California's Board Diversity Law: More Seats at the Table for Different Voices and Increased Scrutiny of Board Composition
| Publication year | 2021 |
| Author | Robin Nunn and Mark A. Feller |
Robin Nunn and Mark A. Feller
Robin Nunn leads one of the country's preeminent banking and financial services practices. Robin's practice focuses on counseling financial institutions, as well as innovators in the digital space, in litigation and meeting compliance obligations. Robin has a wealth of experience gained in private practice and working in-house for Fortune 500 companies.
Mark A. Feller practices civil litigation in federal and state courts with experience in a variety of areas including securities and consumer class actions, shareholder disputes, and environmental litigation. He has advised clients in the oil and gas, automotive and technology industries throughout the United States.
On September 1, 2020, Governor Gavin Newsom signed Assembly Bill (AB) 979, the so-called board diversity mandate, into law.1 This first-of-its-kind legislation in the United States mandates that public corporations based in California have one to three directors from underrepresented communities by 2023. The precise number depends on the board's size.2 The law sought to remedy historical injustices, change pervasive biases, and combat stereotypes that have caused most corporate boards to be overwhelmingly White and male. AB 979 was proposed amidst social movements, a series of shareholder lawsuits, and calls from the investment community for increased diversity on corporate boards. The law is an important tool to make boardrooms look more like the communities they serve. While it is subject to legal challenge, it represents one of many efforts that will affect how companies choose their directors for years to come. Companies are on notice and may need to reevaluate or begin their efforts to increase diversity to comply.
1. Origins of California Corporations, Board-Managed Companies, and Underrepresentation on Public Company Boards Throughout the 20th Century
The concept of the corporation and it being managed by a board of directors grew out of English common law, early colonial law, and state incorporation acts of the early 1800s, beginning with the New York Incorporation Act of 1811.3California's State Constitution of 1849, which formed the basis of the modern-day Corporations Code, discussed the election of directors and their management of corporate affairs.4 The law did not explicitly bar women and certain underrepresented groups from company boards, but social norms of the time tended to ensure that these groups were not present. Corporations were managed by White, male directors for the benefit of White, male shareholders. Women and people of color need not apply.
However, explicit legal barriers existed as well. For example, California's initial State Constitution contained language against Chinese-Americans: "No corporation now existing or hereafter formed under the laws of this State, shall, after the adoption of this Constitution, employ directly or indirectly, in any capacity, any Chinese or Mongolian."5 Racial, ethnic, and gender relations of the 19th century were painfully different from today—men barred women from voting,
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slaveowners treated Black people as chattel, Californians targeted Asian-Americans and Latino-Americans with xenophobic laws,6 and state and non-state actors continued to engage in genocide against Native Americans.7
This sad state of affairs largely continued long after the Civil War and well into the 20th century. While women and people of color became increasingly present members of the business community, including becoming shareholders in companies, they continued to be shut out of major portions of economic life—including at the highest levels of corporations. In the early 20th century, women began being nominated to boards. Clara Abbott, married to Wallace Abbott —owner of Abbott Laboratories—was the first woman who served as a corporate director in America.8She served on the board of Abbott Laboratories from 1900 to 1908 and from 1911 to 1924 before the company was publicly listed.9
It was not until much later, in 1964, amid the civil rights movement, that two Black men —Samuel R. Pierce, Jr. and Asa T. Spaulding—became the first reported black directors of major company boards when they joined the boards of US Industries and W.T. Grant Company, respectively.10 A decade later, there had been underwhelming growth with only eighteen Black directors on major company boards.11 Asian and Latino Americans were also largely shut out of corporate director positions. But still, the following decades resulted in additional progress such that hundreds of underrepresented groups and women served as directors of public boards.
By 2019, American public company boards had increased diversity. 10% of Russell 3000 directors in 2019 were people of color.12 The number of women in board positions surpassed 20% for the first time.13 However, because the United States is over 40% non-White and 50% female, public company boards did not (and still do not) reflect America's population.
2. Persistent Bias, Stereotypes, and Negative Network Effects Contribute to Low Minority Board Positions
Researchers have investigated the causes for the lack of people of color in leadership positions (such as director positions) and related attitudes. Studies indicate that explicit and implicit biases, negative stereotypes, and board recruitment from insular social circles from which board positions arise may be a part of the problem.
For example, Asian-Americans and Black people may receive fewer board appointments due to baseless stereotypes. One study designed vignettes describing an Asian or White leader (Tung-Sheng Wong vs. John Davis) who worked in
engineering or sales.14 Participants read about the leader and then rated him on different dimensions of leadership.15Asians were rated as lower on leadership overall, particularly in sales and lacking in prototypical leadership attributes.16
Likewise, studies have found that individuals develop beliefs about behaviors and characteristics of leaders—being White is considered a characteristic of the prototypical business leader, which may lead to biased evaluations of minority leaders, particularly African-Americans who are unfairly and inaccurately stereotyped as being lazy and incompetent.17 These stereotypical characteristics of a leader explain why research shows that White leaders are perceived as more effective and successful than Black leaders18 and why African-Americans are perceived as lacking the knowledge and skills necessary for high-level positions.19
Further studies have shown that boards heavily rely on social networks in identifying board candidates. Over 50% of Black directors were known to a fellow board member prior to being appointed (as compared to 35% of White directors) and Black directors were more likely to have been recruited by an executive search firm.20 On the other hand, White directors were more likely to be current or former executives of the company, suggesting that the internal pipeline to the board is dominated by White executives.21 Thus, long-standing racial and gender inequities are perpetuated by network-based recruiting because of America's history, social segregation, and the fact that corporate America has been dominated by White men.
These studies lend credence to the view that despite strides in race relations, negative stereotypes and network effects stemming from insular social circles contribute to the lack of people of color on public company boards. Proponents of legislative action seek to remedy the historical discrimination inflicted against people of color and to correct bias and negative stereotypes that persist in America, including in large businesses.
B. AB 979's Precursor and Legislative Context1. SB 826—the Gender Diversity Mandate
Recognizing the absence of women proportional to population in the boardroom, California sought to increase the number of women on California company's boards. In addition, the #MeToo movement raised awareness of sexual harassment and assault in the entertainment industry and beyond, which helped highlight potential reasons why women were absent from the boardroom. On September 30, 2018, California Governor Jerry Brown signed into law
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Senate Bill Number 826 (SB 826)—the precursor to AB 979. SB 826 requires publicly traded companies with principal executive offices in California to have a minimum number of female directors.22 The California Legislature found that increasing female board representation would boost the California economy, improve opportunities for women in the workplace, and protect California shareholder value.23 The law recognized that if affirmative measures were not taken to increase the number of female directors, it would take as long as fifty years to achieve gender parity among directors.24
SB 826 adds sections 301.3 and 2115.5 to the California Corporations Code and requires a "publicly held domestic or foreign corporation" whose principal executive offices are located in California to have a minimum number of at least one to three female directors depending on the size of the board by the end of 2021.25 For companies with six or more directors, there must be at least three female directors; for companies with five directors, there must be at least two female directors; and for companies with four or fewer directors, at least one female director.26 SB 826 permits a company to amend its bylaws to increase the total number of directors to accommodate the female director or directors, so that no male director needs to be replaced.27
The law authorizes the Secretary of State of California to impose fines for violations of (i) $100,000 for a first violation and (ii) $300,000 for a second or subsequent violation.28 The...
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