By: Héctor González Medina

Diversity, equity and inclusion has become an important initiative for organizations engaged in a wide array of business activities spanning from the private sector to higher education to non-profit foundations.[1] Despite advances in recruitment and retention, especially in technology, media, and telecommunications,[2] a 2020 report by the Alliance for Board Diversity and Deloitte found that the boards of Fortune 500 companies consisted of 83.9% White/Caucasian directors, with only 8.6% identifying as African American/Black, 3.8% identifying as Hispanic/Latinx, and 3.7% identifying as Asian/Pacific Islander.[3]

Similarly, in March 2020, the Latino Corporate Directors Association (LCDA) found that of 662 publicly held corporations headquartered in California, only 105 had at least one African American, only 87 had at least one Latinx board member and 281 had at least one Asian or South Asian board member.[4] In the same report, LCDA found that 233 publicly traded California companies had boards containing only White directors in July 2020.[5] Another report found that despite awareness of a lack of gender diversity on corporate boards, “fewer than 20% of board seats of S&P 1500 companies [we]re held by women” in 2016.[6] In an attempt to remedy this underrepresentation, California has enacted laws to increase diversity on corporate boards via statutory mandate.

California’s Diversity Mandate Legislation

California is no stranger to flexing its market share to accomplish targeted social and policy goals through legislation.[7] In a push for greater diverse representation on publicly held corporate boards, California Governor Gavin Newsom signed Assembly Bill 979 into law on September 30, 2020. The act follows 2018 legislation seeking to increase gender diversity on corporate boards of publicly held California corporations.[8] The newly signed legislation amends the California Corporations Code to require directors from “underrepresented communit[ies]” on the boards of “publicly held domestic or foreign corporation[s] whose principal executive offices . . . are located in California.”[9] The act requires impacted corporate boards to have at least one director from an underrepresented background no later than December 31, 2021.[10] By December 31, 2022, expanded standards based on the size of the corporation’s board of directors will apply:

  1. For boards with nine or more directors, a minimum of three directors from underrepresented communities will be required;
  2. For boards with five to eight directors, a minimum of two directors from underrepresented communities will be required; and
  • For boards with four or less directors, a minimum of one director from an underrepresented community is required.[11]

For purposes of this act, the Legislature 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.”[12] Importantly, these requirements apply to corporations with principal executive offices in California per SEC 10-K filings, whether or not such corporations were incorporated in the State of California or another foreign jurisdiction.[13] Corporations, however, will be allowed to increase the size of their board of directors in order to comply with the law. [14] Despite this flexibility, boards expanded under this law will still be subject to the higher minimum director standards by the end of 2022. [15]

Challenges to California’s Law

California’s diversity statutes have faced minimal challenges in the courts. Currently, both diversity laws are being challenged under a California taxpayer standing doctrine.[16] An initial case seeking injunctive relief against the gender diversity law was dismissed, but is currently on appeal with trial set for June 2021.[17] A related case with nearly identical claims was filed shortly after the 2020 underrepresented community diversity bill was signed into law.[18] A third case, Meland v. Padilla, challenged the gender diversity law as a shareholder suit alleging the law was unconstitutional under the Equal Protections Clause of the 14th Amendment. The case was dismissed for lack of standing in the U.S. District Court for the Eastern District of California,[19] and is currently on appeal to the U.S. Court of Appeals for the Ninth Circuit.

Lasting Effects of California’s Diversity Mandates

Despite pending litigation challenging both diversity laws, California-based corporations have made significant strides in incorporating these requirements onto their boards. According to The Wall Street Journal, when S.B. 826, mandating gender diversity, was adopted on September 30, 2018, “ninety-three California-based members of the Russell 3000 . . . had all-male boards.”[20] A little over a year later, that number had dropped to 17.[21] Additionally, the California Secretary of State’s compliance report found that, in 2019, there were 625 corporations impacted by the new law.[22] Of the impacted corporations, 330 filed a 2019 Corporate Disclosure Statement and 282 reported compliance with state gender diversity requirements,[23] a substantial increase from previous statistics. In addition to this progress, local business groups, such as the highly influential Silicon Valley Leadership Group,[24] as well as corporations, including Oportun, Bloom Energy, and HP Inc. have welcomed the push for greater corporate board diversity.[25]

The law gives no exemption for new or “emerging growth companies,” so these diversity requirements are expected to apply to California-based companies planning an initial public offering (IPO) or direct listing on public stock exchanges.[26] Even if an exemption is subsequently granted or such laws are struck down by the courts, the effect of industry compliance will have downstream effects as corporations will likely be subjected to “greater investor and stakeholder scrutiny regarding board diversity.”[27] Between the widespread business support and proactive implementation of diversity measures, we are unlikely to see a dip in industry appetite for diverse board representation in the years to come.

