California Lawmakers Approve New Diversity Quotas For Corporate Boards

TOPLINE

California passed a bill Sunday requiring corporations to include a minimum number of underrepresented people on their boards, becoming the first state to pass this type of diversity quota for board membership.

KEY FACTS

The bill requires all public companies headquartered in California to have at least one board member from an underrepresented community by 2021 and for companies to have a minimum of three by the end of 2022, depending on the size of the board.

The bill defines people as underrepresented if they self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native or as gay, lesbian, bisexual or transgender.

The bill, which needs to be signed into law by Gov. Gavin Newsom (D) requires the California Secretary of State to write annual diversity reports and to fine companies that are in violation or fail to report data with the state.

It builds on the 2018 law that required public companies headquartered in California to have at least one female board member by the end of 2019 and for companies to have a minimum of three by the end of 2021, depending on the size of the board.

Since that law went into effect, women accounted for about 45% of new board seats among Russell 3000 companies based in California, compared with about 31% nationwide, according to Bloomberg data.

key background

Research has shown the economic benefit of corporate diversity. A 2020 McKinsey and Company report found companies in the top-quartile for gender diversity on their executive teams were 25% more likely to experience above-average profitability compared to their counterparts. Similarly, companies in the top-quartile for ethnic and cultural diversity at the executive level were 36% more likely to experience above-average profitability.

further background

Bill

Diversity wins: How inclusion matters (McKinsey and Company)

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