How Comply-or-Explain Disclosure Regulation Can Improve Corporate Governance and Gender Equality

In 2020, the Nasdaq stock market filed a proposal with the U.S. Securities and Exchange Commission seeking permission to adopt a board diversity-related disclosure requirement for its listed companies. In 2021, the SEC approved the proposal, making Nasdaq the most significant stock exchange to date to mandate listing rules that reflect the intention of diversifying corporate boardrooms, wrote Prof.SarahKaplan and colleagues in an article from The CLS Blue Sky Blog. The post is based on a research article  “Corporate Governance and Gender Equality: A Study of Comply-or-Explain Disclosure Regulation,” published in the Seattle University Law Review. Nasdaq’s support for diversity is not the first attempt to address homogeneous boards in the U.S. In 2009, the SEC adopted a rule requiring publicly traded firms to report whether they consider diversity in identifying director nominees. More recently, California mandated diversity quotas. Between these two approaches – the light touch of the SEC’s “pure disclosure” and the heavy hand of California’s quota – Nasdaq’s new listing rule reflects a principles-based philosophy that is implemented through a “comply-or-explain” formulation. It requires listed companies to state whether they adhere to a particular standard of behavior (“comply”) and, if not, they must provide reasons for their lack of compliance (“explain”).