New California Law Requires More Diversity on Corporate Boards of Directors

Starting next year, all public companies headquartered in California will be legally required to diversify their boards of directors. This includes diversifying by race, ethnicity, sexual orientation, and gender identity. The move comes after years of criticism that corporate boards throughout the United States remained homogenized. Below, we cover the specifics of California's new law and how it can impact corporations headquartered in the state.

What Does Assembly Bill (AB) 979 Require?

Assembly Bill (AB) 979, which was signed by California Governor Gavin Newsom on September 30, 2020, requires companies to have at least one board member from an “underrepresented community” by the end of 2021. It requires at least two or three -- depending on the board's size -- by the end of 2022.

Who Is Considered a “Director from an Underrepresented Community?”

People from underrepresented communities are defined in the bill as anyone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or an Alaska Native. The definition also encompasses anyone who self-identifies as gay, lesbian, bisexual, or transgender.

Of the 279 top executives at the nation’s 50 largest companies, only 5, or 1.8%, were Black, including two who recently retired, according to an analysis by USA Today. Many of these corporations are still led by all-white executives in the top 5 slots, which include the, CEO, CFO, and 3 other top-paid positions.

"This new law represents a big step forward for racial equity... This is a win-win as ethnically diverse boards have shown to outperform those that lack diversity," one of the bill’s authors, Assemblyman Chris Holden, said in a statement. “While some corporations were already leading the way to combat implicit bias, now, all of California’s corporate boards will better reflect the diversity of our state.”

The new law is likely to establish a new minimum threshold for corporate diversity across the country, much like California’s 2018 law requiring a minimum number of women directors. Haeggqist & Eck, LLP has previously written about this law.

Are There Reporting Obligations?

The California Secretary of State may adopt implementing regulations, but it is expected that corporations will be required to report on their compliance with this new law. Compliance information is likely to be made public. Currently, the California Secretary of State is required to publish an annual report on March 1 of each year providing certain information on the board gender diversity law.

What if a Corporation Does Not Comply with AB 979?

Corporations that do not comply with the requirements of AB 979 are subject to fines, ranging from $100,000 for a first violation or a failure to timely file the required information with the Secretary of State to $300,000 for second or subsequent violations. A “violation” occurs when a director seat required to be held by a director from an underrepresented community is not held by such a director for at least part of the calendar year.

In addition to the punitive fines, corporations may face public criticism as a result of their failure to comply. Given that AB 979 only requires a single seat to be given to a member of an unrepresented community in 2021, companies who fail or refuse to observe the regulations could face significant backlash that has the potential to damage the corporation's reputation and trigger a public relations crisis.

What Can You Do?

If you have questions or concerns about AB 979, especially if a company you have invested on does not plan to comply, you should take immediate action. We encourage you to contact attorney Amber Eck at (619) 468-5222 or reach out by email at ambere@haelaw.com.