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Article | Executive Pay Memo North America

Diversity requirement for California company boards of directors

Governance Advisory Services |Executive Compensation|Inclusion and Diversity
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By Gary Chase and Mark Kazmierowski | October 8, 2020

New law requires boards of companies headquartered in California to include members from underrepresented communities by end of 2021.

California Gov. Gavin Newsom signed Assembly Bill 929 into law, requiring diversity on the boards of directors of publicly held companies that are a “California company” — or a company that has its headquarters in California, regardless of the state or county in which it is incorporated.

Under the new law, the board of directors of a California company must include at least one member from an underrepresented community by the end of 2021. By the end of 2022, corporate boards with four to nine members must have at least two directors from underrepresented communities, and those with more than nine members must include at least three directors from underrepresented communities. A director from an underrepresented community is defined as an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, gay, lesbian, bisexual or transgender. The California secretary of state would be required to publish an annual report on board diversity starting March 1, 2022.

The law imposes a $100,000 fine for failure to file reports required by the California secretary of state. The law also imposes a $100,000 penalty for the first failure to satisfy the representation requirement, and $300,000 for each subsequent failure.

A lawsuit has already been filed to challenge the law, which was filed by the same organization that is challenging a similar law from 2018 that requires California companies to include female representation on their boards.

Increased focus on board diversity

The California law is part of a growing effort by states to regulate board diversity. For example, in 2019 Illinois passed a law requiring companies headquartered there to annually disclose the racial, ethnic and gender diversity of their boards of directors; how diversity is considered when identifying potential directors and executive officers; and policies and practices for increasing diversity among the board and executive officers. The Illinois law also requires the University of Illinois to establish a rating system for companies based on the diversity-related information that is reported. Unlike the California law, the Illinois law does not require boards of directors to satisfy any specific diversity criteria.

Next steps

Companies headquartered in California should review the current diversity of their boards to gain a sense of whether any changes may be necessary. In the event a current board's makeup does not satisfy the diversity requirement, discussions with legal counsel and the board’s nominating and governance committee are recommended to determine whether changes to the current composition of the board or size of the board are warranted.

Companies headquartered in other states that are not yet subject to board of director diversity requirements may also wish to review their current board composition and discuss whether to proactively consider diversity when selecting individuals to nominate for future board openings.

Authors

Director, Retirement and Executive Compensation

Senior Director, Executive Compensation (San Francisco)

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