By Anne Steele
California Gov. Gavin Newsom signed legislation Wednesday that
will require the boards of publicly traded companies based in the
state to have at least one racially, ethnically or otherwise
diverse director by 2021.
The new quota is the first of its kind in the U.S. and follows a
similar California measure enacted two years ago that mandated
female directors on all boards of the state's public companies. The
law is expected to have wide-ranging impact within the state's
borders and beyond, potentially sparking fresh debate and
legislative efforts in other parts of the country.
"We have a vision about how this state could be an example for
the rest of the country," said Assemblyman Chris Holden, a
co-author of the bill. "This is an opportunity to get people of
color at the table where the decisions are made, where the culture
is set."
Under the new law, individuals who identify as Black,
African-American, Hispanic, Latino, Asian, Pacific Islander, Native
American, Native Hawaiian or Alaska Native, or who identify as gay,
lesbian, bisexual or transgender, would be considered eligible for
meeting the requirement.
The bill passed 56-8 in the assembly at the end of August;
dissenters said it would violate equal protection provisions of the
law.
More than 35% of California's 513 public-company boards -- 185
companies -- wouldn't meet the new requirement of one director from
a diverse background when it goes into effect in 2021, according to
Equilar, a research firm that gathers data on executives and
boards. By comparison, 20% of California-based public companies in
the Russell 3000 index, which includes the majority of companies
traded on major U.S. stock exchanges, had no female directors when
the state mandated that women get directorships, according to
Equilar.
The new diversity rule requires a greater number of
underrepresented minorities required on boards starting in 2022,
and approximately 83% -- or 423 public companies in California --
wouldn't be able to satisfy the requirement with their current
boards, according to Equilar. In 2022, corporate boards with four
or more members would have to include two people from
underrepresented groups; boards with at least nine directors would
have to include a minimum of three diverse directors.
Some supporters of the new law mandating diversity have been
heartened by the outcome of California's gender mandate for boards.
Most public companies with all-male boards when that law was
enacted two years ago have since added at least one woman, with the
majority of those recruits being first-time directors, according to
Equilar.
While a few organizations have filed lawsuits over the state's
gender mandate, the business community, by and large, hasn't
challenged the law, partly because institutional investors, such as
BlackRock Inc. and State Street Corp., had called for greater
gender diversity within the ranks of companies, including at the
top.
While California's move to mandate racial, ethnic and other
types of diversity at the board level is unprecedented in the U.S.,
companies are facing increased pressure to diversify and make such
disclosures in the midst of a growing emphasis by institutional
investors on environmental, social and governance metrics, or
so-called ESG.
Pinterest Inc. in August appointed veteran media executive
Andrea Wishom as a director, adding a Black woman to its board.
Bristol Myers Squibb Co. and Procter & Gamble Co. also added
Black directors to their boards this summer, including Derica Rice
and Debra Lee, respectively.
In July, New York City Comptroller Scott Stringer called on 67
public companies to disclose the composition of their workforces by
race, ethnicity and gender. Earlier this week, 34 companies in the
S&P 100 index complied, among them Amazon.com Inc., General
Motors Co., PayPal Holdings Inc., Coca-Cola Co. and Pfizer Inc.
Mr. Stringer, who serves as investment adviser to the city's
retirement systems, which includes city employees and teachers,
said he believes in the business case for more inclusion. "Greater
diversity means greater long-term value for shareowners," he
said.
On a national scale, racial diversity of corporate boards is
harder to track than gender. It is not clear how California plans
to obtain information about companies based in the state. Few
companies disclose the ethnic makeup of their directors. According
to the Conference Board and ESG data analytics firm Esgauge, 13% of
S&P 500 companies and 4.9% of Russell 3000 companies disclose
the race of each director on the board.
"The issue here is about getting the data," said Matteo Tonello,
the Conference Board's managing director of ESG. "There's just not
enough detailed disclosure about this type of information."
The focus on social justice and racism this year, following the
killing of George Floyd and other Black Americans by police, has
prompted a wave of businesses to examine diversity within their
ranks more closely.
Earlier in September a group of public and private companies,
including Zillow Group Inc. and Nextdoor.com Inc., joined a pledge
to add a Black director to their board within a year or, if their
boards already included a Black director, use their power to speak
out on the issue. Earlier this week, companies including Albertsons
Cos., Nordstrom Inc., Under Armour Inc., Mastercard Inc. and
private-equity firm TPG joined an initiative formed by the
Executive Leadership Council to increase representation of racially
and ethnically diverse directors.
In August the Securities and Exchange Commission enacted new
rules that touch on leadership and workforce diversity. The agency
changed Regulation S-K, which focuses on nonfinancial reporting, to
require companies to disclose material "human capital measures" and
objectives for managing the business, though the regulation gives
companies wide latitude to determine what to report.
"We will see significant progress in the coming months," Mr.
Tonello said of the recent, mounting efforts. "As companies make
progress, they'll be more willing to volunteer this type of
information,"
Yet quotas aren't cure-alls, said Sheryl Sandberg, the chief
operating officer of Facebook Inc. and founder of LeanIn.org, an
advocacy group for advancing women's careers, during The Wall
Street Journal's Women In the Workplace digital conference
Wednesday.
"Legal mandates can work," said Ms. Sandberg, who also sits on
Facebook's board. "But I do think we have to realize the
limitations."
In Norway, for instance, women's participation on corporate
boards has been mandated for years. The hope was that participation
at that level would result in more women in the C-suite, but that
has not panned out, Ms. Sandberg noted.
Write to Anne Steele at Anne.Steele@wsj.com
(END) Dow Jones Newswires
September 30, 2020 23:52 ET (03:52 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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