[1] See, e.g., Google Diversity Annual Report 2020, Google, https://diversity.google/annual-report/ (last visited Nov. 2, 2020); Diversity, Equity & Inclusion, U. of Mich., https://diversity.umich.edu/about/ (last visited Nov. 2, 2020); Diversity, Equity, and Inclusion Annual Report 2020, Ford Foundation, https://www.fordfoundation.org/media/5533/2019-dei-update.pdf (last visited Nov. 3, 2020); Diversity, Equity & Inclusion, Bain & Co., https://www.bain.com/about/diversity-equity-inclusion/ (last visited Nov. 4, 2020).

[2] Missing Pieces: Industry View, Deloitte, https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/missing-pieces-report-industry-view.html (last visited Nov. 2, 2020).

[3] See id.

[4] 233 CA-Based Public Company Boards Lack Racial or Ethnic Diversity, Latino Corporate Directors Association (July 1, 2020), https://latinocorporatedirectors.org/ca_public_company_boards.php.

[5] Id.

[6] Women on Corporate Boards, Robbins Geller Rudman & Dowd LLP (Feb. 16, 2017), https://www.rgrdlaw.com/news-item-Women-on-Corporate-Boards-050417.html.

[7] See, e.g., Cal. Corp. Code § 301.3 (West 2019) (amending the California General Corporation Law to mandate gender diversity on the board of directors of certain California-based corporations); California Consumer Privacy Act of 2018, Cal. Civ. Code § 1798.100-199 (West 2020) (regulating the way businesses collecting California residents’ personal information retain, store, sell or share such information).

[8] S.B. 826, 2017-18 Reg. Sess. (Cal. 2018).

[9] Assemb. B. 979, 2019-20 Reg. Sess. (Cal. 2020).

[10] Id.

[11] Id.

[12] Id.

[13] See id.

[14] Id.

[15] Id.

[16] Crest v. Padilla, 19STCV27561 (Cal. Super. Ct. 2019).

[17] Id.

[18] Crest v. Padilla Redux – Conservative Activist Group Challenges AB 979, California’s Board Diversity Law for “Underrepresented Communities, Cooley PubCo (Oct. 6, 2020), https://cooleypubco.com/2020/10/06/crest-v-padilla-redux/.

[19] Meland v. Padilla, No. 2:19-CV-02288-JAM-AC, 2020 WL 1911545 at*2-4 (E.D. Cal. Apr. 20, 2020).

[20] Rachel Feintzeig, California Law Spurs Companies to Add Female Directors, The Wall St. J. (Dec. 18, 2019, 5:30 AM), https://www.wsj.com/articles/california-law-spurs-companies-to-add-female-directors-11576665000.

[21] Id.

[22] State of California Secretary of State Office, Women on Boards March 2020 Rep. 3 (2020).

[23] Id.

[24] Silicon Valley Leadership Group Supports AB 979, a Landmark Bill to Diversify Corporate Boardrooms, Silicon Valley Leadership Group (Aug. 25, 2020), https://www.svlg.org/silicon-valley-leadership-group-supports-ab-979-a-landmark-bill-to-diversify-corporate-boardrooms/.

[25] See Opportun Applauds the Passage of California AB 979, Oportun (Aug. 31, 2020, 4:05 PM), https://investor.oportun.com/news-releases/news-release-details/oportun-applauds-passage-california-ab-979; Allison Levitsky, Bloom Energy, HP Execs Push California Bill that would Require Diverse Boards, Silicon Valley Bus. J. (Aug. 19, 2020, 5:40 PM), https://www.bizjournals.com/sanjose/news/2020/08/19/ab-979-panel-bloom-hp.html.

[26] New California Law Will Require Increased Diversity on Public Boards, Goodwin Procter LLP, https://www.goodwinlaw.com/publications/2020/10/10_14-new-california-law-will-require (last visited Nov. 3, 2020).

[27] Id.