's
rules related to board diversity and proxy disclosure, current
reporting of board-level diversity statistics has been significantly
unreliable and unusable to investors. This has been due to myriad data
collection challenges, including the scarcity of reported information,
the lack of uniformity in the information that is disclosed and
inconsistencies in the definitions of diversity characteristics across
companies.\123\ The heightened national discourse around diversity and
mounting grievances from investors surrounding transparency on board
diversity prompted Nasdaq to examine the state of board diversity among
its listed companies. While conducting that research, Nasdaq identified
a number of key challenges, such as: (1) Inconsistent disclosure and
definitions of diversity across companies; (2) limited data on diverse
characteristics outside of gender; (3) inconsistent or no disclosure of
a director's race, ethnicity, or other diversity attributes (e.g.,
nationality); (4) difficult-to-extract data because statistics are
often embedded in graphics; and (5) aggregation of information, making
it difficult to separate gender from other categories of diversity.
Investors and data analysts have raised similar criticisms.
---------------------------------------------------------------------------

    \123\ See Petition for Rulemaking (July 6, 2017), available at:
https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.
---------------------------------------------------------------------------

    As the Illinois Treasurer observed, the paucity of data on race and
ethnicity creates barriers to investment analysis, due diligence and
academic study.\124\ For example, the scarcity of such data is an
impediment to academics who want to study the performance impact of
racially diverse boards.\125\ Nasdaq is concerned that investors also
face the many data collection challenges Nasdaq encountered, rendering
current diversity disclosures unreliable, unusable, and insufficient to
inform investment and voting decisions. Commissioner Allison Herren Lee
expressed similar concerns, stating that the current SEC disclosure
requirements have ``led to spotty information that is not standardized,
not consistent period to period, not comparable across companies, and
not necessarily reliable. . . . And the current state of disclosure
reveals the shortcomings of a principles-based materiality regime in
this area.'' \126\
---------------------------------------------------------------------------

    \124\ See Press Release, Illinois State Treasurer Frerichs Calls
on Russell 3000 Companies to Disclose Diversity Data (Oct. 28,
2020), available at https://illinoistreasurergovprod.blob.core.usgovcloudapi.net/twocms/media/doc/october2020_russell3000.pdf.
    \125\ See Office of Illinois State Treasurer, supra note 110, at
3-4.
    \126\ See Lee, supra note 22.
---------------------------------------------------------------------------

    Some stakeholders believe there is a correlation between companies
that disclose the gender, racial and ethnic composition of their board
and the number of diverse directors on those companies' boards.\127\
Currently, the lack of reliable and consistent data makes it difficult
to measure diversity in the boardroom, and a common set of standards
for diversity definitions and disclosure format is greatly needed. At
present, U.S. companies must navigate a complex patchwork of federal
and state regulations and disclosure requirements. The limited
disclosure currently provided voluntarily, which is primarily focused
on gender (due in part to that data being the most readily available),
fails to provide the full scope of a board's diverse
characteristics.\128\ It is difficult to improve what one cannot
accurately measure. This lack of transparency is impacting investors
who are increasingly basing public advocacy, proxy voting and direct
shareholder-company engagement decisions on board diversity
considerations.\129\
---------------------------------------------------------------------------

    \127\ See Proxy Disclosure Enhancements, 74 FR at 68,355
(``Although the[se] amendments are not intended to steer behavior,
diversity policy disclosure may also induce beneficial changes in
board composition. A board may determine, in connection with
preparing its disclosure, that it is beneficial to disclose and
follow a policy of seeking diversity.''); see also Office of
Illinois State Treasurer, supra note 110, at 3.
    \128\ See, e.g., CGLytics, supra note 111, at https://www.cglytics.com/diversity-on-the-board-metrics-of-fortune-100-companies/; Petition for Amendment of Proxy Rule, supra note 80;
Office of Illinois State Treasurer, supra note 110.
    \129\ See Office of the Illinois State Treasurer, Russell 3000
Board Diversity Disclosure Initiative, https://www.illinoistreasurer.gov/Financial_Institutions/Equity,_Diversity__Inclusion/Russell_3000_Board_Diversity_Disclosure_Initiative (last accessed
Nov. 25, 2020).
---------------------------------------------------------------------------

