Now that Nasdaq’s board diversity matrix disclosure deadline has arrived, foreign private issuers (FPIs) and companies considering US initial public offerings are increasingly considering their current board makeups and director candidates in light of US and home country requirements, as well as expectations of investors and shareholder advocacy groups.

The Nasdaq diversity rules apply to FPIs – in contrast to many corporate governance rules that allow FPIs to only follow home country requirements. As explained in an August 2021 Cooley PubCo blog post, the diversity disclosure has several requirements.

  • By August 8, 2022: Disclose diversity information about company board members in a matrix.
  • By August 7, 2023: Have at least one diverse director or explain why you do not.
  • By August 6, 2025/26: Have at least two diverse directors or explain why you do not.
  • Most US domestic registrants will require at least one director who self-identifies as female and at least one LGBTQ+ or Underrepresented Minority director.
  • FPIs and smaller reporting companies can instead have two directors who self-identify as female. (“Diverse” for FPIs includes “Underrepresented Individuals in Home Country Jurisdiction,” as discussed in detail below, instead of the defined term “Underrepresented Minority.”)
  • Boards with five or fewer members require only one diverse director.
  • Newly public companies have phase-in requirements based on their IPO date.

The New York Stock Exchange has not yet announced similar requirements, though public companies are incentivized to meet diversity expectations of institutional investors (discussed below) regardless of listing venue.

As noted in this July 2022 Cooley PubCo blog post, large US domestic companies generally comply at this point, with all the S&P 500 having at least one racially or ethnically diverse board member and 31% having four or more. Smaller US domestic companies in the Russell 3000 also have made clear progress in increasing board diversity, with only 10% not having at least one racially or ethnically diverse member.

Outside the US, regulatory focus generally remains on female board representation

In June 2022, provisional agreement was reached on the European Union’s proposed “women on boards” directive, which aims to ensure greater parity on boards of publicly listed companies in the EU. Under the directive, 40% of non-executive directors and 33% of all directors must be women by June 2026, and member states are encouraged to back up the requirement with administrative fines and judicial unwinding of nonconforming appointments, in contrast to the comply or explain approach of many other jurisdictions, including Nasdaq. According to Deloitte’s global Women in the Boardroom survey, five EU member states plus Norway already exceed the 33% threshold as of March 2021, though other member states reportedly are significantly below that level. Australia adopted a comply or explain 30% target in 2019, which was achieved by Australian Securities Exchange (ASX) 300 companies in 2021.

Many emerging market jurisdictions, while starting from a low base, also have recently adopted gender diversity targets:

  • Hong Kong will require at least one board member of the non-dominant gender by 2025, despite currently having 22% of issuers with boards of all men (an increase of 2% from 2019).
  • China does not have a formal requirement for board diversity, but listed companies in Shenzhen have a substantially higher proportion of women directors than those listed in Shanghai.
  • Singapore-listed companies are required from 2022 to have a board diversity policy and describe in their annual reports progress toward achieving diversity. While there is no concrete target, the proportion of women directors is expected to increase as a nine-year limit on independent directors comes into force, vacating up to 30% of independent director seats.
  • In Indonesia, state-owned enterprises, which make up many of the largest listed companies, are targeting 25% women director representation by the end of 2023.
  • The 1,000 largest Indian public companies have been required to have at least one woman board member since April 2020.
  • Argentina, Chile and Colombia have legislation in place with board gender diversity requirements ranging between 30% and 50% applicable to certain listed companies and/or publicly held companies.
  • While Brazil and Mexico haven’t yet adopted formal requirements, legislative and policy momentum is focused on diversifying board representation.

The UK is a notable exception to the non-US trend, with the Financial Conduct Authority’s April 2022 diversity and inclusion policy setting not only a similar 40% women board membership target, but also a target of at least one director with a minority ethnic background (as defined in UK statistics). The UK’s approach remains one of comply or explain, with issuers that do not meet the targets required to set out their reasons in their annual reports.

Institutional investors appear to accept non-US/UK focus on women’s representation – for now

Institutional investors, who have been big proponents of increased board diversity for more than five years, appear to accept this jurisdictional mix for the time being. For example, one major investor’s diversity guidance differs depending on the market of listing (and size of company): All companies are expected to have at least one female board member, while Russell 3000, Toronto Stock Exchange (TSX), FTSE 350, STOXX Europe 600 and ASX 300 companies are expected to reach 30% representation. In contrast, one racially or ethnically diverse director is expected for companies in the S&P 500 and FTSE 100 only. A major proxy adviser also expects ethnic diversity for S&P 1500, Russell 3000 and FTSE 100 companies only (with a 2024 plan for smaller UK listed companies). Notably, no Asian indices are included in the investor’s guidance, though the proxy adviser does require one female director in India and Japan.

Will ‘underrepresented individual’ category for FPIs have diversity results that Nasdaq expects?

Under the Nasdaq rules, FPIs are asked to disclose board members who are “Underrepresented Individuals in Home Country Jurisdiction,” defined as “A person “who self-identifies as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the Foreign Issuer’s principal executive offices (as reported on the Foreign Issuer’s Forms F-1, 10-K, 20-F or 40-F).”

As discussed, it seems likely that many non-US FPIs based in ethnically and religiously homogenous countries will opt to rely on two female board members to meet diversity obligations, which is also more likely to meet local requirements in their home jurisdictions. However, the extraterritorial impact of the Nasdaq rule is worth considering. While the rules contemplate that disclosure may be prohibited by home country law (as in France) and provide an exemption, we wonder if there could be unintended consequences of the FPI underrepresented individual definition. For example, it may be an unintended consequence, not to mention counterproductive to what Nasdaq and institutional investors are trying to accomplish, for an Asia-headquartered FPI to appoint a white man who identifies as an underrepresented individual on the basis of ethnicity to their board in order to increase its diversity. In addition, the structure of the FPI matrix and required disclosure means that specific approach to complying with the diversity rules in that instance may not be immediately clear.

What should FPIs and companies considering US IPOs be doing now?

Improve board diversity now and identify additional director candidates to be ready for a potential public exit, either in the US or your home market. The academic literature also generally finds public company board diversity is correlated with improved financial performance. Certain financial advisers have committed to only advising on IPOs for issuers that satisfy their board diversity requirements. While data on private companies is more limited, Crunchbase reports that even heavily backed private companies have markedly fewer diverse directors than their public peers.

That being said, in recruiting diverse directors (or those with expertise in emerging areas such as cybersecurity or climate issues), don’t neglect the strategic role of the board – strategic experience on US boards has been declining, as discussed in this June 2022 Cooley PubCo blog post. Constructing an effective, diverse board will not happen overnight, so don’t leave it until you are required to comply or explain in your regulatory filings.


Steven Holm

Tim Pitrelli

David Boles

Claire Keast-Butler

Rita Sobral

Brad Goldberg

Posted by Cooley