Board diversity requirements for California-based businesses

On Behalf of | Feb 4, 2022 | Business Litigation |

Companies based in our state have a myriad of state-specific laws and regulations they must follow. One of the more unique requirements that some may not know is California’s board member diversity requirements.

SB 826 and AB 979

Back in 2018, the state mandated that public companies that were headquartered here have at least one woman on their board of directors by the end of 2019 (SB 826). Most recently, toward the end of 2020, Governor Gavin Newsom signed a law that increased this diversity requirement (AB 979). Specifically, it required that these same companies now must also have board members from underrepresented communities.

AB 979 requirements

By the end of 2021, public companies based in California must have at least one member on their board of directors that is from an underrepresented community. These include people that self-identify as transgender, gay, bisexual and lesbian. It also includes those who self-identify as Native (Alaska, American and Hawaiian), Hispanic, Latino, Black, African American, Asian and Pacific Islander. Then, by the end of 2022, that number of required underrepresented board members may increase, depending on the number of directors on the company’s board. If there are only four or fewer members, only one underrepresented board member is required. For companies with five to eight members, the number increases to two, and for those companies with nine or more board members, the number increases to three.

Non-removal compliance

California-based companies can comply with these diversity requirements in a number of ways. They can add one or more board members, which would eliminate the need to remove board members. Though, as board membership expands, the number of required underrepresented board members could, correspondingly, increase. For example, for an eight-member, all-white board, they could add an underrepresented board member last year, but by the end of 2022, they will need to two additional underrepresented board members. Though, the company could remove current members to reduce this requirement.

Diversity compliance

Another way that companies can meet this requirement is to hire a board member that is both a woman and meets the new diversity requirements as well. For Irvine, California, and Orange County, public companies, these requirements have real teeth. Failure to comply can mean substantial ongoing penalties.

 

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