c. Support for Updating Diversity Disclosure Requirements

    Nasdaq's surveys of investors and reviews of their disclosed
policies and actions show that board diversity is a priority when
assessing companies, and investors report, in some cases, relying on
intuition when there is a lack of empirical, evidenced-based data.
Furthermore, the continued growth of ESG investing raises the
importance of quality data, given the data-driven nature of investment
products such as diversity-specific indices and broader ESG funds.
    Investors have a unique platform from which to engage and influence
a company's position on important topics like diversity. Similarly,
Nasdaq, like other self-regulatory organizations, is uniquely
positioned to establish practices that will assist in carrying out
Nasdaq's mandate to protect investors and remove impediments from the
market. Various stakeholders, including Nasdaq, believe that clear and
concise annual disclosure of board diversity information that
disaggregates the data by race, ethnicity, gender identity and sexual
orientation will provide the public, including key stakeholders, with a
better sense of a company's approach to improving corporate diversity
and the support needed to effectuate any changes. Required disclosures
also would eliminate the number of shareholder proposals asking for
these key metrics and the need for companies to respond to multiple
investor requests for information.\130\ Moreover, companies manage
issues more closely and demonstrate greater progress when data is
available.\131\
---------------------------------------------------------------------------

    \130\ See Petition for Rulemaking, supra note 123, at 2.
    \131\ See, e.g., Gwen Le Berre, Parametric, Investors Need Data
to Make Diversity a Reality (Aug. 24, 2020), https://www.parametricportfolio.com/blog/investors-need-data-to-make-diversity-a-reality.
---------------------------------------------------------------------------

    In 2015, nine large public pension funds who collectively
supervised $1.12 trillion in assets at the time petitioned the
Commission to require registrants to disclose information related to,
among other things, the gender, racial, and ethnic diversity of the
registrant's board nominees.\132\ In 2017, Human Capital Management
Coalition, which described itself as a group of institutional investors
with $2.8 trillion in assets at the time, made a similar petition to
the Commission.\133\ More recently, in October 2020, the Illinois
Treasurer spearheaded an initiative along with twenty other investor
organizations, asking for all companies in the Russell

3000 Index to disclose the composition of their board, including each
board member's gender, race and ethnicity.\134\
---------------------------------------------------------------------------

    \132\ See Petition for Amendment of Proxy Rule, supra note 80.
    \133\ See Petition for Rulemaking, supra note 123.
    \134\ See Press Release, supra note 124.
---------------------------------------------------------------------------

    The largest proxy advisory firms have aligned their voting policies
to encourage increased board diversity disclosure. Institutional
Shareholder Services (``ISS''), recently adopted a new voting policy
under which it will identify boards of companies in the Russell 3000 or
S&P 1500 that ``lack racial and ethnic diversity (or lack disclosure of
such)'' in 2021 and, beginning in 2022, will recommend voting against
the chair of the nominating committee of such companies. The stated
goal of the policy is ``helping investors identify companies with which
they may wish to engage and to foster dialogue between investors and
companies on this topic.'' \135\ In 2017, proxy advisory firm Glass
Lewis announced a policy regarding board gender diversity that took
effect in 2019. Glass Lewis generally recommends voting against the
nominating committee chair of a board that has no female members, and
when making such a recommendation, the firm closely examines the
company's disclosure of its board diversity considerations and other
relevant contextual factors.\136\ On November 24, 2020, Glass Lewis
announced the publication of its 2021 Proxy Voting Policy Guidelines,
which expand its board gender diversity policy to vote against
nominating chairs if there are fewer than two female directors,
beginning in 2022.\137\ Most notably, beginning with the 2021 proxy
season, the company will include an assessment report of company proxy
disclosures relating to board diversity, skills and the director
nomination process for companies in the S&P 500 index. According to
Glass Lewis, it ``will reflect how a company's proxy statement
presents: (i) The board's current percentage of racial/ethnic
diversity; (ii) whether the board's definition of diversity explicitly
includes gender and/or race/ethnicity; (iii) 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 (aka
`Rooney Rule'); and (iv) board skills disclosure.'' \138\
---------------------------------------------------------------------------

