New California Law Mandates Corporate Board Diversity

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In the midst of national conversations surrounding racial equity and social justice, Governor Gavin Newsom signed AB 979 into law on September 30, 2020. AB 979 is a first-of-its-kind legislation requiring that no later than the close of the 2021 calendar year, publicly held domestic or foreign corporations, whose principal executive office is in California, include a minimum of one director from an underrepresented community.1 An individual from an underrepresented community includes “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”

While the number of directors from an underrepresented community required for corporations with four or fewer directors would remain the same in 2022, the requirement would scale up for larger boards. Corporations with over four but fewer than nine directors will have to have at least two directors from underrepresented communities, and corporations with nine or more directors must have at least three directors from underrepresented communities by the end of 2022.

AB 979 follows California SB 826, enacted during a wave of #MeToo-inspired legislation passed by the California Legislature in 2018, which mandated similar requirements for gender diversity on corporate boards. Like SB 826,2 AB 979 would require the California Secretary of State to track and report compliance and levy fines for non-compliance. Non-compliant companies would risk fines between $100,000 and $300,000. Because the period for compliance with AB 979 is very limited, corporations that fall under the scope of the legislation must immediately ensure their compliance.

As with SB 826, AB 979 leaves certain questions unanswered, and will likely face challenges on constitutional and other grounds.3

The Broader Implications of AB 979

Employers – even those not headquartered in California – should be prepared for the potential impacts of AB 979. As noted, SB 826 was enacted in response to the #MeToo movement and the legislation became part of the public discourse surrounding gender diversity in boardrooms. AB 979 is likely to inspire similar discussion regarding the inclusion of other underrepresented communities in corporate boardrooms.

As reported in the Wall Street Journal, when SB 826 went into effect, 93 California-based companies in the Russell 3000 had all-male boards; a little over a year later, only 17 had no women on their boards.4 Since the law went into effect, according to the Wall Street Journal, 244 California companies in the Russell 3000 have added at least one female director, and 41 companies have added two female directors. Moreover, over 90% of the companies in the S&P 500 now include two or more women on their boards, compared to the 86% in the prior year. Indeed, some venture capital firms like BELLE Capital USA focus on funding companies that have at least one female founder or C-level executive, and/or are willing to recruit top female talent to the C-suite and Board of Directors. In addition, Goldman Sachs Group Inc. has already announced it would no longer take companies public without at least one board director from an underrepresented group.

Several states also have pending legislation patterned after the California SB 826 model, while others have taken more limited approaches.5 In Illinois, for example, the law requires domestic and foreign companies (with principal executive offices in Illinois) to include in their state annual filings data on board composition, the corporation’s process for identifying and evaluating nominees for the board and executive officer positions, including whether and how demographic diversity is considered, and a description of the company’s policies for promoting diversity.6 In New York, a recently enacted law requires domestic and foreign corporations authorized to do business in the state to report the composition of their boards. In Maryland, another new law encourages companies doing business in the state to have at least 30% women directors by December 31, 2022, but the requirement to report board composition applies only to domestic companies.7 Other states, like Ohio, have introduced resolutions to urge all private and public companies and institutions doing business in the state to commit to increasing gender diversity on their boards and senior management positions, and to set and publish goals by which to measure their progress.8 Iowa and Pennsylvania legislatures have introduced similar resolutions.9

Moreover, the 2019 findings in “Board Practices Report: Common Threads Across Boardroom,” published jointly by Deloitte’s Center for Board Effectiveness and the Society for Corporate Governance demonstrate that most respondents (61%) said that their boards are focused on increasing gender diversity. However, the very same study demonstrated that the focus on other aspects of diversity, such as race and ethnicity (48%), continued to lag behind in the boardroom. These numbers suggest that the companies in question are paying attention to investor demands for more equity in the boardroom and the novel California legislations.

Looking Ahead

If the past is any indication, legislatively speaking, what starts in California has a tendency to expand nationally. Corporations throughout the country should watch for similar legislative developments on this novel topic. Corporations also may wish to conduct a self-audit of their boards and executive teams, and proactively embrace steps to encourage diversity, as legislatures and the public take notice.

 

Footnotes

1 2019 California Assembly Bill No. 979, California 2019-2020 Regular Session.

2 Cal. Corp. Code § 301.3 (West)

3 See for e.g.Meland v. Padilla, 2:19-CV-02288-JAM-AC, 2020 WL 1911545, at *1 (E.D. Cal. Apr. 20, 2020).

4 Rachel Feintzeig, California Law Spurs Companies to Add Female Directors,The Wall St. Journal, Dec. 18, 2019.

805 Ill. Comp. Stat. Ann. 5/8.12 (2019).

7 Md. Tax-Prop. Code Ann. § 11-101 (2020).

8 Minority Caucus, House Lawmakers Introduce Legislation To Encourage More "Women On Board", Minority Caucus Blog, Sept. 10, 2019.

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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