Governor Gavin Newsom has recently signed a new law that requires all publicly held companies headquartered in California to include board members from underrepresented communities.
The new law – AB 979 – ensures representation by underrepresented communities in the corporate sector. Underrepresented communities include Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native peoples, or anyone who self‑identifies as gay, lesbian, bisexual, or transgender (LGBT).
The new law requires that by the end of 2021, boards must have at least 1 member from an underrepresented community. By the end of 2022, publicly held corporations must go further. For a board of 9 or more, a least 3 members must be from an underrepresented community. If the board has 5 to 8 members, two must be of the diverse category. If the board has 4 or fewer members, one member must be of the underrepresented category.
Corporations Should Mirror Society’s Diversity
Data collected in 2018 by Deloitte and the Alliance for Board Diversity, showed that 84% of corporate board seats in California were held by people who identified as white. This figure over-represents the group’s share of the general population by 22 percentage points.
The lack of diversity in corporate life in the United States is systemic. Its negative repercussions reverberate through every sector of society including housing, education, criminal justice, and employment
This lack of diversity has negative consequences for the general population as well as for workers, customers, and investors. Lack of diversity limits the possibility for career advancement for underrepresented communities. CEOs tend to hire people who look and act as they do. Products and services offered do not match the needs and preferences of underrepresented consumers.
This new law is modeled after 2018 legislation, Senate Bill 826, establishing similar criteria for women in California boardrooms.
How Do Corporations Fulfill the Law’s Requirements?
The legislation allows corporations to add board seats instead of removing current board members. Adding an underrepresented LGBT board member to a small board by the end of 2021 is possible without removing current board members. The tiered system is designed to take corporate size and structure into account when adding or replacing members in 2022 and beyond. Thus, for a small board, 4 or fewer, the least number of underrepresented board members is 1.
This new legislation must work in conjunction with SB 826, requiring that more women serve on California corporate boards. Corporations will undoubtedly seek board members who can tick both boxes.
The new legislation carries fines for failures to comply. Fines range from $100,000, for a first violation, to $300,000, for later violations. A corporation is in compliance even if an underrepresented board member is seated for only part of the calendar year.
It is still unclear how California will track compliance. The state has no rule in place so far that mandates disclosure of a corporate board member’s ethnicity or self-identification of a board member as LGBT. This matter of compliance may change the recruitment of board members. It will certainly change how board members are interviewed.
Will the Law Survive Legal Challenges and Ambiguities?
It is likely that the new law will be challenged in court. Tracking the legal challenges brought against SB 826 is instructive here. SB 826 has been challenged on Equal Protection grounds. While discrimination is against the law, affirmative action as a tool to remedy discrimination runs afoul of equal protections. SB 826 cases in California are ongoing. AB 979 will likely face similar legal challenges.
Legal challenges in the face of social advancement are nothing new. We will have to wait to see what happens to both SB 826 and AB 979 as these challenges unfold and move through the courts. In the interim, corporations must find ways to incorporate a more diverse board members. This will require continued openness and discussion of the interplay and effect of increased diversity at the top echelons of corporate structure.