California Bill Would Require Diversity on Corporate Boards

September 14, 2020 Updated: September 16, 2020

Assembly Bill 979 (AB 979), which would require publicly listed corporations in California to appoint individuals from underrepresented communities to their boards of directors, is sitting on Gov. Gavin Newsom’s desk awaiting his signature to become law.

According to AB 979, introduced by Assembly members Chris Holden (D-Pasadena) and Cristina Garcia (D-Bell Gardens), any company that doesn’t add at least one member from a minority group before 2022 could be hit with a $100,000 fine—and that’s for the first violation. 

A second violation would result in a fine of triple that amount. 

The proposed legislation defines underrepresented community members as anyone who “self-identifies” as black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, gay, lesbian, bisexual, or transgender. 

“As we have seen over the last months, there have been folks out there protesting,” Garcia told The Epoch Times. “And I think, first and foremost, [they] are talking about police reform, but in general, it is about … how race is an issue in all of our systems and how do we get rid of systemic racism? And so it just made sense that the time was now.”

Sen. John Moorlach (R-Costa Mesa) was one of eight state senators who opposed AB 979.

“I don’t believe in interfering with the private sector to pursue what others might perceive as social justice,” he told The Epoch Times. “I believe that positions on boards are based on merit.”

Diversity Leads to Success, Study Says

Garcia said the data shows diverse boards help companies thrive.

“We have seen that inclusion leads to stronger corporations, a stronger culture, and better performance,” she said. 

She referred to a 2015 study conducted by McKinsey & Company, a management consulting firm, that reported U.S., British, Canadian, and Latin American companies in the “top quartile of racial/ethnic diversity were 35 percent more likely to have financial returns above their national industry median.” 

However, the authors of the study noted that those results vary by country and industry. For example, U.S. companies with 10 percent higher gender and ethnic diversity on management teams and boards reported earnings only 1.1 percent higher than average. 

The new legislation is modeled after 2018’s SB 826, Garcia said, which requires a minimum number of board members who self-identify as female. 

While SB 826 was successful to the extent that 511 board seats were filled by women in California, Garcia said it fell short on giving representation to black women and Latinas. 

She cited a study by the Latino Corporate Directors Association (LCDA) showing that nearly 78 percent of those women were white, while about 11 percent of the seats were filled by Asian women, 5.3 percent went to black women, and only 3.3 percent were filled by Latinas. 

“We know that there are individuals out there that are qualified to be on these boards,” Garcia said. “For a lot of people of color, we don’t even get to get in the door. We’re just trying to break the door open. And so I think this will really just bust the door open for folks.” 

Epoch Times Photo
A file photo of California Assembly member Cristina Garcia. (Courtesy of Cristina Garcia)

Moorlach said, “I think society is changing … [and] this problem will solve itself over time.” 

He said if board appointments aren’t done by merit alone, “I would think that some [people who] have really worked hard and have been successful would be a little frustrated if they found [someone else] on their board … was there because there was a requirement by the state government to do that.

“You want to get the best people, period,” he said. 

Regarding the data cited by Garcia showing how successful businesses are with diverse boards, Moorlach said, “If it’s true, then that would just be a nice reason to naturally appoint a diversified board.

“Do it because the market tells you to do it. Not because Sacramento tells you to do it.”

Sen. Ben Hueso (D-San Diego) responded to Moorlach’s argument, telling The Epoch Times, “If they’re going to do it naturally, then there should be no objection to an actual state mandate.” 

“It’s well within the state’s purview as a licensure of corporations to create some rules and guidelines in terms of how those corporations operate, what requirements they must fulfill in being compliant with what the goals of the state are and encouraging business and investment in the state.”

“We’re not telling them who to hire or who to put on their boards,” Hueso said. “We’re asking them to put people that are more reflective of the community because it’s good for a business’s ability to solve problems and reach out and be more effective at communicating with its customer base.” 

While the potential impacts on companies across the state have divided lawmakers, other critics believe AB 979’s biggest challenges will be legal. 

Legal Challenges

“It’s unconstitutional because it violates the equal protection clause,” says Keith Bishop, a lawyer and former state commissioner of corporations.

“Frankly, I think that the bill is discriminatory; it’s unjustified and arbitrary,” he told The Epoch Times. “The U.S. Supreme Court has basically said that classifications based on race are odious. That’s their term.” 

Bishop referred to a 2013 U.S. Supreme Court decision, which stated that cases that maintain “distinctions between citizens solely because of their ancestry are by their very nature odious to a free people.” They “are contrary to our traditions and hence constitutionally suspect.” 

It says, “racial characteristics so seldom provide a relevant basis for disparate treatment” and “the Equal Protection Clause demands that racial classifications … be subjected to the most rigid scrutiny.” 

Bishop says the bill is likely to be challenged as unconstitutional on those grounds, but also on Commerce Clause grounds, because it tries to impose “quotas on corporations formed in other states based on the fact that they have their principal executive offices in California.”

Bishop said another problematic element can be found in the term “self-identifies.”  

“So, for example, if someone wants to wake up in the morning and identify within one of the favored ethnic or racial groups—the bill would seem to allow that even if there’s no basis for that,” he said. “Even the ethnic groups that are described in the bill are very ambiguous as to who’s in and who’s out.” 

“The bill designates Asians, but does that include countries like Armenia, which might be considered to be part of the Asian continent? Or Kazakhstan or India? Are those Asian countries? Would a Caucasian from South Africa qualify as an African American under the bill?” 

“But it really doesn’t matter, because if everybody’s free to self-identify, there doesn’t seem to be any objective requirement or … factual basis for [however] they self identify.” 

Garcia told The Epoch Times, “It’s been my experience that most people don’t want to identify with an underrepresented community. … They don’t want to have to carry those barriers and that burden on them. Most folks want to identify with what they see [as] powerful.”

Bishop also expressed concerns that, when paired with SB 826, the new proposed legislation could discriminate “in favor of females from minority communities over males from minority communities. And it will also privilege transgender females over other females.” 

If the bill is signed into law by Newsom before the Sept. 30 deadline, Garcia said it will be a “first step [that] might not get all the results we want.” 

“That’s why we have data collection and we have a report in 2023 that will come back to the legislature before Chris [Holden] and I term out so you could actually see how it’s doing it. And if it’s doing well, then we’ll leave well enough alone. If it’s not, we might have to follow it up with another bill.”

The follow-up report will detail the number of corporations that complied with the law annually, the number of companies that moved their headquarters into and out of California, and the number of companies that were subject to the law during the previous year but are no longer publicly traded. 

“I tell folks, oftentimes the law is the floor and not the ceiling, and this is why we’re asking for data,” Garcia said. “But I do think that we do not have equality of opportunity. And I think that this bill helps with some of that, as well by opening the doors and giving us a seat at the table.”