California put itself at the tip of the diversity spear again on Sept. 30, 2020, when Governor Gavin Newsom signed AB 979 to make California the first state to mandate that its public company boards have at least one board member from an underrepresented community. The 2018 Senate Bill 826 carried a similar mandate regarding gender. These recent laws now have public companies headquartered in California grappling not only with how to restructure their boards, but also with the disclosure and reporting requirements of this legislation, which pose their own collection and privacy considerations.
To put this in context, it’s worth a brief discussion of the laws. According to AB 979, directors from underrepresented communities are defined as anyone 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.
Senate Bill 826 made California the first state to require California public companies to add female directors to their boards. Since 2018, several other states have passed, or are considering, similar legislation, including Colorado, Maryland, Illinois, New York, Hawaii, Massachusetts, Michigan, New Jersey, and Washington. In addition, Ohio and Pennsylvania are both considering bills that “urge” or “encourage” diversity. In many cases, the legislatures in these states appear to be following California by considering how to broaden these provisions to include diversity beyond gender.
Each state has its own phased-in timing, and most require companies to disclose the demographic details of their boards—to show compliance with the requirements—in their annual reports. For California and several other states, these requirements begin in 2021 and may raise some critical disclosure challenges for these companies. The challenge is how to effectively and appropriately collect the data that must be disclosed.
For California, the passage of AB 979, combined with SB 826, sets up the following requirements for California public company boards:
- By the end of 2021, boards with four or fewer directors must have at least one female director, those with five directors must have at least two female directors, and those with six or more directors must have at least three female directors (SB 826).
- By the end of 2021, boards must have at least one director from an underrepresented community (AB 979).
- By the end of 2022, boards with four to nine directors must have at least two directors from an underrepresented community, and boards with nine or more directors must have at least three (AB 979).
Each covered corporation is required to report information about the total number of directors, female directors, and directors from underrepresented communities to the California Secretary of State.
Penalties for failing to file or failing to meet the minimums include, $100,000 for not filing on time, $100,000 for the first violation, and $300,000 for subsequent violations. And the statutes specify that each required but unfilled seat is a separate violation.
While it remains to be seen whether the California legislation and similar laws enacted by other states will survive various legal challenges, the approaching proxy season has many companies considering the addition of demographic-oriented questions in their Directors’ & Officers’ Questionnaires. However, this may pose challenges if board members are not willing to publicly disclose such details. In addition, demographic information may be difficult or impossible for companies to verify, especially when the law refers to self-identification. In some cases, directors may not have a choice. Even where required, it may be a delicate balancing act for company legal teams as they seek to gather this information while also considering director privacy concerns.
In an effort to help clients with these issues, Nasdaq Board Engagement experts work with Goodwin Procter, an external legal partner, to develop sample questions and consent language to assist in obtaining appropriate permissions.
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