    \135\ See ISS Governance, ISS Announces 2021 Benchmark Policy
Updates (November 12, 2020), available at: https://www.issgovernance.com/iss-announces-2021-benchmark-policy-updates/.
    \136\ See Glass Lewis, 2019 Policy Guideline Updates (Oct. 24,
2018), available at: https://www.glasslewis.com/2019-policy-guideline-updates-united-states-canada-shareholder-initiatives-israel/.
    \137\ See Glass Lewis, 2021 Proxy Paper Guidelines: An Overview
of the Glass Lewis Approach to Proxy Advice--United States (2020),
available at: https://www.glasslewis.com/wp-content/uploads/2020/11/US-Voting-Guidelines-GL.pdf?hsCtaTracking=7c712e31-24fb-4a3a-b396-9e8568fa0685%7C86255695-f1f4-47cb-8dc0-e919a9a5cf5b.
    \138\ Id.
---------------------------------------------------------------------------

    Congress and members of the Commission also have weighed in on the
importance of improving board transparency. In 2017, Representative
Carolyn Maloney introduced the ``Gender Diversity in Corporate
Leadership Act of 2017,'' which proposed requiring public companies to
provide proxy disclosure regarding the gender diversity of the board of
directors and nominees.\139\ In November 2019, the U.S. House of
Representatives, with bipartisan support, passed the ``Corporate
Governance Through Diversity Act of 2019,'' which requires certain
registrants annually to disclose the racial, ethnic, and gender
composition of their boards and executive officers, as well as the
veteran status of any of those directors and officers, in their proxy
statements.\140\ The bill also requires the disclosure of any policy,
plan or strategy to promote racial, ethnic, and gender diversity among
these groups. Legislators have proposed a companion bill in the U.S.
Senate.\141\
---------------------------------------------------------------------------

    \139\ Gender Diversity in Corporate Leadership Act of 2017, H.R.
1611, 115th Cong. (2017).
    \140\ Improving Corporate Governance Through Diversity Act of
2019, H.R. 5084, 116th Cong. (2019).
    \141\ Improving Corporate Governance Through Diversity Act of
2019, S. 360, 116th Cong. (2019).
---------------------------------------------------------------------------

    The Council of Institutional Investors (``CII''), U.S. Chamber of
Commerce,\142\ National Urban League, Office of New York State
Comptroller and the National Association for the Advancement of Colored
People praised the House of Representatives' for passing the 2019
legislation. According to the U.S. Chamber of Commerce's members and
associations, it has become increasingly important to see improvements
in board diversity.\143\ Additionally, CII's General Counsel stated
that the proxy statement disclosure requirement in the legislation
``could contribute to enhancing U.S. public company board consideration
of diversity.'' \144\
---------------------------------------------------------------------------

    \142\ See Letter from Various U.S. Chamber of Commerce
Associations and Members to Chairman Mike Crapo and Ranking Member
Sherrod Brown, U.S. House Committee on Banking, Housing, and Urban
Affairs (July 27, 2020), available at: https://www.uschamber.com/sites/default/files/200727_coalition_h.r._5084_senatesmallbusiness.pdf.
    \143\ Id.
    \144\ See Joe Mont, SEC, Congress seek better diversity
disclosures, Compliance Week (Feb. 20, 2019), https://www.complianceweek.com/sec-congress-seek-better-diversity-disclosures/24802.article.
---------------------------------------------------------------------------

    More recently, SEC Commissioners have called for greater
transparency surrounding ethnic diversity on company boards. In a
September 2020 speech titled ``Diversity Matters, Disclosure Works, and
the SEC Can Do More'' given at the CII Fall Conference, Commissioner
Lee advocated advancing corporate diversity and for various approaches
by which the Commission could promote diversity, including among other
things, strengthening the C&DI's guidance related to disclosure of
board candidate diversity characteristics.\145\ Commissioner Lee
stated:
---------------------------------------------------------------------------

    \145\ See Lee, supra note 22.

    [The SEC has] largely declined to require diversity-related
disclosure. In 2009, we adopted a requirement for companies to
disclose if and how diversity is considered as a factor in the
process for considering candidates for board positions, including
any policies related to the consideration of diversity. In 2018, we
issued guidance encouraging the disclosure of self-identified
characteristics of board candidates. While I appreciate these
measures, given that women of color hold just 4.6% of Fortune 500
board seats and less than one percent of Fortune 500 CEOs are Black,
it's time to consider how to get investors the diversity information
they need to allocate their capital wisely.\146\
---------------------------------------------------------------------------

    \146\ Id. Commissioner Crenshaw also expressed disappointment
with the Commission's silence on diversity. See Crenshaw, supra note
7.

