As California corporations tout their efforts to address systemic racism and increase diversity within their companies, their boardrooms tell a different story.
Gains were made for more gender representation after former Gov. Jerry Brown signed Senate Bill 826 in 2018 to appoint more women on boards of directors. But people of color are still largely underrepresented.
It’s why lawmakers say they have introduced Assembly Bill 979, which would compel public corporations headquartered in California to increase ethnic representation on their boards of directors or face fines from the Secretary of State.
“Clearly, the numbers are not what you’d expect them to be,” said David Larcker, director of the Corporate Governance Research Initiative at Stanford Graduate School of Business. ” It’s a long-standing controversy.”
While Larcker has seen advances when it comes to gender representation, he’s observed less progress for African Americans and Latinos in both director and C-suite-level positions. Diverse candidates, he said, can bring unique perspectives to the decision-making process, “as opposed to a board where everybody went to the same schools and (has the) same socioeconomic background.”
“It’s just the right thing to do,” he said.
Larcker, however, said he would rather see a market-based solution to increasing board diversity instead of having a law that mandates corporations to diversify their leadership or face fines.
If the bill is signed into law, publicly held companies without a director from an under-represented community could face fines between $100,000 and $300,000, according to the office of Assemblyman Chris Holden, D-Pasadena, one of the bill’s sponsors.
About three years ago, Assemblyman Holden said he sought legislation that would have increased representation among Silicon Valley corporations.
“We’ve decided to bring it back, and to focus on it and broaden it so that it’s not just on Silicon Valley, or on tech companies, but it would be inclusive of all corporations headquartered in the state,” he said.
The bill’s current language defines under-represented groups as African American, Hispanic and Native American.
The bill is expected to be updated next week, according to Holden’s office, to include under-presented groups that self-identify as Asian, Pacific-Islander, Native Hawaiian and Alaska Native.
The bill would require a corporation to have one director from an under-represented group for companies with less than four members on their board of directors. Corporations with more than four directors, but fewer than nine, would have a minimum of two under-represented directors. A corporation with nine or more directors would require at least three directors from an under-represented community.
It could draw a legal challenge if Gov. Gavin Newsom signs it.
Anastasia Boden, a senior attorney at the right-leaning Pacific Legal Foundation argues that bills that seek to increase a board’s gender or ethnic make up are contrary to the U.S. Constitution’s promise of equality.
“It forces people to make choices on the basis of race or sex in order to gain those numbers, which in themselves are not realistic about a world full of equal opportunity,” she said.
Last year, Boden led a lawsuit, which a federal judge dismissed, challenging California’s “woman quota” law on behalf of a shareholder in a security systems manufacturer. Boden said the Sacramento-based group has since filed an appeal.
California’s largest public pension fund, the California Public Employees’ Retirement System, uses a softer approach to encourage corporate board diversity.
CalPERS has not issued a public stance on AB 979, but identified improving corporate board diversity and inclusion in its Total Fund Governance & Sustainability 5-Year Strategic Plan.
The pension fund plans to use proxy voting and shareowner campaigns “to bring change where engagements have not led to positive outcomes.”
Companies that show no response or an inadequate response could lead to CalPERS withholding votes from the board chair, governance committee members and long-tenured directors. On its website, CalPERS states it will support shareowner proposals related to diversity.
“Empirical evidence shows that companies with diverse boards and executives tend to have better financial performance than less diverse companies,” CalPERS says on its website. “Better financial performance leads to better investment returns, which improves our ability to pay benefits.”
A 2018 McKinsey & Company study of over 1,000 companies in 12 countries found that companies in the top quartile for gender diversity were 21% more likely to have higher financial returns. Companies in the top quartile for racial and ethnic diversity were 33% more likely to have higher financial returns.
Companies in the bottom quartile, with the least gender and ethnic representation, were more likely to underperform, according to the study.
“Gender and ethnic diversity are clearly correlated with profitability, but women and minorities remain under-represented,” the study stated.
Women of color are still under-represented in California’s boardrooms after passage of the 2018 bill.
A recent analysis of 662 California headquartered, public companies, conducted by the Latino Corporate Directors Association, found that 35% of the boards are all white. Of the 511 public board seats filled by women as of March 1, white women account for 77.9%, followed by Asian women, 11.5%, African American women, 5.3%, and Hispanic women, 3.3%.
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