New year, new requirements, new litigation. California was one of the first states to pass laws requiring publicly held companies headquartered in the state to include women and members of underrepresented communities on the corporate boards.
The initial law, SB 826, passed in 2018, mandated the public companies incrementally increase the number of women on their boards. By the end of 2019 there should have been at least one woman on the board and by the end of 2021 companies were expected to have at least two female directors if there were five people on a board. Additional future increases would be necessary contingent on the size of the board.
In addition to SB826, California passed AB 979 in 2020, requiring public companies headquartered in California also have at least one director on their board from an underrepresented background such as the LGBTQ+ community or a person of color by the end of 2021.
Underrepresented is defined as, “an Individual who self- identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”
The law also mandates that the number of directors from underrepresented communities increase incrementally contingent upon the size of the board by the end of calendar year 2022 as follows:
- If its number of directors is nine or more, the corporation shall have a minimum of three female directors.
- If its number of directors is five to eight, the corporation shall have a minimum of two female directors.
- If its number of directors is four or fewer, the corporation shall have a minimum of one female director.
Companies can comply with the law by adding board seats, allowing them to maintain their existing directors. The step-up feature does, however, then call for an increase in the number of women and/or individuals from underrepresented communities. Adding a woman who meets diversity requirements of SB 826 in 2021 could also satisfy the requirements of AB 979 if the woman self identifies as LGBTQ+, racially or ethnically diverse. If the woman only satisfies the gender diversity requirement, adding more members to satisfy the diversity requirements for 2022 may be required. This could present challenges for some smaller boards.
Failure to comply could result in fines starting at $100,000 for the first violation and $300,000 for subsequent violations. To date, the Secretary of State has not imposed any fines related to lack of compliance.
With all the new diversity requirements, multiple lawsuits have been filed. Ambiguities and questions remain surrounding the Equal Protection Clause of the Fourteenth Amendment and the ‘internal affairs doctrine’ under the Commerce and Full Faith and Credit Clauses. There has also been litigation filed surrounding the use of public funds to implement such laws.
As more and more states consider how to implement similar diversity requirements, California’s actions and litigation outcomes are ones to watch out for.