Malaysia: Diving Into Board Diversity

New Nasdaq Board Diversity Requirements

On 1 December 2020, the Nasdaq Stock Market LLC ("Nasdaq")  proposed new listing requirements to the Securities and Exchange Commission ("SEC") which are aimed at advancing diversity among the board of directors of Nasdaq-listed companies ("Proposal").

The Proposal which is still subject to public comment and SEC approval seeks to introduce the new Rule 5605(f) on Diverse Board Representation and Rule 5606 on Board Diversity Disclosure, which (subject to certain exceptions¹) would collectively require Nasdaq-listed companies to: 

1. have at least one director who self identifies as a female²; and

2. have at least one director who self identifies as an Underrepresented Minority³,

("Diversity Requirements") or alternatively, to publicly disclose why the company does not meet the Diversity Requirements. Nasdaq has also proposed a prescribed format to be complied with in respect of a Nasdaq-listed company's disclosure of diversity statistics and information.

Interestingly, the definition of "Underrepresented Minority" in the Proposal includes individuals who self-identify as LGBTQ+.

If the Diversity Requirements are approved by SEC, more than 2,500 Nasdaq-listed companies will be required to: 

1. disclose their board diversity statistics and information within one year from SEC's approval;

2. have at least one director who self-identifies as diverse in accordance with the Diversity Requirements (or explain why they do not) within two years after SEC approval;

3. have at least two directors who self-identify as diverse in accordance with the Diversity Requirements (or explain why they do not) within four years⁴ or five years⁵ after SEC approval, depending on the Nasdaq market in which the companies are listed. 

A company which does not meet the Diversity Requirements and also fails to provide an adequate disclosure explaining its failure would be subject to Nasdaq delisting procedures⁶.  For companies who face trouble in finding suitable candidates to form a diverse board Nasdaq is prepared to provide such companies with free access to a network of board-ready diverse candidates and a tool to support board evaluation, benchmarking and refreshment.

The Proposal also applies to foreign issuers, including foreign private issuers. However, NASDAQ proposes to allow some flexibility  for compliance by foreign issuers such as applying a different disclosure matrix, varying the definition of "Underrepresented Minority" or by allowing the Diversity Requirement to be met by having two female directors. This is to take into account the foreign issuers' need to comply with diversity regulations and demographics makeup of different jurisdictions.

Gender Diversity in Malaysian Boards

In Malaysia, similar efforts to improve board diversity in companies are evident from the principles and practices encapsulated in the  Malaysian Code on Corporate Governance ("MCCG") published by the Securities Commission Malaysia ("SC").⁷ Although the MCCG is targeted primarily at listed companies, unlisted entities, including state-owned enterprises, are encouraged by the SC to embrace the principles and practices in the MCCG.

Practice 4.5 of the MCCG requires companies to disclose in their annual reports their respective targets and measures on policies relating to gender diversity. Large Companies⁸ are expected to have at least 30% women directors on its board. The statistics below reveal that since the introduction of the MCCG, women participation on the board of Large Companies has continued annually on an upward trend. Further, 682 listed issuers (this includes all issuers and not just Large Companies) have at least one woman director on their board as at 31 December 2019. 

A noteworthy point in Nasdaq's Proposal is that the definition of "female" is based on one's self-identification as a woman, without regard to the individual's designated sex at birth. On the other hand, MCCG does not make such a distinction and the term "woman" is likely to refer to one's biological gender.

Comments

It is doubtful that Malaysia will embrace the concept of "self-identification" regardless of biologically assigned traits. However, it is undeniable that the MCCG has encouraged notable progress in terms of gender diversity in Malaysian companies. It remains to be seen whether women are merely token representations in such companies, or are they really breaking the glass ceiling? 

Footnotes

1 Companies which are exempted include acquisition companies listed under IM-5101-2, asset-backed issuers and other passive issues under Rule 5616(a)(1), cooperatives under Rule 5616(a)(2), limited partnerships under Rule 5616(a)(4), management companies under Rule 5616(a)(5), etc.

2 The definition of "female" is based on one's self-identification as a woman, without regard to their designated sex at birth.

3 "Underrepresented Minority" refers to one or more of the following: Black or African American, Hispanic or Latinx, Asia, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities, or as LGBTQ+.

4 For companies that are a part of the Nasdaq Global Select / Global Market listings.

5 For companies that are a part of the Nasdaq Capital Market listings.

6 Nasdaq will notify a noncompliant company that it has until the latter of its next annual shareholders meeting, or 180 days to either nominate additional directors so that it satisfies the Diversity Requirement or provide the disclosure required by Rule 5605(f)(3). If a company fails to comply within the applicable remedy period, a Staff Delisting Determination Letter would be issued.

7 The MCCG was first published by the SC in 2000 and was revised in 2007 and 2012. The current edition was issued in April 2017.

8 A Large Company refers to a company that is included in the FTSE Bursa Malaysia Top 100 Index or has a market capitalisation of RM2 billion and above at the start of its' financial year.

9 See  https://www.sc.com.my/resources/media-releases-and-announcements/positive-progress-made-on-gender-diversity;  https://www.sc.com.my/api/documentms/download.ashx?id=98f99389-e438-4546-85e4-754717fa56ed, 'Corporate Governance Monitor 2019 at page 6; and  https://www.sc.com.my/api/documentms/download.ashx?id=ff69ce0d-a35e-44d4-996a-c591529c56c7, Corporate Governance Monitor 2020 at page 4. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.