The Nasdaq stock market has filed a proposal with the US Securities and Exchange Commission requesting permission to enforce new rules aimed at advancing diversity among board members of Nasdaq-listed companies and increasing disclosure of diversity statistics. Investors and shareholders have devoted significant attention (and several lawsuits) in recent years to addressing environmental, social, and governance (“ESG”) issues at the board level. Nasdaq’s proposal would bring diversity to the forefront of the boardroom, as well as present new compliance obligations and possible D&O exposures to companies subject to the proposed listing requirements.

Over the past several years, public companies have been subject to increased litigation exposure due to so-called “event-driven” securities lawsuits, where plaintiffs have focused on adverse events impacting company operations or financials as opposed to more traditional claims of misrepresentations or omissions in securities filings. Many of those claims, which can be covered by directors’ and officers’ liability insurance, have been driven by ESG factors, including alleged poor oversight and corporate governance, failure to address climate change, or mistreatment of employees and other workers in the supply chain.

The Nasdaq proposal underscores the important ESG issue of board diversity—which has been shown to be as important as revenue growth in predicting a company’s long-term success—by requiring listed companies to publicly disclose board-level diversity statistics within one year of the SEC’s approval of the proposed rule. The timeframe to meet the minimum board diversity expectations varies by listing tiers, but companies must either meet the board composition objectives within the applicable period or provide a public explanation of why the objectives cannot be met. Companies that fail to comply are subject to notice of deficiencies or delisting.

D&O liability insurance affords protection to companies and their officers and directors from lawsuits targeting company disclosures, decision making, and corporate governance issues. Nasdaq-listed companies that either fail to comply with proposed diversity recommendations outlined in the new proposal or provide what investors deem to be an inadequate or insufficient explanation of why board composition objectives are not met could be subject to additional scrutiny. Deviation from Nasdaq’s recommendations or information gleaned from the added board composition disclosures could serve as new data points for putative securities plaintiffs monitoring correlation between stock price and adverse events. Compliance with these and other important ESG objectives should remain top-of-mind as policyholders are placing or renewing D&O policies in the coming months.