VI. Nasdaq Proposal

a. Overview of Disclosure Requirements

    Disclosure of information material to an investor's voting and
investment decision is the bedrock of federal securities laws. The
Exchange's listing rules require companies to comply with federal
securities laws, including the registration requirements under the
Securities Act of 1933. Once listed, companies are obligated to solicit
proxies and file all annual and periodic reports with the Commission
under the Act at the prescribed times.\147\ In discharging its
obligation to protect investors, Nasdaq monitors listed companies for
compliance with those disclosure obligations, and the failure to do so
results in a notice of deficiency or delisting.
---------------------------------------------------------------------------

    \147\ See Nasdaq Stock Market Rulebook, Rules 5250(c) and (d).
---------------------------------------------------------------------------

    Nasdaq believes it is well within the Exchange's delegated
regulatory authority to propose listing rules designed to enhance
transparency so long as they do not conflict with existing federal
securities laws. For example, Nasdaq requires listed companies to
publicly disclose compensation or other payments by third parties to a
company's directors or

nominees, notwithstanding that such disclosure is not required by
federal securities laws. In approving that proposed rule, the
---------------------------------------------------------------------------
Commission noted:

    To the extent there are certain factual scenarios that would
require disclosure not otherwise required under Commission rules, we
believe that it is within the purview of a national securities
exchange to impose heightened governance requirements, consistent
with the Act, that are designed to improve transparency and
accountability into corporate decision making and promote investor
confidence in the integrity of the securities markets.\148\
---------------------------------------------------------------------------

    \148\ See Order Granting Accelerated Approval of a Proposed Rule
Change, 81 FR 44,400, 44,403 (July 7, 2016).

    Nasdaq is concerned that while investors have increasingly
emphasized that they consider board diversity information to be
material, the current lack of transparency and consistency makes it
difficult for Nasdaq and investors to determine the state of diversity
among listed companies as well as each board's philosophy regarding
diversity. Investors also have voiced dissatisfaction about having to
independently collect board-level data about race, ethnicity and gender
identity because such investigations can be time consuming, expensive,
and fraught with inaccuracies.\149\ Moreover, in some instances, based
on Nasdaq's own investigation, such information is either unavailable,
or, if available, not comparable across companies. To the extent
investors must obtain this information on their own through an
imperfect process, Nasdaq is concerned that it increases information
asymmetries between larger stakeholders, who are able to collect this
data directly from companies, and smaller investors, who must rely on
incomplete public disclosures. For all investors who take on the burden
of independently obtaining the current information, there is a cost and
time burden related to the data collection.
---------------------------------------------------------------------------

    \149\ See Petition for Amendment of Proxy Rule, supra note 80,
at 2.
---------------------------------------------------------------------------

    Nasdaq believes that additional disclosure regarding a board's
composition and philosophy related to board diversity will improve
transparency and accountability into corporate decision making. Nasdaq
proposes to improve transparency regarding board diversity by requiring
all listed companies to publicly disclose unbundled, consistent data
utilizing a uniform, transparent framework on their website or in their
proxy statement under Rule 5606. Similarly, Nasdaq proposes to promote
accountability in corporate decision-making by requiring companies who
do not have at least two Diverse directors on their board to provide
investors with a public explanation of the board's reasons for not
doing so under Rule 5605(f)(3). Nasdaq designed the proposal to avoid a
conflict with existing disclosure requirements under Regulation S-K and
to mitigate additional burdens for companies by providing them with
flexibility to provide such disclosure on their website or in their
proxy statement, and not requiring them to adopt a formal diversity
policy.
    Nasdaq proposes to foster consistency in board diversity data
disclosure by defining ``Diverse'' under Rule 5605(f)(1) as ``an
individual who self-identifies in one or more of the following
categories: Female, Underrepresented Minority or LGBTQ+,'' and by
adopting the following definitions under Rule 5605(f)(1):
     ``Female'' means an individual who self-identifies her
gender as a woman, without regard to the individual's designated sex at
birth.
     ``LGBTQ+'' means an individual who self-identifies as any
of the following: lesbian, gay, bisexual, transgender or a member of
the queer community.
     ``Underrepresented Minority'' means an individual who
self-identifies as one or more of the following: Black or African
American, Hispanic or Latinx, Asian, Native American or Alaska Native,
Native Hawaiian or Pacific Islander, or Two or More Races or
Ethnicities.
    The terms in the proposed definition of ``Underrepresented
Minority'' reflect the EEOC's categories and are construed in
accordance with the EEOC's definitions.\150\ The terms in the proposed
definition of LGBTQ+ are similar to the identities defined in
California's A.B. 979, described below, but have been expanded to
include the queer community based on Nasdaq's consultation with
stakeholders, including human rights organizations.\151\
---------------------------------------------------------------------------

