California Assures Diversity to Publicly Traded Companies
California Gov. Gavin Newsom recently signed Assembly Bill (AB) 979 requiring publicly held corporations with principal executive offices in California as indicated in the corporation's Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) to each have at least one director from an underrepresented community by the end of 2021. By the end of 2022, each of these corporations would be required to have two directors from underrepresented communities if the corporation has more than four but fewer than nine directors or at least three directors from underrepresented communities if the corporation has nine or more directors.
Underrepresented communities include individuals who "self-identif[y] as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identif[y] as gay, lesbian, bisexual, or transgender."
The law, signed on Sept. 30, 2020, also requires the California Secretary of State to report certain information about corporations' compliance with the bill and authorizes fines for violations ($100,000 for failure to timely file board information or for a first violation of the bill and $300,000 for a second or subsequent violation).
Existing law under California Senate Bill (SB) 826 requires publicly held corporations with principal executive offices in California as indicated in the corporation's Form 10-K filed with the SEC to have at least one female director on their board as of the end of 2019. Subsequently, by the end of 2021, such corporations with five directors are required to have at least 2 female directors, and corporations with six or more directors are required to have a minimum of three female directors. SB 826 already has two lawsuits challenging its constitutionality, and expectations are that AB 979 also could face legal challenges.
AB 979 requires self-certification for membership in an underrepresented community, and corporations complying with the measure should make a good faith attempt to fully adhere to it. In other words, corporations should integrate compliance with AB 979 with other organizational diversity efforts.
Studies put forth by McKinsey1, The Wall Street Journal2 and other publications have demonstrated that a diverse leadership is a boon for companies. Additionally, most proxy advisor firms and a significant number of funds have an environmental, societal and governance (ESG) component or mandate, which, among other requirements, require diverse leadership. This trend has been increasing in recent years, so it is likely that some type of ESG mandate will soon be nearly universal among funds. Whether or not there is a legal requirement for diverse leadership, public companies should consider these societal trends.
Non-compliance with AB 979 risks a substantial public backlash with prevailing "cancel" cultural trends.3 Shareholders and boardrooms should expect reporters, bloggers and the public to verify AB 979 compliance. The mandate for California to publish non-compliance reflects California's understanding of public demand for diversity throughout organizations, including at highest leadership levels, which includes the boardroom.
It is worth noting that women from underrepresented communities may be in particularly high demand for board candidacies because these women will help subject corporations satisfy each of California's requirement for female board directors and the directors from underrepresented communities. While inadvertent discrimination against men from underrepresented communities may occur, California's overall expectation is that boardrooms will be reshaped and lead corporations toward board compositions more reflective of the United States' population generally.
In our experience, current director recruitment efforts, particularly for publicly traded companies, tend to favor directors with prior or current experience as directors, which may not automatically lead to diversity or compliance with AB 979. Corporations, educators and industry trade groups should consider enhanced director development programs to identify, promote, and train director candidates from underrepresented communities.
Holland & Knight's attorneys and professionals are experienced with advising clients on corporate governance matters, including board composition and corporate director recruiting programs with diversity policies. Please contact Jay Bettinger or visit the firm's Corporate Governance Practice to learn more.
Notes
1 "Diversity Wins: How Inclusion Matters," McKinsey & Co, May 19, 2020
2 "The Business Case for More Diversity," The Wall Street Journal, Oct. 26, 2019
3 See, e.g., "Social Media Called Out These Fashion Brands. What’s Next?" Vogue, June 17, 2020