California board diversity mandate spreads to other states, Washington

Rep. Andy Barr, R-Ky., has expressed reservations about requiring diversity on corporate boards via federal legislation. (Bill Clark/CQ Roll Call file photo)
Rep. Andy Barr, R-Ky., has expressed reservations about requiring diversity on corporate boards via federal legislation. (Bill Clark/CQ Roll Call file photo)
Posted July 19, 2019 at 5:31pm

SACRAMENTO, Calif., — California’s mandate that boards of directors overseeing public companies include women is catching fire as states including Illinois, New York and New Jersey, as well as lawmakers in Washington, consider similar rules to promote diversity, government officials told CQ Roll Call.

But efforts to establish requirements for other underrepresented groups such as African Americans and Latinos or Latinas, however, are encountering opposition from business groups and skeptics who say the measures either aren’t needed or aren’t inclusive enough.

The California law, SB 826, passed late last year amid predictions a court challenge would halt it. So far, no lawsuit has materialized.

Lawmakers in other states are watching California to see how and if they too can attempt to disrupt the largely white, male ranks of corporate America’s top echelons.

“The whole country should do it,” California Sen. Hannah-Beth Jackson, a Democrat and the law’s main architect, said in an interview. “It’s better for business; it’s better for the economy.”

While some state-level Democrats echo Jackson’s enthusiasm for SB 826, business groups and legal experts are critical, saying companies are diversifying on their own and don’t want a quota-based system.

The measure mandates that publicly traded companies that list principal executive offices in California in federal regulatory filings have at least one female director by the end of this year.

By the end of 2021, companies with five board members must have at least two female directors and those with six seats must have at least three female members, based on board members’ self-identified gender.

California Assemblywoman Lorena Gonzalez, a Democrat who leads the chamber’s Latino Caucus, introduced the Assembly version of the bill.

While disclosure and shaming companies can work, a board membership mandate was the quickest way to accomplish the equal representation lawmakers wanted, she said, standing just off the Assembly floor in California’s palm tree-lined state capitol building.

About 19.3 percent of Russell 3000 company directors are women, consulting and data firm Equilar Inc. reported.

That compares with 50.8 percent of the overall U.S. population.

As SB 826 passed into law with Democratic backing, it faced threats of legal challenges.

Former SEC Commissioner Joseph Grundfest argues that the law is vulnerable to challenges based on equal rights protections and because it applies to companies based in California but incorporated out of state.

Still, Robert Lapsley, president of the California Business Roundtable, an organization of business leaders in the state, said in an interview that he hasn’t heard of any businesses interested in suing to halt the law.

Lapsley attributed companies’ acceptance of the mandate to trends already afoot in the business world. He said board gender diversity was already increasing, adding that the optics of a lawsuit could also be a factor.

However, Lapsley believes additional mandates would spur a fight. “If they start to take it down to other categories or quotas, then I think there’s going to probably be a big battle,” he said.

When Illinois Rep. Emanuel “Chris” Welch saw that California’s governor signed the state’s board diversity mandate into law, he began thinking his state should follow suit and potentially go a step further by also requiring minority representation on company boards.

Welch, a Democrat and member of the Illinois Legislative Black Caucus, proposed a broader requirement that all publicly traded companies based in the state have at least one female director and one African American director by the end of 2020 or face fines. Latino representation was later added.

Before the bill passed the Illinois Senate, however, state lawmakers stripped out its more stringent language in favor of a simple mandate for transparency.

The version awaiting the signature of Gov. JB Pritzker, a Democrat, requires that Illinois-based public companies disclose in annual state filings board members’ gender, as well as the race and ethnicity of minority directors based on self-identification.

Companies must also share if and how they consider diversity in board and executive officer appointments.

“The threats of lawsuits were even greater than what we were hearing in California,” Welch said in an interview, describing the reaction to his measure, HB 3394, before the edits.

Many Illinois senators were uncomfortable supporting a bill that mandated representation for African Americans and Latinos but not other minority groups such as Native Americans and Asian Americans, he said.

As women’s boardroom representation expands, representation of minorities is advancing more slowly.

Minorities held about 16.1 percent of board seats at Fortune 500 companies in 2018, Deloitte reported. About 39.6 percent of the U.S. population is not “white alone,” according to the U.S. Census Bureau.

Democrats in other states are turning to California and Illinois as models.

Lawmakers in New York reached out to Welch and Jackson to talk about their bills, and New Jersey legislators contacted Welch. Party members in both states introduced legislation with requirements almost identical to California. And changing state policies are propelling debate in Washington.

Two bills that would require public companies to report information on the diversity of their top leaders (HR 1018, HR 3279) passed out of committee with broad backing from both parties this month.

The Democrat-sponsored bills previously sat stagnant under GOP control.

But a Republican lawmaker, as well as business groups like the U.S. Chamber of Commerce, pointed to quota-style mandates as the wrong way to address the issue of board diversity.

“We should all keep that in mind as we look to improving and enhancing diversity on these corporate boards that what we’re striving for is not just tokenism but is true diversity and that would be a diversity of opinions and viewpoints and backgrounds regardless of immutable characteristics like race or gender,” Republican Rep. Andy Barr of Kentucky said at a committee meeting where the bills went to a vote.

While Gonzalez and Jackson each sponsored the gender diversity law, they strike a different tone on what, if anything, comes next. Jackson said SB 826 could allow for companies to bring in women of color and that it opens the boardroom doors for everyone.

Gonzalez views additional legislation as an essential move to address the lack of racial and ethnic diversity among corporate board members. She pointed to transparency as a next step in late June while speaking at a Society for Corporate Governance conference in San Diego. “We have historical barriers not only to women but to folks who are African American and Latino, Asian American, and we need to address that as well,” Gonzalez said in an interview. “We’re not done.”