California Capitol Watch: New Law Requires Corporate Board Diversity

By Eric Gelber

This edition of California Capitol Watch discusses AB 979 (Holden), a newly enacted law that requires diversity on the boards of publicly traded companies.

What issue/problem does the new law address?

The legislative findings and declarations in AB 979 note, among other things, the following: The United States Bureau of Labor Statistics reported in 2019 that 90% of chief executives were white. According to the Latino Corporate Directors Association, there are 662 publicly traded companies headquartered in California. Two hundred thirty-three of these companies have all white boards of directors as of this year. Data from the Latino Corporate Directors Association shows that in the boards of these 662 publicly traded companies, only 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 as of May 2020. In contrast, 100% of these boards have at least one white board member.

According to the author, since the beginning of recent social unrest, corporations have publicly stated their support for diversity and Black lives. However, unless this support includes diversity within corporations, it will not lead to long-term structural change.

A report in the Harvard Business Review concluded that a diverse board can contribute to better decision making, improve company governance, and can respond to market shifts more effectively. The McKinsey & Company Consulting Firm suggests that these benefits are not restricted to the board of directors, but can benefit entire companies. For example, McKinsey found that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians and companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians.

What AB 979 Does

The new law requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are in California to have a minimum of one director from an underrepresented community on its board. By the close of the 2022 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are in California is required, if its number of directors is nine or more, to have a minimum of three directors from underrepresented communities. If its number of directors is more than four but fewer than nine, the corporation is required to have a minimum of two directors from underrepresented communities. If its number of directors is four or fewer, the corporation is required to have a minimum of one director from an underrepresented community. A corporation may increase the number of directors on its board to comply with these requirements. The Secretary of State is authorized to impose fines for violations of these provisions.

The law defines a director from an underrepresented community as 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.

Comments

AB 979 is similar to a bill enacted in 2018 (SB 826 (Hancock)), which focused on increasing female representation on boards of directors. The findings and declarations in AB 979 point out that, since the enactment of SB 826, data show that out of 511 director seats filled by women in California publicly traded companies, 77.9% are white. In comparison, 3.3% of female directors hired are Latina, 5.3% are Black, and 11.5% are Asian.

The statute enacted by SB 826 is the subject of two lawsuits challenging its validity. The first lawsuit was filed in August 2019 by Judicial Watch, a Washington-based conservative activist group, and alleges that the law is unconstitutional and spending taxpayer money to enforce the law is illegal under the California Constitution. That case remains pending and may go to trial in June of this year.

The second lawsuit, filed in November 2019 by the libertarian Pacific Legal Foundation, claims that the state’s mandate is unconstitutional and in violation of the Equal Protection Clause of the U.S. Constitution because it discriminates on the basis of sex. The lawsuit alleges that requiring a corporation to consider gender when voting to add members to its all-male, seven-member board of directors forces it to discriminate. A federal District Court dismissed this case in April 2020, ruling that the plaintiff shareholder lacked standing to bring the action because the law applies to corporations, not shareholders, and did not impact his right to vote for the board member he chooses. The court did not rule on the constitutionality of the statute. The case is on appeal in the 9th Circuit.

Judicial Watch has again filed a lawsuit, this time against implementation of AB 979. The litigation seeks to enjoin the Secretary of State from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota and violates the California constitution. The lawsuit asserts that the law’s “requirement that certain corporations appoint a specific number of directors based upon race, ethnicity, sexual preference, and transgender status is immediately suspect and presumptively invalid” under the equal protection provisions of the California Constitution and subject to “strict scrutiny” by the courts. Because it classifies directors by virtue of their race, ethnicity, sexual preference, or transgender status, the lawsuit alleges, AB 979 can only be justified by a compelling governmental interest, and its use of race and ethnicity must be narrowly tailored to serve that compelling interest.  Plaintiffs assert the Secretary of State “cannot make these difficult showings.” Therefore, plaintiffs allege, “AB 979 is unconstitutional and any expenditure of taxpayer funds or taxpayer-financed resources in furtherance of, ensuring compliance with, or otherwise effectuating the racial, ethnicity, sexual preference, and transgender quotas required by AB 979 is illegal.”

