Gov. Gavin Newsom signed a law on Wednesday aimed at compelling public corporations headquartered in California to appoint minority or LGBTQ directors to their boards of directors.
It mirrors legislation signed by former Gov. Jerry Brown in 2018 that requires California-based corporations to appoint women to their boards of directors.
“When we talk about racial justice, we talk about empowerment, we talk about power and we need to talk about seats at the table,” Newsom said before signing the bill.
The new law, Assembly Bill 979, directs corporations to appoint leaders from under-represented communities defined as people who identify as Black, Latino, Native American, Asian American, Pacific Islander, native Hawaiian or native Alaskan. Companies also can comply with the law by appointing directors who self-identify as gay, lesbian, bisexual or transgender.
The law requires corporations to have at least one director from an under-represented community by the end of 2021. Additionally, corporations with more than four directors, but fewer than nine, would require a minimum of two diverse directors
A corporation with nine or more directors must have at least three directors from an under-represented community by 2022 to comply with the law.
Companies that don’t comply with the law could face fines between $100,000 and $300,000, according to Holden’s office. The fines will be imposed by the Secretary of State
“This is an opportunity, really, to get people of color at the table where the decisions are made,” said one of the bill’s authors Assemblyman Chris Holden, D-Pasadena. “I think this is a first of its kind.”
It is expected to draw legal changes similar to ones contesting the 2018 law requiring corporations to appoint women to their boards of directors.
Anastasia Boden, senior attorney at the Pacific Legal Foundation, said both bills share a similar “constitutional flaw” of treating people differently based on their sex or gender.
Boden last year led a lawsuit, which a federal judge dismissed, challenging the female representation law on behalf of a shareholder in a security systems manufacturer.
“Quotas require the very thing that we’re trying to get rid of in society and that is handing out benefits and burdens solely because of someone’s race or sex or sexual identity,” Boden said. “They essentially tell some people they need not apply for certain positions, simply by virtue of their birth. And that’s what makes them not only pernicious but unconstitutional.”
A recent analysis of 662 California headquartered, public companies, by the Latino Corporate Directors Association, found that 35% of companies had all-white boards. In a state where Latinos account for 39% of the population, 13% of boards had at least one Latino director.
“Latinos are the least represented on California public boards and we are very hopeful that this will provide a solution to the omission of Latinos on boards” said Kathy Jurado Munoz, advocacy and demand vice president for the Latino Corporate Directors Association.
Supporters cited studies that said companies with diverse board members are more financially successful. Companies in the top quartile for racial and ethnic diversity were 33% more likely to have higher financial returns, according to a 2018 McKinsey & Company study of over 1,000 companies in 12 countries.
Ahmad Thomas, CEO of the Silicon Valley Leadership Group, endorsed the law in August.
“Diversity in the boardroom is not just the right thing to do, it’s a business imperative,” he said in a statement on Wednesday. “We applaud the governor and all legislators who championed AB 979 and work to make California businesses more diverse, inclusive and ultimately more innovative and competitive.”
Assemblywoman Cristina Garcia, D-Bell Gardens, a joint author of the bill, said “we can no longer wait for corporations to figure it out on their own.”
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