California Gov. Gavin Newsom (D) signed into law the nation’s first mandate for boards of directors to seat members of underrepresented communities on boards.
The law applies to public companies headquartered in California and creates challenges for boards given the lack of regulatory guidance for applying its criteria in classifying individuals filling board seats.
The mandate also creates quotas that are likely to draw legal challenges. Some immediate board governance guidance is in order.
What the Law Requires
California-based public companies must comply with the new diversity mandate by filling some board seats with individuals from underrepresented communities by the end of 2021. The law—which follows on the existing statutory gender mandate—requires boards initially to seat board members who identify with an “underrepresented community.”
The law defines an individual from an underrepresented community as someone 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.
The mandate is phased so that by the end of 2022, boards must be composed of increasingly greater percentages of underrepresented communities. Like California’s gender mandate, the measure requires annual reporting of gender and community makeup for boards and significant fines for compliance failures ($100,000 for the first violation and increasing from there). The law does not require corporations to identify by name the director who holds the respective underrepresented community board seat.
Immediate Challenges for Board Committees
The law presents immediate challenges for the board committees responsible for board refreshment. First, it categorizes individuals who are members of underrepresented communities as those who “self-identify” with the specific categories. But the law does not explain what “self-identification” means nor does it provide guidance for this determination.
Lacking an objective measure to determine the legitimacy of any individual’s self-identification, board members will need a basis—and sufficient training—to make this determination. Professional assistance (human resources, legal and other recruiting professionals) should be sought to address this challenge.
Audit Refreshment Practices
Modifying board refreshment to comply with the new requirement should begin with a realistic self-critical assessment of today’s board. That introspection should include an examination of the board’s current makeup, what seats will become vacant (and when), and the desired technical skills for board members.
The past practice analysis should focus on historical candidate sourcing and selection, past recruiting successes (and mistakes), and a healthy dose of open-mindedness as to future refreshment behavior.
This introspection should direct strategy moving forward. This is where good board governance meets the law’s diversity mandate.
Change Ineffective Refreshment Habits
A pivot to bold and creative efforts that reach underrepresented communities should be considered. Tapping into the same networks, and the same closed-loop and insular establishments, together with the same possibly outdated descriptions of desired roles—should be reconsidered.
Existing board members should consider expanding their networks—perhaps through volunteering through local or national community organizations or through mentoring business people who have an interest (and as yet undeveloped talent) in board service.
Recruiting tools that require a minimum number of candidates for each role may also produce a more intentional group of non-traditional candidates. Professional recruiters can be key change-makers in this process, especially if they have a track record of identifying and reaching candidates who might otherwise fall outside traditional recruiting sources.
Manage the Process With Rigid Recordkeeping and Reporting
Boards should designate a board governance professional (legal, human resources, or professionals supporting the board governance) to collect and track the data concerning the law’s requirements. This process begins with a self-identification request to each board member as well as future candidates.
The law requires that an individual “self-identify” with an underrepresented community, but guidance is lacking as to how to determine whether a candidate’s identification is legitimate. Training for board committee members as well as professional human resources or legal assistance will be key to making these determinations.
The law poses a similar challenge to its gender-mandate predecessor in that its reporting mechanism may not correspond with proxy season, federal regulatory reporting, and the election (or re-election) of board members. This reporting requirement must align with existing board governance reporting practices.
The collection of this information will also require rigid adherence to privacy laws. Other sensitivities should be observed, such as respecting the wishes of individuals who self-identify with the LGBT community but who wish to keep that information confidential.
Finally, boards should consider the disclosures be made to shareholders concerning the efforts to comply with the diversity mandate. Changes in board refreshment and representation likely go beyond the legal compliance that reporting requires and will necessitate intentionality in reporting—in other words, what is the corporate plan to satisfy the mandate, and how will the board fulfill it?
Compliance Will Be Challenging
Statutory activism has replaced shareholder activism in California with respect to board diversity. Although the benefits resulting from a board representative of the community cannot be overstated, the lack of guidance for boards on how to implement this statutory directive will be challenging.
Identifying, electing, and seating diverse board members may be the statutorily mandated result, it is the means to that end that merits board focus. These issues present legal compliance issues, and the goal should be creating a board that strategically outperforms any legislative mandates.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jen Rubin is a member at Mintz practicing employment law and is also a member of the firm’s ESG Practice Group. She advises clients across various industries on issues such as wage and hour compliance and maintains a robust trial practice, with a focus on class actions, trade secrets, and employment mobility disputes, and the defense of discrimination, retaliation, and other disputes arising from the employment relationship.