United States: California's Push For Diverse Corporate Boards

California Assembly Bill 929 (Diversity Bill), which was passed by the California State Legislature on August 30, 2020, and signed into law by California Governor Gavin Newsom on September 30, 2020, requires domestic and foreign publicly held corporations headquartered in California to include people from underrepresented communities on their boards of directors.

Historically Non-diverse Boards

California lawmakers proposed the Diversity Bill to address lack of diversity in corporate board rooms. According to data detailed in the Diversity Bill itself, in 2018, the percentages of Fortune 500 company board seats held by people that identified as African American/Black was 8.6%, Hispanic/Latino(a) was 3.8%, and Asian/Pacific Islander was 3.7%. The Diversity Bill does not identify representation on corporate boards by those who self-identify as gay, lesbian, bisexual, or transgender.

Presently, California has 662 publicly traded corporations headquartered in the state, of which 233 have all-White boards. In contrast, only 16% of these companies have at least one African American/Black board member, 13% have at least one Hispanic/Latino board member, 42% have at least one Asian/Pacific Islander board member, and 6% have at least one non-White/other board member.

The Board Diversity Mandate

The Diversity Bill, which modifies California's Corporations Code, applies to all domestic and foreign publicly held corporations whose principal executive offices are located in California according to the corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission (California Corporation).  A "publicly held corporation" means a corporation with outstanding shares listed on a major United States stock exchange, but does not include corporations with shares quoted on the OTC Markets. Notably, a publicly held corporation headquartered in California has to comply with the Diversity Bill's provisions, regardless of its state of incorporation.

The Diversity Bill mandates racial diversity in the board room, stating that (i) no later than December 31, 2021, a California Corporation must have a minimum of one director from an underrepresented community on its board, and (ii) no later than December 31, 2022, a California Corporation must comply with the following: (a) if its number of directors is nine or more, the corporation must have a minimum of three directors from underrepresented communities; (b) if its number of directors is more than four but fewer than nine, the corporation must have a minimum of two directors from underrepresented communities; and (c) if its number of directors is four or fewer, the corporation must have a minimum of one director from an underrepresented community. A "director from an underrepresented community" means 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.

The Diversity Bill also amends existing legislation created by the passage of Senate Bill No. 826 (Gender Bill), which became law on September 30, 2018, and requires: (i) no later than December 31, 2019, a California Corporation must have a minimum of one female director on its board, and (ii) no later than December 31, 2021, a California Corporation must comply with the following: (a) if its number of directors is six or more, the corporation must have a minimum of three female directors; (b) if its number of directors is five, the corporation must have a minimum of two female directors; and (c) if its number of directors is four or fewer, the corporation must have a minimum of one female director. For purposes of the Diversity Bill, the term "female" means an individual who self-identifies their gender as a woman, without regard to the individual's designated sex at birth.

The California Secretary of State will publish a list of companies not in compliance with the above provisions, and the penalty for any such violation will range from $100,000 to $300,000.

Potential Challenges

Like the Gender Bill, the Diversity Bill is facing scrutiny, especially with regard to its constitutionality. The Diversity Bill states that it is a moderate affirmative action plan designed to increase the representation of women and minorities in historically unrepresented fields and occupations in furtherance of the legislative goals of the Civil Rights Act of 1964; therefore, implying the government mandate is constitutional. However, opponents argue that the Diversity Bill arbitrarily and unfairly discriminates on the basis of gender and race and thus violates the Equal Protection Clauses of the United States and California Constitutions.

Key Takeaway

Now that the Diversity Bill has been signed into law, California Corporations should start thinking about ways to implement its provisions. Note, however, California Corporations are cautioned not to cite the Diversity Bill as the reason for nominating a particular candidate as to avoid any unintended legal consequences. More importantly, publicly held corporations – whether headquartered in California or not – may want to start thinking about diversifying their upper management, as the push for diversity in the board room gains momentum across the country. The leading proxy advisory firms, Glass Lewis and ISS, recently modified their voting recommendations to promote female board membership – the Glass Lewis 2020 Voting Guidelines can he found here, and the ISS 2020 Voting Guidelines can be found here. These prominent firms could be expected to further modify their voting recommendations regarding underrepresented groups, especially since the Diversity Bill has become law.

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