California Expands Board of Director Diversity Requirement

California Expands Board of Director Diversity Requirement

October 14, 2020, Covington Alert

In 2018, via Senate Bill 826 ("SB 826"), California became the first state to require corporations with outstanding shares listed on a major U.S. stock exchange and with a principal executive office in California to include women on their boards of directors.Now Governor Gavin Newsom has signed Assembly Bill 979 ("AB 979"), which adds new Section 301.4 to the Corporations Code to also require such corporations to include a member of an underrepresented community on their boards by the end of 2021. 

Under AB 979:

• By the end of 2021, such corporations must have at least one director from an underrepresented community;
• By the end of 2022, such corporations with more than four but fewer than nine directors must have a minimum of two directors from an underrepresented community; and

• By the end of 2022, such corporations with nine or more directors must have at least three directors from an underrepresented community.

Directors from "underrepresented communities" means individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, or as gay, lesbian, bisexual, or transgender.

The California Secretary of State may adopt regulations to implement these new requirements, and is authorized to impose fines on corporations failing to comply.Fines are $100,000 for a first violation and $300,000 for each subsequent violation.The California Secretary of State is also authorized to fine corporations $100,000 for failing to timely file board member information. 

AB 979 cites multiple sources, including data reported by government agencies and market research conducted by private organizations, to demonstrate the unequal racial, ethnic and gender representation in management and executive positions on corporate boards, and to highlight the benefits of diversifying the makeup of individuals holding these roles.For example, the EEOC found that fewer than 1% of Silicon Valley executives and managers are African American.

AB 979 has already been opposed by at least one political activist group seeking to enjoin its enforcement on state constitutional grounds (the same plaintiff filed a similar lawsuit upon passage of SB 826, Crest v. Alex Padilla I, which is still pending).Although the text of AB 979 does not make constitutional issues explicit, the California Legislature stated that AB 979 aligns with the legislative goals of federal laws, including Title VII of the Civil Rights Act of 1964 and the Sarbanes-Oxley Act of 2002.AB 979 was one of a series of bills signed on September 30, 2020 with the goal of advancing racial equity and justice in the state of California, including the landmark legislation establishing a task force to make recommendations on reparations for slavery.

Our earlier post on SB 826 is here.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Corporate Governance practice.