As noted in the Senate policy committee analysis of AB 979, “[s]trict scrutiny is a notoriously high bar to meet, but it is not insurmountable.” Remedying past discrimination can be a sufficiently compelling government interest to withstand strict scrutiny. Citing reasons such as those stated in the bill’s findings and declarations, including findings on the dearth of representation of racial and ethnic minorities on corporate boards, the State will seek to show that AB 979 is necessary to achieve a compelling state interest. It’s important to point out that corporate board appointments do not fall under the purview of governmental hiring or any other practice contemplated by Proposition 209. This means that Proposition 209’s bar on state preferential treatment based on race, sex, color, ethnicity, or national origin in public employment, education, or contracting does not apply to AB 979. Thus, cases invalidating state affirmative action programs because of Proposition 209 are irrelevant to AB 979.

The only opposition to AB 979 listed in committee analyses came from one individual, a corporate law attorney, on grounds that it is unconstitutional and will adversely affect the participation of male and non-binary persons on the boards of directors of publicly held corporations. Observing that the provisions of AB 979 will layer on top of the provisions of SB 826, this individual stated that publicly held corporations will be required to comply with both sets of quotas. Therefore, individuals who self-identify as both female and as African American, Hispanic, or Native American will undoubtedly be preferred as director candidates because they will satisfy both quotas. The easily predictable result of enactment of AB 979, this individual argues, would be a decrease in the over-all number of directors on publicly held company boards who self-identify as male or non-binary and as being from an underrepresented community.

The fate of SB 826 and AB 979 is in the hands of the courts. Stay tuned.


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About The Author

Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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42 Comments

  1. Ron Oertel

    The finding:

    The United States Bureau of Labor Statistics reported in 2019 that 90% of chief executives were white.

    The law:

    The law defines a director from an underrepresented community as 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 new law requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are in California to have a minimum of one director from an underrepresented community on its board.

    Seems to me that the new law would allow 100% of board members to be “white”, depending upon how they identify.

    In any case, it appears that the legislature has a different view regarding Affirmative Action than the majority of voters do. It also seems to me that this isn’t the only example of a difference between the two bodies.

      1. Ron Oertel

        Don’t know.  Maybe it’s due to the groups that support their candidacy.  Takes a lot of money to (successfully) run for office, and/or may be due to the type of people who run for office.

        As some have noted, this seems to occur at local levels, as well. Though on this particular issue, I wouldn’t be surprised if the majority of Davis voters supported Affirmative Action. Nor would I be surprised if all of the council members did.

        The broader issue sounds like a topic for another article.

        1. Ron Oertel

          I’m not sure what your question was, but suggest leaving it at that.

          Personally, I think the more interesting thing here is that the new law would apparently allow 100% of board members to be white males, depending upon how they identify.

          I find that rather amusing. I’m sure that some others do not.

        2. Eric Gelber

          … new law would apparently allow 100% of board members to be white males, depending upon how they identify.

          Not sure how you came to that conclusion. If someone identifies only as white, they wouldn’t be counted toward the company’s board diversity minimum.

        3. Ron Oertel

          Eric:  It’s apparently in the law I cited above (and below). This would include “white males”. Did you miss that?

          or who self-identifies as gay, lesbian, bisexual, or transgender.

          Keith:  Good point, as well.

        4. Eric Gelber

          Also, don’t forget that the earlier law referenced in the article (SB 826) requires female representation on boards. So, all-male boards would be out of compliance.  But yes, a board could be all white if the AB 979 diversity requirements were met through adding members who were gay, lesbian, bisexual or transgender.

        5. Ron Oertel

          Interesting, Eric. Did that earlier law go into effect?

          Would, for example, the inclusion of one white lesbian theoretically meet all of the smorgasboard of requirements for a given board?

          Also wondering why they didn’t include “disability” as an under-represented group. I would think that they likely are, in reality.

        6. Eric Gelber

          Ron – Good question re disability. The bill initially included only African Americans. It was then amended to include other racial/ethnic groups. It was only late in the process that gay, lesbian, bisexual or transgender were added, no doubt to get broader support for the bill. But as groups are added, the less likely the original intent of the bill (increasing African American representation on boards) would be met. So, assuming disability was even considered, the further dilution of the original intent would be the reason not to add that category. Sounds like a good idea for a new bill this year, though

        7. Ron Oertel

          I’m not sure it’s a good idea, for a variety of reasons.  Including, but not limited to how they (accurately) determine someone’s characteristics and how they identify. Seems to me that this would (also) include privacy concerns, and a potential for misrepresentation.

          I believe there’s likely other under-represented groups, as well.