    \150\ While the EEO-1 report refers to ``Hispanic or Latino''
rather than Latinx, Nasdaq proposes to use the term Latinx to apply
broadly to all gendered and gender-neutral forms that may be used by
individuals of Latin American heritage, including individuals who
self-identify as Latino/a/e.
    \151\ Further, Nasdaq agrees with the United Kingdom Financial
Reporting Council that the acronym LGBTQ+ ``does not attempt to
exclude other groups, nor does it imply that the experiences of
people under its umbrella are the same.'' See Hay et al., supra note
98, at 14.
---------------------------------------------------------------------------

    In constructing its proposed definition of ``Diverse,'' Nasdaq
considered various state and federal legislation, stakeholder
sentiments and academic studies. For example, California requires
public companies headquartered in the state to have at least one
individual who self-identifies as a female on the board by 2019 under
S.B. 826 \152\ and at least one director who is a member of an
``underrepresented community'' by 2021 under A.B. 979.\153\ S.B. 826
defines ``Female'' as ``an individual who self-identifies her gender as
a woman, without regard to the individual's designated sex at birth,''
consistent with legislation proposed by New Jersey, Michigan and Hawaii
related to board gender diversity.\154\ A.B. 979 considers directors
from underrepresented communities to be individuals who self-identify
as Black, African American, Hispanic, Latino, Asian, Pacific Islander,
Native American, Native Hawaiian or Alaska Native, or as gay, lesbian,
bisexual or transgender. Since S.B. 826 was passed, 669 women have
joined public company boards in the state and the number of public
companies with all male boards has declined from 30% in 2018 to 3% in
2020.\155\
---------------------------------------------------------------------------

    \152\ See Cal. S.B. 826, supra note 112.
    \153\ See Cal. A.B. 979, supra note 112.
    \154\ See Cal. S.B. 826, supra note 112. See also N.J. Senate
No. 3469, Sec.  3(b)(2) (2019); Mich. S.B. 115, Sec.  505a(2)(b)
(2019); Haw. H.B. 2720, Sec.  414-1(b)(2) (2020).
    \155\ See California Partners Project, Claim Your Seat: A
Progress Report on Women's Representation on California Corporate
Boards 4 (2020), available at: https://www.calpartnersproject.org/claimyourseat.
---------------------------------------------------------------------------

    The state of Washington requires public companies whose boards are
not comprised of at least 25% directors who self-identify as women by
January 1, 2022 to provide public disclosures related to the board's
consideration of ``diverse groups'' during the director nomination
process. The state considers ``diverse groups'' to include ``women,
racial minorities, and historically underrepresented groups.'' \156\
---------------------------------------------------------------------------

    \156\ See Wash. Subst. S.B. 6037, supra note 112. At least 11
states have proposed diversity-related requirements. See Hatcher and
Latham, supra note 11.
---------------------------------------------------------------------------

    As discussed above, Congress has proposed legislation relating to
disclosure of racial, ethnic, gender and veteran status among the
company's directors. Section 342 of the Dodd-Frank Act defines
``minority'' as ``Black American, Native American, Hispanic American,
and Asian American,'' \157\ and the Diversity Assessment Report for
Entities Regulated by the SEC requires the Exchange to report workforce
composition data to the SEC based on

the EEOC's categories.\158\ Most companies are required by law to
provide similar workforce data to the EEOC through the EEO-1 Report,
which requires employers to report statistical data related to race,
ethnicity and gender to the EEOC.\159\
---------------------------------------------------------------------------