California Law Aims to Add More Minorities to Corporate Boards

Following the passage of a law that boosted the number of women on California corporate boards, those boards will soon be required to add members of more underrepresented groups.

On Sept. 30, Gov. Gavin Newsom signed AB 979, which is modeled on SB 826, a 2018 bill, which was signed into law and required boards of California-based publicly held companies to have at least one female director by the end of 2019 and to increase the number of female directors by the end of 2021. Violators of either law can be fined as much as $300,000.

Supporters say these laws make great strides in diversifying boards of directors that are disproportionately white and male, and also benefit the companies because those with less homogenous boards may be more profitable and perform better.

Diverse boards make more-nuanced decisions and are more open to new ideas, said Belinda Vega, an attorney with Venable in Century City and a member of the Los Angeles Fire and Police Pension board of commissioners. "It adds a different level of experience in terms of facing challenges. Women have a different way of approaching risk and innovation, and that's also true for people who are minorities. We all bring our experiences to the table," said Vega, who advises companies on corporate compliance.

Dramatic Rise

Since SB 826 took effect on Jan. 1, 2019, the number of female directors of California-based publicly traded companies has risen significantly—though more than three-quarters of the women appointed to boards have been white, according to the text of AB 979.

According to accounting firm KPMG, 29 percent of California-based publicly held companies had all-male boards at the start of 2019, but by year's end, only 4 percent did. The company surveyed 138 women who joined 126 California-based publicly held companies with previously all-male boards.

"You can't argue with the results: The law passed, and change happened," said Wynter Deagle, an attorney with Troutman Pepper in San Diego and a member of 2020 Women on Boards, a national nonprofit that seeks to increase the number of female board members.

AB 979 would further broaden board diversity by mandating the appointment of directors who identify as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, or gay, lesbian, bisexual or transgender.

Of the 662 publicly traded companies headquartered in California, 233 had all-white boards, according to the Latino Corporate Directors Association. Nationally, about 21.1 percent of new board members at S&P 500 companies in 2019 were people of color; that figure was 15 percent at 3,000 of the U.S.'s largest publicly traded companies.

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Under AB 979, California-based publicly held companies have until the end of 2021 to appoint at least one director from an underrepresented group. By the end of 2022, boards with nine or more members must have at least three from underrepresented communities. Boards of four to nine directors must have at least two minority directors, and boards with fewer than four directors must have at least one minority director.

Opponents contend that laws imposing quotas for women and racial minorities are unconstitutional. The Pacific Legal Foundation, a libertarian legal group, opposes AB 979 and filed a lawsuit in a federal court in Sacramento to stop SB 826.

"We're not opposed to diversity at all; it's a good thing," said Daniel Ortner, an attorney with Pacific Legal Foundation. "But the issue is that the state can't promote diversity through coercive quotas, even ones meant to help. That's harmful to the ideal of equal protection under the law." The alternative he prefers is public pressure—from investors and shareholders, for example—to persuade boards to become more diverse.

More Women on Boards

Nationally, the number of women appointed to corporate boards has never been higher. About 45 percent of new directors appointed to the boards of more than 2,000 companies in 2019 were female, and nearly 1 in 3 directors on the boards of S&P 500 companies are women.

HR executive Grace Lee recently became a director on the board of Austin, Texas-based Asure Software. Lee is senior vice president and chief HR and diversity officer for Cubic Corp., a San Diego-based company with 7,000 employees. She is the sole woman on Asure's eight-person board but not its first female director. She was recommended for the seat by a board member with whom she'd collaborated on an HR project. "When you have a balanced board, you have all these different perspectives," she said.

Teresa Jacques, a partner in Major Executive Search based in San Diego who is active in 2020 Women on Boards, has seen an uptick in the number of female chief human resource officers (CHROs), like Lee, being tapped for director roles. The pandemic has boosted the visibility and value of CHROs and chief information officers, better positioning them for board appointments. "They've been the linchpins in keeping companies going during this crisis," she said.

June Bell is a regular contributor to SHRM, covering California HR matters and labor and employment issues.