California Considers Mandate to Include Underrepresented Communities on Public Company Boards

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Pending legislation would require public companies in California to have at least one director from an underrepresented community by the end of 2021 and would mark the second instance of California seeking to force the diversification of public company boards though legislation.

TAKEAWAYS

  • Would apply to public companies with a principal place of business in California as disclosed on Form 10-K.
  • Would require at least one director from an “Underrepresented Community” by the end of 2021.
  • Governor Gavin Newsom has until September 30 to decide whether to sign the bill.

On August 30, 2020, the California Legislature passed a bill that would mandate diversity on certain public company boards of directors. No other state in the country currently requires that corporate boards of directors include individuals from underrepresented classes, and this would constitute the second time California seeks to force the diversification of public company boards through legislation. It is expected that, if the law is passed, its constitutionality will be challenged in court. California’s 2018 legislation mandating women on public boards, Senate Bill 826, has already faced several lawsuits challenging its constitutionality. Additional information on that law can be found in our previous client alert here.

The bill, AB 979, cited several statistics demonstrating the lack of diversity on corporate boards, including that, as of 2018, the percentage of board seats of Fortune 500 companies held by people who identified as African American/Black, Hispanic/Latino(a), and Asian/Pacific Islander was 8.6%, 3.8%, and 3.7% respectively. The bill also noted that, as of May 2020, of the 662 publicly traded companies headquartered in California, 13% have at least one Latino board member, 16% have at least one African American board member, 42% have at least one Asian board member, and 6% have at least one non-White or Other board member. In contrast, 100% percent of these boards have at least one White board member.

The bill would require any publicly held domestic or foreign corporation with its principal executive office in California, according to the company’s annual report on Form 10-K, to have a minimum of one director from an underrepresented community on its board of directors by the end of 2021. As set forth in the law, an “underrepresented community” includes individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identify as gay, lesbian, bisexual, or transgender. As a result, any corporation with headquarters in California that has outstanding shares listed on a major U.S. stock exchange would be subject to this mandate, regardless of its state of incorporation.

Going forward, the new bill would require additional directors from underrepresented communities depending on the size of the applicable companies’ board of directors. By the end of 2022, companies subject to the bill would be required to comply as follows:

The bill would require the Secretary of State to publish reports on its website no later than March 1, 2022 (and annually thereafter) documenting the number of corporations in compliance with these provisions. The bill would also authorize the Secretary of State of California to adopt regulations that would impose fines as follows:

• $100,000 for failure to timely file board member information with the Secretary of State
• $100,000 for a first board seat violation
• $300,000 for a second or subsequent board seat violation

Each director seat that would be required to be held by a director from an underrepresented community, and which is not so held during at least a portion of a calendar year, would constitute a violation under the law. That provision also means that if a director from an underrepresented community holds a seat for only a portion of a year, that seat would not be deemed to be in violation of the new law.

The full text of the bill can be found here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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