California expands board diversity mandate for public firms

UPDATE: Oct. 1, 2020: Gov. Gavin Newsom signed the bill into law Sept. 30, requiring that certain boards include "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."

Dive Brief:

California’s legislature has shown movement on a proposal that would require each publicly held corporation based in the state to have at least one director from an underrepresented community on its board by the end of 2021. The state’s Assembly passed the bill in January and the Senate made amendments July 28; it now awaits committee action.
According to the bill, AB-979, an underrepresented individual is one who "self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native."
If passed, the law would include higher standards for the following year: covered businesses with more than four but fewer than nine directors would need a minimum of two directors from underrepresented communities, while those with nine would need a minimum of three. A business may be fined $100,000 for the first violation and $300,00 for subsequent violations.

Dive Insight:

The proposal comes on the heels of a similar California mandate requiring women on boards. The bill, signed into law in 2018, required that publicly traded companies based in the state have at least one female director by the end of last year. The number required will increase, much like AB-979’s increases, for the end of 2021 and includes similar penalties.

In 2019, a lawsuit challenged that law, claiming it is "plainly unconstitutional." A district court dismissed the suit and an appeal is now pending. Still, it seems the effort may already have had an effect in the state.

While research showed that a fair number of employers were at risk of noncompliance near the end of 2019, it also determined that the bill increased the number of board seats held by female directors by 23% after it was enacted. But while that may be viewed as a win for diversity, the research also found that relevant stocks recorded average returns of -1.2% when the first law passed. Researchers, however, said they were able to tie that effect directly to the "the more onerous requirements that firms add up to three female directors by 2021."