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Nasdaq Board Diversity Proposals highlights the importance of ESG issues, increased D&O risks



The Nasdaq stock market has submitted a proposal to the US Securities and Exchange Commission requesting permission to enforce new rules aimed at promoting diversity among board members of Nasdaq-listed companies and increasing the publication of diversity statistics. Investors and shareholders have paid close attention (and several lawsuits) in recent years to addressing environmental, social and governance issues (“ESG”) at the board level. Nasdaq's proposal would bring diversity to the boardroom, as well as current new obligations and possible D&O exposures to companies covered by the proposed listing requirements.

In recent years, public companies have been exposed to increased dispute exposure. due to so-called “event-driven” securities cases, where the plaintiff has focused on adverse events that affect the company's operations or finances as opposed to more traditional allegations of incorrect information or omissions in securities archives. Many of these claims, which can be covered by board members and officer liability insurance, have been driven by ESG factors, including alleged poor supervision and corporate governance, failure to deal with climate change or the abuse of employees and other workers in the supply chain.

The Nasdaq proposal underscores the important ESG issue of board diversity ̵

1; which has proven to be as important as revenue growth in predicting a company's long-term success – by requiring listed companies to publicly disclose diversity statistics to the board within a. years when the SEC approved the proposed rule. The time frame for meeting the minimum expectations for the board's diversity varies depending on listing levels, but companies must either meet the board's compositional targets within the applicable period or provide a public explanation as to why the targets cannot be achieved. Companies that do not follow are notified of deficiencies or delisting.

D&O liability insurance provides companies and their executives and board members with protection against lawsuits aimed at corporate information, decision-making and corporate governance issues. Nasdaq-listed companies that either do not follow the proposed diversity recommendations described in the new proposal or provide what investors consider to be an inadequate or insufficient explanation for why the Board's compositional goals are not achieved may be subject to further review. Deviations from Nasdaq's recommendations or information obtained from the information on the composition of the Board of Directors may serve as new data points for suspected securities seekers who monitor the relationship between the share price and adverse events. Consistency with these and other key ESG targets should remain high in mind as policyholders place or renew D&O policies in the coming months.


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