        8. Ron Oertel

          To clarify, probably none of this is a good idea, and has predictably led to legal challenges.

          This also leads me to question the overall leadership of California.

        9. Eric Gelber

          Privacy is protected. Disclosure of disability (or sexual orientation, or race/ethnicity) would be entirely voluntary. If an individual chooses not to disclose sexual orientation or disability, for example, they could be on the board; however, they wouldn’t be counted for purposes of meeting board diversity requirements.

        10. Ron Oertel

          Conversely, I would think that it’s possible that someone could provide misleading information regarding their identity, so that a given board can meet its requirements.

           

        11. Eric Gelber

          … probably none of this is a good idea, and has predictably led to legal challenges.

          We’ll have to wait and see how the courts rule on legality. Whether it’s a good idea is a different issue.

        12. Ron Oertel

          Or, not even “misleading”, depending upon how one counts percentages (and identifies with one identity, vs. another).

          It seems that lawmakers proceed with this type of thing, without thinking it through.

  2. Chris Griffith

    Here we have an extremely dysfunctional state government telling private Enterprise how to run their businesses boy talking about the tail wagging a dog..

    It should be private Enterprise private corporations and public corporations telling state government how to function properly.

    If the banana republic to California continues down this path there will be nothing but homelessness and poverty in the state of California.

    1. Keith Olsen

      If California keeps interfering with businesses in California with laws like this it will only lead to more businesses leaving the state.  Texas will be waiting with open arms.

  3. Alan Miller

    The law defines a director from an underrepresented community as 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.

    I didn’t see Jews or Muslims on the list.  What gives?

  4. Bill Marshall

    I found this interesting…

    reportin the Harvard Business Review concluded that a diverse board can contribute to better decision making, improve company governance, and can respond to market shifts more effectively. The McKinsey & Company Consulting Firm suggests that these benefits are not restricted to the board of directors, but can benefit entire companies. For example, McKinsey found that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians and companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians.

    If true, (and I have no reason to doubt that), wouldn’t the Boards, and the stockholders want to increase diversity on their Boards without the “big brother” interference, mandates, quotas that ‘smack’ (or at least, ‘sniff’) of ‘tokenism’?

    This sure appears to be “a legislative act too far”…

      1. Bill Marshall

        Did it say how many of these boards that were performing better were forced by government into those diversity goals?

        I have no clue… not a subject I feel a need to drill down into… to paraphrase the line Margaret Mitchell gave Rhett Butler, “Frankly, Alan, I don’t give a damn…”

        But as someone invested in ‘publically traded companies’, I expect them do do what is right, for ‘business reasons’, and if that means diversity on the Boards (and I suspect that is true, based on the research cited), that means “hell yes!  Frankly (although I’m not), Alan, I DO give a damn… ”

        Not picking on you Alan… just to have a name other than “Scarlett” to use in my literary reference… and, you made a good point, in saying I had a good point… [see big grinning, tongue in cheek, emoticon]

      1. Ron Oertel

        To make it “complete”, seems to me that they’d also have to make it apply to companies doing business in California, in any form.

        Including any from China. (Which probably isn’t all that “diverse”.) Though I’m not sure if they’re “publicly-traded”.

        And for that matter, why stop at “publicly-traded?

        🙂

    1. Eric Gelber

      Penalties provided for in the bill:

      (A) For failure to timely file board member information with the Secretary of State pursuant to a regulation adopted pursuant to this paragraph, the amount of one hundred thousand dollars ($100,000).
      (B) For a first violation, as described in paragraph (2), the amount of one hundred thousand dollars ($100,000).
      (C) For a second or subsequent violation, as described in paragraph (2), the amount of three hundred thousand dollars ($300,000).

      Here is paragraph (2):

      (2) For the purposes of this subdivision, both of the following apply:
      (A) Each director seat required by this section to be held by a director from an underrepresented community, which is not held by a director from an underrepresented community during at least a portion of a calendar year, shall count as a violation.
      (B) A director from an underrepresented community having held a seat for at least a portion of the year shall not be a violation.

    1. Bill Marshall

      Not an attorney, but it plainly says ‘publicly traded corporations’… looks like any 503 c – X would not not be subject… not publicly traded… and would even be more onerous, and foolish, if they are included…

  5. Moderator

    I would respectfully suggest that this conversation has run it course and is deteriorating into personal acrimony. Let’s leave it now. Please come back tomorrow and see what new topic David has presented for you.

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