A new law is creating additional diversity requirements for boards of directors in California. Under AB 979, boards will need to include directors from an underrepresented community. This bill follows and adds to an earlier bill that requires boards to include female directors.
Underrepresented Communities in California Boards
The bill cites data that shows certain communities are underrepresented in high-level management positions. For example, based on 2018 data from Deloitte and the Alliance for Board Diversity, only 8.6% of Fortune 500 company board seats were held by people who identified as African American or Black, while only 3.8% were held by people who identified as Hispanic or Latino/Latina, and only 3.7% were held by people who identified as Asian or Pacific Islander.
Many directors are White. The United States Bureau of Labor Statistics reported that 90% of chief executives were White in 2019. Of the 662 publicly traded companies that have headquarters in California, 233 had all an all-White board of directors in 2020.
AB 979 Requirements for Underrepresented Communities
AB 979 applies to any publicly-held domestic or foreign corporation with principal executive offices located in California. Under the new law, these corporations must have at least one director from an underrepresented community on their board by the end of the calendar year 2021. A corporation may choose to increase the number of directors on its board to meet this requirement.
Some corporations will need to meet additional requirements based on the size of the board. By the end of the calendar year 2022:
- Corporations with nine or more directors will need to have at least three directors from an underrepresented community.
- Corporations with five to eight directors will need to have at least two directors from an underrepresented community.
The bill defines an individual as being from an underrepresented community if the individual identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender.
Failure to comply with the new requirements will result in a fine of $100,000 for the first violation and a fine of $300,000 for subsequent violations. The requirements may be met if a director from an underrepresented community holds a seat for at least part of the year.
Requirements for Female Directors
Previous legislation created similar requirements regarding female directors. By the end of calendar year 2019, boards were required to have at least one female director. By the end of calendar year 2021, boards with six or more directors must have at least three female directors, and boards with five directors must have at least two female directors.
According to Capitol Weekly, women have been joining boards in record numbers in California, and other states may follow suit. Washington has adopted similar legislation, and other states are considering similar requirements.
Failure to comply with these requirements could create D&O exposure for your company. The industry is seeing a boom in D&O lawsuits related to board oversight in the areas of discrimination, harassment, and cyber preparedness.
D&O insurance rates have been rising and market capacity is shrinking. If you haven’t reviewed your D&O coverage lately, now is a great time to reach out to your Heffernan agent for a D&O policy check-up.