By Tara K. Giunta is a Partner in the Litigation Department is a Vice Chair of the Investigations and White Collar Defence practice and Quinn Dang is an associate, at Paul Hastings LLP
In December 2020, Nasdaq made history by becoming the first US stock exchange to put a stake in the ground for board diversity, proposing a comply-or-explain requirement on companies listed on the exchange.
While the measure must yet be approved by the US Securities and Exchange Commission (SEC), Nasdaq’s proposal is both significant on its own and reflective of a broader, quickly accelerating recognition by businesses and their regulators of the fundamental importance and impact on businesses of environmental, social and governance (ESG) issues. This growing spotlight on ESG promises to make these matters central to corporate governance, a trend anticipated to accelerate under the Biden administration, both at the SEC and throughout the executive branch agencies. President Biden, particularly through the appointment of key roles, including the SEC chairman, could elevate key ESG priorities including standardised disclosures, not only as it relates to board diversity, but also with respect to climate change risks. As such, boards are well-advised to put ESG as a top priority on their list of risks, opportunities and challenges for 2021 and beyond.
On 1 December 2020, Nasdaq proposed new listing rules that would require most Nasdaq-listed companies to disclose annually, to the extent permitted by applicable law, diversity statistics in a board diversity matrix format to assist in data collection and enable better comparisons across companies. Subject to certain exceptions (such as foreign issuers), Nasdaq-listed companies would be required to have at least two diverse directors, one who self-identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+. If this quota is not met, the company must explain why.
Nasdaq stated goal is to provide stakeholders with a better understanding of a company’s current board composition and to enhance investor confidence. The exchange also cited ‘over two dozen studies that found an association between diverse boards and better financial performance and corporate governance’. Indeed, multiple studies have established a correlation between diverse executive teams and corporate boards, with enhanced profitability, with such companies financially outperforming their peers by as much as 33 to 35 per cent. Moreover, studies have established a ‘strong and statistically significant correlation’ between the diversity of management teams and overall innovation, leading to higher revenue from new products and services, as ‘[m]ultiple voices lead to new ideas, new services, and new products, and encourage out-of-the-box thinking’. These empirical studies and acknowledgement of the relationship between board diversity and corporate performance have resonated at the SEC. For instance, SEC Acting Chair Allison Herren Lee has publicly stated: “[T]o the extent one seeks economic support for diversity and inclusion…, the evidence is in. There is an increasing body of research showing that diversity correlates with enhanced performance.”
The challenge is, as Lee has acknowledged, that companies must still decide whether diversity information is material, lending voice to the growing support for a standardised approach to disclosure. The SEC’s Investor Advisory Committee issued its recommendation in May 2020 to adopt a uniform disclosure regime, in order to provide investors with ‘material, comparable, consistent information they need to make investment and voting decisions’. Pressure is also being exerted by consumers, who are demanding corporations take meaningful steps to address pressing matters, such as diversity and inclusion, climate change and responsible governance.
Corporations that fail to do so, or are falling short of their promises, are also at risk of being subject to shareholder derivative lawsuits, as shareholders have recently brought claims against major companies from the tech sector to the apparel industry, alleging that such companies have breached their duty of oversight under Caremark for making false proxy statements in relation to each company’s emphasis on diversity.
Nasdaq’s proposal has drawn support from a broad group of institutions and individuals, from the US Chamber of Commerce to the Council of Institutional Investors to heads of state retirement systems. In dozens of official comments submitted to the SEC, some of the country’s top companies, including large corporations, institutional investors and non-profit organisations dedicated to improving boardroom diversity, endorsed the comply-or-explain approach and echoed Nasdaq’s findings that diversity in leadership leads to better business outcomes.
The SEC must render a decision by 11 March 2021. If the SEC approves Nasdaq’s proposed rule, Nasdaq-listed companies would have one year from approval to publicly disclose board-level diversity statistics; however, the time period by which companies would need to meet the minimum board composition is based on a company’s listing tier. Nasdaq has also announced a partnership with Equilar, which will enable Nasdaq-listed companies to access the Equilar Diversity Network and BoardEdge platform, which can help companies identify more than one million board and executive candidates who meet various criteria.
All eyes will be on the SEC to act on the Nasdaq proposal. However, regardless of the SEC’s decision, corporate boards and management need to be laser-focussed on ESG risks in their businesses, including with regard to diversity and inclusion on the board and in management, particularly as more regulatory requirements for transparency and disclosure might be coming in the near future as the new Biden administration takes shape.
About the Authors
Tara K. Giunta, a partner in the Litigation Department, is a vice chair of the investigations and white collar Defence practice, which is routinely recognised by the Global Investigations Review (GIR) as a leading investigations practice and one of a handful of global ‘elite’ FCPA practice groups. Her work has spanned the globe, performing risk assessments, conducting investigations and rolling out comprehensive compliance programmes in Africa, the Middle East, South America, and Asia. Giunta advises clients on fraud, waste and abuse, as well as on environmental, social and governance (ESG) and human rights issues.
Quinn Dang is an associate in the corporate practice and is based in the firm’s Washington, DC office. Her practice focusses on national security reviews before the Committee on Foreign Investment in the United States (CFIUS). Dang advises clients regarding the national security risks of proposed transactions and assists both acquiring and acquired interests in obtaining clearances from CFIUS. In addition, her practice includes advising clients on cybersecurity matters (including data breach incident response) and privacy compliance. Ms. Dang is admitted to practice law in the District of Columbia and New York.