New California Law Requires Diversity on Corporate Boards of Directors

On September 30, 2020, Governor Gavin Newsom signed into law Senate Bill (SB) 979, a measure that will require publicly held corporations in California to achieve diversity on their boards of directors by January 2023.

Similar to its 2018 predecessor (SB 826), which focused on increasing female representation on boards of directors, SB 979 requires each covered corporation to have at least one director from an underrepresented community on its board by the end of 2021. By the close of 2022, a covered corporation with between five and eight directors must have at least two directors from underrepresented communities, and a covered corporation with nine or more directors must have at least three directors from underrepresented communities. Under the new law, the California secretary of state may impose a $100,000 fine“[f]or failure to timely file board member information” for the first violation and $300,000 for each subsequent violation.

The new law defines a covered corporation as “a publicly held domestic or foreign corporation whose principal executive offices … are located in California,” regardless of where the corporation is incorporated. A publicly held corporation is defined as “a corporation with outstanding shares listed on a major United States stock exchange.” A director from an underrepresented community means “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.” SB 979 is codified by adding Section 301.4 to the state’s Corporations Code.

Two years ago, then-governor Jerry Brown signed into law SB 826 (now codified at Corporations Code Section 301.3) requiring publicly held corporations with principal executive offices in California to have at least one female director on the board by December 31, 2019. Depending on the size of the board at that time, covered corporations may need to add additional female directors by the end of 2021. Similar to SB 979, the 2018 measure authorized the secretary of state to impose substantial fines for initial and   subsequent violations.

Both SB 979 and SB 826 require the secretary of state to publish reports on its website documenting, among other things, the number of corporations in compliance. The measures further require that any fines collected “be available … for use by the [s]ecretary of [s]tate to offset the cost of administering” the requirements.

Both SB 979 and SB 826 also make findings and declarations reflecting the underrepresentation of women, African Americans, Latinos, and Asians on the boards of publicly traded companies in California. SB 979 also cites several sources concerning the lack of diversity on corporate boards, including a statement that of the 662 publicly traded companies headquartered in California, 35 percent had “all White boards of directors” as of July 1, 2020. SB 826 cites reports finding that companies with women on their boards of directors have higher net income growth and better stock performance, and carry less risk and debt, than companies without women on their boards.

Legal challenges to Sections 301.3 and 301.4 on constitutional grounds are anticipated despite the inclusion of these declarations. Legal challenges are also anticipated as California’s legislators attempt to change corporate governance requirements of corporations incorporated outside of California.