A corporate governance issue that has drawn broad attention is the under­representation of females on corporate boards. Many attempts to address this issue follow a rules-based approach, in which mandated quotas for female representation in boards are imposed. An alternative to a prescriptive regulatory approach is a principles-based one, under which firms publicly disclose their compliance with suggested “best practice” guidelines, and, if their practices depart from the guidelines, firms must explain the reasons for their non-compliance. In the U.S., the SEC has recently approved a Nasdaq principles-based proposal aimed at improving board diversity, in which firms are required to have at least one director who self-identifies as female and another who self-identifies as an underrepresented minority or LGBTQ+. To avoid forced delisting, a firm must “diversify or explain”: either have the required number of diverse directors or explain why it does not. Fried (2021) argues that Nasdaq’s proposal will generate substantial risks for investors, as existing research has shown that increasing board diversity can lead to lower share prices. Fried notes that there has been no research on a “diversify or explain” regulation such as that proposed by Nasdaq.

We seek to fill this gap by studying the effects of a “diversify or explain” legislation that has been in place in Canada since 2014. The Ontario Securities Commission (OSC) introduced female representation policy disclosure requirements, which came into effect in December 2014. The amendment requires listed firms to disclose policies regarding the representation of females on the board and in the executive suite, or to provide an explanation for their absence.

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