Social unrest currently roiling the U.S. body politic has brought systemic racial inequity and injustice into sharp focus. Why, after decades of public statements and corporate commitments to enhancing racial diversity has so little progress been made?  Because, as it’s often said, change starts at the top, one avenue to begin to address these issues is to increase the number of African-Americans and ethnic and other underrepresented minorities represented on boards of directors. Yesterday afternoon, California Governor Gavin Newsom signed into law AB 979, designed to do for “underrepresented communities” on boards of directors what SB 826 did for board gender diversity. (See this PubCo post.) As reported in the Sacramento Bee, prior to signing the bill, Newsom said that “[w]hen we talk about racial justice, we talk about empowerment, we talk about power and we need to talk about seats at the table.”

The new law requires that boards of public companies, including foreign corporations with principal executive offices located in California, include specified numbers of directors from “underrepresented communities.” According to the Assembly analysis of the bill, since

“the beginning of recent social unrest, corporations have publicly messaged their support for diversity and Black lives. However, critics have pointed out this public support does not translate to diversity within a company and will not lead to long-term structural change. AB 979 will serve as a springboard to: address the ethnic pay gap, facilitate employment and outreach opportunities, promote board diversification, establish pipeline creation and upward mobility of diverse technical talent, and retention of that talent through company culture and development.” 

A number of other states have legislation on the books or in the works that is largely patterned after California’s board gender diversity law, SB 826, although the timing and diversity goals may vary. Will other states now follow suit with regard to board diversity for underrepresented communities?  Will corporations incorporated in other states observe its provisions or challenge the application of this California law?

What the new law requires. Like SB 826, this new law will require, no later than the close of 2021, that a “publicly held corporation” (that is, a corporation with outstanding shares listed on a major U.S. stock exchange) with principal executive offices (according to its Form 10-K) located in California, no matter where it is incorporated, have a minimum of one director from an underrepresented community.  A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender.  A corporation may increase the number of directors on its board to comply with the new law. No later than the close of 2022, a corporation with more than four but fewer than nine directors will be required to have a minimum of two directors from underrepresented communities, and a corporation with nine or more directors will need to have a minimum of three directors from underrepresented communities.  As with board gender diversity, the bill will likely have the effect of  compelling companies to look outside their traditional channels to find new directors from underrepresented communities.

The bill will also require, on or before specified dates, that the Secretary of State publish various reports on its website documenting, among other things, the number of corporations in compliance with the bill’s provisions, the number that have moved their headquarters in or out of California and the number no longer publicly traded. The legislation also authorizes the imposition of fines for violations in the amounts of $100,000 for the first violation, and $300,000 for each subsequent violation. Failure to timely file board member information with the Secretary of State is also subject to a fine of $100,000. (Note that no regulations have yet been adopted to implement the fines authorized under SB 826, which was signed into law in 2018.)

Why did the legislature believe this bill was necessary? The findings set forth in the bill establish the case that there is a deep underrepresentation of Black and other minority communities in industry.  Among the bill’s findings:

  • only 31% of African-Americans and 22% of Latinos worked in management, professional and related occupations, while 54% of Asians and 41% of whites worked in the same occupations.
  • according to data from Deloitte and the Alliance for Board Diversity, at Fortune 500 companies, only 8.6% of  directors identified as African American/Black, 3.8% as Hispanic/Latino(a), and 3.7% as Asian/Pacific Islander.
  • data from the Latino Corporate Directors Association showed that, of 662 publicly traded companies headquartered in California, 233 had all white boards as of May 2020, only 13% had at least one Latino board member, 16% at least one African-American board member, 42% at least one Asian board member, and 6% at least one non-white or other board member.
  • in 2019, 90% of CEOs were white, according to the Bureau of Labor Statistics
  • since the enactment of Senate Bill 826, data shows that out of 511 director seats filled by women in California publicly traded companies, 77.9 percent are white. In comparison, 3.3 percent of female directors hired are Latina, 5.3 percent are African American, and 11.5 percent are Asian.
  • more racially and gender diverse boards also further the independence of boards, a goal of SOX, “which pushed for more independent boards that decrease the likelihood of corporate fraud.”
  • directors who “hold numerous board seats exert considerable influence over United States corporations and broader society. As directors gain seats on more boards, they gain influence over the creation of policy in more companies and rise in corporate status amongst the corporate elite, which in turn enhances their influence on the creation of policy.”

The bill found that underrepresentation of racial and ethnic minorities is especially pronounced in high tech. The bill found that about one quarter of U.S. professionals and about 5% to 6% of the total labor force are employed in high tech. The EEOC reports that “employment in computer science and engineering is growing at twice the rate of the national average. These jobs tend to provide higher pay and better benefits, and they have been more resilient to economic downturns than other private sector industries over the past decade. In addition, jobs in the high tech industry have a strong potential for growth.” Nevertheless, relative to private industry overall, “the high tech sector employs more White and Asian-American employees and fewer African-American and Hispanic employees,” especially executives. In particular, the bill finds that

  • “highly ranked universities graduate African American and Latino computer science and computer engineering majors at twice the rate that leading technology companies hire them.” 
  • less than 1% of Silicon Valley executives and managers are African-American.
  • according to McKinsey, “for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8 percent.
  • according to Dalberg Global Development Advisors, “the high tech industry could generate an additional $300–$370 billion each year if the racial or ethnic diversity of tech companies’ workforces reflected that of the talent pool.”

The bill’s findings also address the legislation in the context of affirmative action plans, presumably, to fend off potential future constitutional challenges based on equal protection. According to the San Francisco Chronicle, a senior attorney at the conservative legal organization that has a challenge to California’s board gender diversity legislation pending in the 9th circuit said that the organization “would consider bringing or supporting a legal challenge over the bill if it becomes law.” (Notably, however, while there were multiple official opponents of the board gender diversity legislation—including a coalition of over two dozen organizations that comprised every variety of Chamber of Commerce in California—no major business groups, such as the California Chamber of Commerce, were identified as formal opponents of this new law, reports CalMatters.) According to the Senate analysis, a “statute that draws a distinction based upon race or ethnicity in this fashion—whether remedial or punitive in intent—is suspect and only passes constitutional muster if it can meet the strict scrutiny test: that the statute is narrowly drawn to meet a compelling government interest…. Remedying past discrimination can be a sufficiently compelling government interest to withstand strict scrutiny.” The analysis also acknowledges that the bill may run afoul of the “internal affairs doctrine,” enunciated by SCOTUS in Edgar v. Mite. Under that doctrine, only the state of incorporation may impose requirements on companies that determine how a corporation conducts its internal affairs.

Posted by Cydney Posner