Landmark bill in California would require diversity in corporate boardrooms

The California legislature has passed a landmark bill that will force big companies in the state to honor their recent commitment to racial justice by requiring their boardrooms to be more racially diverse by the end of 2021.

That means action according to a calendar spelled out in the bill passed Sunday in the Democratic-led legislature. Publicly traded companies headquartered in the state must have at least one board member from an underrepresented community by the end of 2021 and two or three by the end of 2022, depending on the size of the board, according to the bill.

The bill identifies underrepresented communities as those who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native or gay, lesbian, bisexual or transgender.

The office of one of the bill’s authors, Assemblyman Chris Holden, said that while there are some similar laws in the U.S. based on gender, this is the first on race.

“Corporations have money, power, and influence,” Holden (D-Pasadena) said in a statement. “If we are going to address racial injustice and inequity in our society, it’s imperative that corporate boards reflect the diversity of our state. One great benefit of this action – corporations with ethnically diverse boards have shown to outperform those that lack diversity.”

It’s not clear when or if Gov. Gavin Newsom plans to sign the bill into law.

A spokesman for Newsom said Monday that the governor’s office doesn’t typically comment on pending legislation.

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If it becomes law, violators would be subject to fines starting at $100,000.

Holden’s office cited a Harvard Law School report from 2018 that said out of 1,222 new board members at Fortune 100 companies, 77% were white. Corporate boards typically govern and advise company executives on a part-time basis and sometimes mask an even greater lack of diversity among a company’s top executive ranks. A recent USA TODAY analysis found that of 279 top executives at the 50 biggest companies in the Standard & Poor’s 100, only five were Black, including two who recently retired.

The corporate boardrooms at those same companies were 11% Black. Many top tech companies in California still have all-white executives in the top five executive spots listed on their regulatory filings, including Apple, Facebook and Netflix.

The bill cited studies that show companies perform better with more diverse leadership, as they serve a market that is becoming less white and more diverse.

“There is enough evidence to show there is discrimination,” Holden said. The numbers simply don’t lie.”

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The racial composition of corporate America has received new scrutiny in recent months after the May 25 death of George Floyd, a Black man, under the knee of a white policeman in Minneapolis. In response to his and other police-related killings, companies issued statements and pledged financial support for the Black community.

Holden’s office cited this support while also noting that “this public support for social justice movements often does not lead to long-term structural change in hiring and retention policies of a diverse staff and leadership.”

Attorney Keith Bishop was the only person to testify against the bill in in the Assembly’s banking and finance committee hearing Sunday. He said the bill would impose quotas and violates the equal protection clauses of the U.S. and state constitutions as well as the commerce clause of the U.S. Constitution. Writing in the National Law Review, Bishop said the bill “will arbitrarily privilege females from underrepresented communities over males from those same communities.  It will also arbitrarily privilege transgender females over other females.”

The bill follows a similar law in California passed in 2018 that required a minimum number of women on the boards of directors for publicly traded companies headquartered in the state.

Since that law was enacted, 78% of the 511 director seats filled by women in California are white, 3.3% are Latina and 5.3% are African American, according to data cited in the new bill.

The new bill would require companies with nine or more board members to have a minimum of three from underrepresented communities. Companies with fewer than nine but more than four board members would be required to have a minimum of two from underrepresented communities.

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