All of the tri-county region’s publicly held companies that trade on major stock exchanges meet California’s new requirement for more diversity on corporate boards.
Assembly Bill 979 was passed in 2020 and went into effect on Jan. 1, 2022. It is similar to Senate Bill 826, a law that went into effect Jan. 1, 2019, calling for publicly held companies trading on major stock exchanges with their executive offices in California to meet gender diversity requirements on their boards of directors. The new law requires representation of at least one board member from historically underrepresented racial and ethnic groups, or from the LGBTQ community.
The new law will have a step-up by Jan. 1, 2023, which will require California companies to have two or more members from an underrepresented community on their boards, depending on the size of the board. Companies with more than four board members will need to have at least two such board members, while companies with more than nine board members must have three from underrepresented groups.
The law is being challenged in court, and the state is not enforcing it while that lawsuit is pending.
A Business Times analysis found that all 21 publicly held companies based on the Central Coast and trading on a major exchange comply with the new law, as of Jan. 5.
“I wish that we didn’t have to have Senate and Assembly bills in order to have this diversity at different levels, but if it comes to that I really believe that they’ll make a difference,” Celina Zacarias, a board member with Goleta-based Community West Bancshares, told the Business Times.
AB 979 was authored by Assemblyman Chris Holden, D-Pasadena, and other California lawmakers, all Democrats. The bill requires publicly traded corporations headquartered in California that trade over a major stock exchange, such as the Nasdaq and New York Stock Exchange, to have “a minimum of one director from an underrepresented community,” by the end of calendar year 2021.
The law defines a member of an underrepresented community as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native,” and would also include people “who self-identifies as gay, lesbian, bisexual, or transgender.”
Though many companies confirmed to the Business Times that they have at least one member from an underrepresented community on their board, an exact number could not be calculated, as many companies did not disclose LGBTQ+ board members or the full count of directors from underrepresented groups. That makes it impossible to tell now how many companies will need to make changes to their boards to meet the more stringent requirements for 2023.
The law will be enforced by California’s Secretary of State Office, which has said its first report on this bill will be released on March 1.
However, the state laws on both gender and racial diversity on corporate boards are subject to ongoing lawsuits. The gender diversity law has been in effect for two years, but the state has not fined any companies for noncompliance.
Zacarias was added to the Community West board in December. As a kid, she worked alongside her parents in the fields, and as an adult, she spent 25 years in mortgage banking, helping Hispanic families realize their dream of owning a home in the U.S.
As a result, she believes hiring more people from underrepresented communities is imperative to making connections in the community.
“I believe for any organization, if you’re going to do business in a community you have to walk with that community and you have to really be engaged with that community,” Zacarias said.
A Harvard Law School report published in 2018 found that of 1,033 board seats filled by directors new to Fortune 500 boards, 81% were filled by white directors, with 60% held by white men.
That report found that the number of nonwhite directors holding board seats is “slightly better” for the Fortune 100, with 77% of board seats filled by white directors and 51% filled by white men.
Kim Hunter, the founder and CEO of Lagrant Communications and Lagrant Foundation, said that he’s served on corporate boards, though not for publicly traded companies, and “when you look at the sea of people on those boards, they’re typically white male.” Hunter is Black.
This pattern can be self-perpetuating, said John Garcia, an associate professor of finance at California Lutheran University in Thousand Oaks. Potential directors who aren’t white males are passed up not because they are unqualified, but because they don’t have access to the same networks and opportunities, he said.
“It’s human nature to seek others like ourselves,” Garcia said. “So if the board is primarily made up of white males, which is kind of the big current norm, there’s always an inherent bias towards filling that seat with another white male.”
Garcia said that diversity on corporate boards drives shareholder value, because it creates a better understanding of the real world, and drives innovation, both of which increase the profitability of any corporation.
“Adding diversity to boards is not only the right thing to do from a society perspective, but it also aligns with the goal of maximizing shareholder value,” he said.
Many companies have added executive-level positions dedicated to diversity, equity and inclusion. One of them is Sonos, the Santa Barbara-based home audio company, where Shamayne Braman was hired in December as chief diversity, equity and inclusion officer.
“Research shows a diverse and inclusive business is now an expectation from employees, consumers and investors alike who care about how businesses are creating a positive impact on society,” Braman told the Business Times via email. “This imperative applies equally to the board and I’m encouraged to see growing awareness and action to bolster board diversity across the state, given the crucial role board members play in shaping company-wide decisions.”