After enacting Senate Bill 826 in 2018, California became the first state to promote gender diversity on corporate boards. Taking the lead once again, California has enacted a new bill which promotes diversity for underrepresented communities.
On September 30th, 2020, Governor Newsom signed Assembly Bill 979 into law. AB 979 requires corporate boards to include directors from underrepresented communities. The underrepresented community composition requirement applies to the boards of publicly held domestic and foreign corporations with principal executive offices located in California, according to the corporation’s SEC 10-K form. Per the legislation, a director from an underrepresented community includes individuals who self-identify 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.
Phased Timeline to Meet the New Requirement
Similar to the implementation of SB 826, AB 979 sets a phased timeline for satisfying this new and important requirement. To start, one director from an underrepresented community is required no later than the close of 2021 calendar year, with authorization to increase the number of directors for compliance purposes. Then, by no later than the end of the 2022 calendar year, the amount and proportion is set as follows:
- Boards of four directors or fewer must have at least one director from an underrepresented community.
- Boards of five to eight directors must have a minimum of two directors from underrepresented communities.
- Boards with nine directors or more must have a minimum of three directors from underrepresented communities.
Penalties for Noncompliance
There are significant penalties for failure to comply. Each director's seat required to be held by a director from an underrepresented community which is not held by the director during at least a portion of the calendar year counts as a violation. (There is no violation if a director from an underrepresented community held a seat for at least a portion of the year.) The penalty for the first violation is $100,000, with the fine increasing to $300,000 for a second or subsequent violation. Failure to timely file board member information pursuant to an adopted regulation may also result in a $100,000 fine.
No later than March 1st, 2022, the CA Secretary of State is required to publish annual compliance information that includes the number of corporations that were in compliance during at least one point during the preceding calendar year, the number of publicly held corporations that moved their U.S. Headquarters into or out of California during the preceding year, and the number of publicly held corporations subject to the requirement during the preceding calendar year but are no longer publicly traded.
The bill does not address how the Secretary of State will collect the compliance information, but it authorizes the Secretary of State to adopt regulations for implementation.
For additional details, please refer to the full text of Assembly Bill 979.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.