Many California corporations will have to increase the diversity of their boards of directors under a new law signed Wednesday by Gov. Gavin Newsom to address a shortage of people of color in executive positions.
The law requires some 625 publicly held corporations headquartered in California to include at least one person from an underrepresented community by the end of next year, with additional appointments required in future years.
Newsom said during an online signing ceremony that the law is necessary to promote diversity in corporate boardrooms as part of a broader effort to improve racial equity in the U.S.
“When we talk about racial justice, we talk about empowerment, we talk about power, we need to talk about seats at the table,” Newsom said.
The new law is likely to be challenged in court by conservative groups including Judicial Watch, which sued to contest a 2018 law that required a minimum number of women on corporate boards.
“It’s a quota, and quotas are unconstitutional,” said Thomas Fitton, president of Judicial Watch, regarding the law signed by Newsom. Fitton made the same argument in a pending lawsuit about the law requiring women on corporate boards.
Fitton said his organization is reviewing the new law before deciding whether to go to court.
“We are deeply concerned about the new legislation,” Fitton said. “It’s a violation of the equal protection clause of the U.S. Constitution. It undermines the core legal concept of equal protection.”
Other constitutional law experts disagree that the measure is on weak ground, including Erwin Chemerinsky, dean of the UC Berkeley School of Law. He said the laws on the subject are unclear and will have to be decided by the courts.
“I believe that there is a compelling need to enhance diversity on corporate boards,” Chemerinsky said. “The question is whether a court will find these laws to be sufficiently narrowly tailored. Because there are few other alternatives, I think there is a strong argument that such laws are constitutional.”
Under Assembly Bill 979, publicly held corporations headquartered in California are required to have at least one director from an underrepresented community by the close of 2021.
By the end of 2022, corporate boards with four to nine members must have two people from underrepresented communities, and those with more than nine members must have at least three people from those communities.
Directors from an underrepresented community include those who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identify as gay, lesbian, bisexual or transgender.
“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,” said Assemblyman Chris Holden (D-Pasadena), one of the authors of the bill, on Wednesday. “This is a win-win, as ethnically diverse boards have shown to outperform those that lack diversity.”
He said that after the death of George Floyd in police custody, many corporations offered public support for diversity, but that too many firms have not acted on that support.
Lawmakers cited 2018 data from Deloitte and the Alliance for Board Diversity that found the percentage of Fortune 500 company board seats held by people who identified as African American or Black was 8.6%, while Latino people held 3.8% of seats, and people identified as Asian or Pacific Islander held 3.7%.
That study indicated that 84% of board seats were held by people identified as white, which lawmakers said is 22% higher than that group’s share of the general population.
Lawmakers have urged corporations for years to make their boards more reflective of society, said Assemblywoman Cristina Garcia (D-Bell Gardens), another author of the new law.
“However, it is clear we can no longer wait for corporations to figure it out on their own,” Garcia said.
Supporters touted the outcome of Senate Bill 826, which required public companies headquartered in California and traded on the NYSE or Nasdaq to have at least one female director by Dec. 31, 2019.
By that date, only 4% of California-headquartered companies had all-male boards, down from 29% as of June 30, 2018, according to a June study by Annalisa Barrett, senior advisor for the KPMG Board Leadership Center.
Opponents say California does not have power to dictate the selection of board members to firms incorporated in Delaware and other locations outside California, even if their headquarters is in the Golden State.
“Limiting a person’s opportunity based solely because of their skin color, sex, or sexual orientation is the thing we should be trying to avoid, yet AB 979 requires exactly that,” said Anastasia Boden, a senior attorney at Pacific Legal Foundation.
Corporate attorney Keith Bishop also warned that the new law, when coupled with the 2018 requirement, will have the unintended consequence of hurting participation by men and non-binary persons on board.
“Publicly held corporations will be required to comply with both sets of quotas,” he said in a letter to lawmakers. “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.”
However, the new law is supported by the California Hispanic Chambers of Commerce, which noted that a recent study by the Latino Corporate Directors Assn. determined that 233 of the public-company boards in California have no members from underrepresented communities.
“Greater boardroom equity that is inclusive of Latinos will lead to greater results for business and our state,” the chamber said in a statement to legislators.