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Christina Milhomem

Christina Milhomem

Senior Associate, MSCI Research

Harlan Tufford

Harlan Tufford

Vice President, MSCI Research

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Nasdaq’s New Board Diversity Rules: What’s the Impact?

  • In the short term, Nasdaq’s forthcoming board diversity quotas will affect almost none of its listed companies, but they could help to reshape U.S. boards over the long term.
  • The exchange’s comply-or-explain quotas rules could have a significant impact on the number of minority and LGBTQ+ directors.
  • The greatest change may stem from required disclosure of data on each board’s gender, racial/ethnic and sexual orientation diversity, which may aid engagement-oriented investors in holding laggards accountable.

As International Women’s Day and Black History month approach, some U.S. companies are being asked to show if they walk the talk. The Nasdaq Inc. stock exchange’s new diversity rules will impose board diversity disclosure requirements on Nasdaq-listed companies.1 While the impact of comply-or-explain diversity quotas is, at best, difficult to predict, these mandatory disclosure requirements may nudge companies to improve the diversity of their boards or risk facing investor pressure.

The new rules — which are the first to be introduced by a U.S. stock exchange — include three key provisions:

  1. Most Nasdaq-listed issuers must annually disclose statistics on their board’s gender, racial/ethnic and sexual-orientation diversity using the Nasdaq Board Matrix starting Aug. 8, 2022. This matrix leverages categories defined by the U.S. Equal Employment Opportunity Commission (EEOC).
  2. One year later, boards will be expected to have at least one director who:
    1. Self-identifies as female; or
    2. Self-identifies as an underrepresented minority or as LGBTQ+
  3. Over 2025-2026, the quota will increase to at least two diverse directors, including one from each diversity group.

The diversity disclosure is mandatory but the quotas are “comply-or-explain” rules: Companies that don’t meet their quota must publicly explain why they fall short, but won’t otherwise be penalized. Nasdaq is not expected to review or assess companies’ explanations.2 And certain issuers are exempt from some or all rules.


Counting quotas

One key problem with the rules is that the one-woman-director quota is a solution to yesterday’s problem. In fact, all-male boards at U.S. companies are nearly extinct. The new challenge for diversity-conscious boards will be to achieve – and maintain – gender parity.


Board gender diversity among MSCI USA IMI constituents



Hover over or tap a part of any bar to display the represented percentage of companies in the MSCI USA IMI. This exhibit comprises constituents of the MSCI USA IMI at Jan. 17, 2022. Board composition assessed as of Dec. 31 in each year. Source: MSCI ESG Research LLC.


Of the 1,261 Nasdaq-listed constituents of the MSCI USA Investable Market Index (IMI) and in the MSCI ESG Ratings coverage, fewer than 30 had all-male boards, as of Jan. 17, 2022. A quota may push some of these holdouts toward at least token gender diversity, but a comply-or-explain rule may not be enough to sway boards that have already shown persistent resistance toward improving board gender diversity.

 The quota on underrepresented-minority and LGBTQ+ directors is likely to require more work from nominating committees as racial/ethnic and sexual-orientation diversity is still in its infancy when compared to gender diversity. Voluntary disclosure of racial/ethnic board diversity in the U.S. has been limited (as shown below), and analyses based on anything other than directors’ self-reported disclosures may not accurately reflect their true identity.


Racial/ethnic board diversity by Nasdaq- and non-Nasdaq-listed companies

Racial/ethnic board diversity by Nasdaq- and non-Nasdaq-listed companies

Comprises constituents of the MSCI USA IMI in MSCI ESG Ratings Coverage at Jan. 17, 2022. Data based on company disclosures published between 2019 and 2021, using the latest reviewed data. As of Jan. 17, 2022, more than 900 constituents of the MSCI USA IMI in ESG Ratings coverage had been screened for 2021 board-diversity data. Source: MSCI ESG Research LLC.

Companies have few incentives to volunteer potentially unflattering disclosures. The fact that Nasdaq-listed companies have lagged other U.S. companies on providing racial/ethnic board diversity data begs the question of whether they have also lagged in terms of actual racial/ethnic diversity representation on their boards. The new quota targeting racial/ethnic and LGBTQ+ board diversity, however, could influence director succession planning at Nasdaq-listed companies over the coming years by encouraging more diverse candidate pools.


Improving transparency

Some companies may choose to ignore these quotas and attempt to explain away their lack of diverse directors, but Nasdaq’s mandatory disclosure rules will give investors the ability to hold laggards accountable in a way that hasn’t been possible through voluntary disclosure alone.

It could also create some harmony in how the metrics are publicly disclosed.

Of the constituents in the MSCI USA IMI in our ESG ratings coverage that had volunteered racial/ethnic board diversity statistics, only 30.1% leveraged the EEOC’s definitions of diversity (33.8% for Nasdaq-listed companies). Most companies used their own definitions, and one company’s definitions were often incompatible with another’s.

By requiring annual disclosure aligned with EEOC definitions, Nasdaq will give investors a consistent, comparable measure of board diversity that can be used to assess a company’s board diversity over time and relative to peers. An increase in the number of and average level of support for shareholder proposals at U.S. companies in 2021 suggested that more investors are turning to engagement as a catalyst for change.3 These diversity data may help those engagement-oriented shareholders to convince even the most skeptical boards to rethink their director recruitment strategies and comply with the new Nasdaq quotas.



1NASDAQ, “NASDAQ’s Board Diversity Rule: What NASDAQ-Listed Companies Should Know,” October 2021.

2Nasdaq's Board Diversity Rule Webinar. Hosted by Nasdaq. Aug. 17, 2021.

3 Mtshali, Zanele et al. “Breaching the Barricades: Investors and Voting During the 2021 Proxy Season”. MSCI ESG Research, December 2021.



Further Reading

Women on Boards: The Hidden Environmental Connection?/u>

The tipping point: Women on boards and financial performance

Diversity in Focus: Advancing diversity in investment-decision making

Women on Boards: 2021 Progress Report (access limited to ESG Research clients)

Women on Boards: Sustaining Board Gender Diversity Beyond the Tipping Point (access limited to ESG Research clients)