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What Nasdaq’s Board Diversity Rules Might Mean for General Counsel

“I definitely think GCs will have a seat at the table in helping to explain and advise the committee and board members on these new rules,” said Victoria Westerhaus, a partner at Bryan Cave Leighton Paisner who also serves as outside GC to several Nasdaq-listed companies.

August 09, 2021 at 04:20 PM

Phillip Bantz More from This Author

What You Need to Know

  • Rules require public disclosure of diversity stats and certain number of diverse board members. 
  • In-house leaders should expect to help companies comply with the Nasdaq rules and similar state laws. 
  • GCs also might have to help firms explain why they can’t comply, which could be tricky. 

Now that the U.S. Securities and Exchange Commission has signed off on Nasdaq’s board diversity rules, general counsel should be ready to work with company leaders to ensure compliance with the new standards.

Under the proposed rule changes, more than 3,000 companies listed on Nasdaq’s U.S. stock exchange will be required to publicly disclose diversity statistics for their boards of directors and have a certain number of diverse directors who self-identify as female, an underrepresented minority or LGBTQ+. 

Nasdaq found in a survey last year that 75% of its companies would fail to satisfy the new board diversity rules. If those firms are unable to comply in the near future, they risk being delisted from Nasdaq’s exchange.

But the diversity rules give companies an out—and a potential trap—by allowing them to avoid being delisted if they can explain why they don’t have diverse directors. Nasdaq won’t judge the merits of the company’s explanation, though shareholders and the public probably will.

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In-house leaders might be called on to help craft these explanations and detail the company’s approach to board diversity. For instance, the general counsel might explain that the company was exploring new term limits for directors to quicken turnover and increase diversity. But the general counsel also could end up in a tricky spot if the company isn’t interested in following the new rules.

“They’re hopefully going to be in the role of educating, as opposed to being put into the role of bringing reasons as to why the board doesn’t want to comply. That would be a challenging spot for the GC,” Victoria Westerhaus, a Kansas City-based partner at Bryan Cave Leighton Paisner, said. She also serves as outside general counsel to several Nasdaq-listed companies.

Nasdaq’s push for board diversity follows similar moves at the state level, including California’s adoption of a board diversity mandate. Now, in-house leaders will likely have to determine whether the new Nasdaq rules conflict with laws in certain states where their companies do business. 

“In a lot of cases, the general counsel provides support for the nominating governance committee,” Westerhaus said. “I definitely think GCs will have a seat at the table in helping to explain and advise the committee and board members on these new rules.”

Nasdaq’s rules establish different compliance deadlines for companies in the exchange’s three U.S. market tiers. Global select and global market firms have two years to bring at least one diverse director on board and four years to have two diverse directors. Capital market firms have the same deadline for having one director, but are getting five years to secure two directors. 

“Companies need to be looking at their board matrix and succession plans. They’ll need to have diverse directors coming up,” Westerhaus said.  

She noted that some of the companies she advises have long-serving directors who “are saying on their own that they’re ready to step aside so they can bring on more diverse directors. Others have decided to expand their boards.”

While the rules present potential challenges for legal chiefs, many in the in-house world are applauding the SEC’s Aug. 6 order approving Nasdaq’s proposal, including Laurie Robinson Haden, president and CEO of Corporate Counsel Women of Color in New York.

“The timing of this is perfect, given everything that’s been happening in our society, from #MeToo to Black Lives Matter to Stop Asian Hate,” she said. “By having diverse board members, [corporate boards] will be able to connect with what’s going on in the world and in our community and have broader voices.”

Several of CCWC’s members already serve on public boards, but they’re outnumbered by the members who are prepared and have the skills to be directors and haven’t been given the chance, according to Haden.

“A lot of these boards are filled with the friend of the friend of the friend at the country club. Many diverse people don’t even have access to that opportunity,” she said. “The hope is that this will open the door for that access.”

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