Starting next year, public companies headquartered in California will be legally required to diversify their boards racially, ethnically and in terms of sexual and gender identity.
The law, which was signed by California Governor Gavin Newsom on Wednesday, requires companies to have at least one board member from an underrepresented community by the end of 2021 and at least two or three – depending on the board’s size – by the end of 2022.
People from underrepresented communities are defined in the bill as anyone 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.
“This new law represents a big step forward for racial equity… This is a win-win as ethnically diverse boards have shown to outperform those that lack diversity,” California State Assemblyman Chris Holden, a coauthor of the legislation, said in a statement.
The new law is likely to establish a new minimum threshold for corporate diversity across the country, much like the state’s 2018 law requiring a minimum number of women directors.
Public companies are not required to report on the racial and ethnic mix of their boards, but a number of analyses have shown that corporate boards remain overwhelmingly White. And the biggest strides they’ve made in terms of diversity is to give women – primarily White women – a seat at the table.
A report earlier this month from ISS ESG, the responsible-investment arm of Institutional Shareholder Services, found that only 16.8% of large cap company boards had racially or ethnically diverse directors, up from 13.6% in 2015. By contrast, the growth in the number of women directors has been much greater. Women directors now account for 27.4% of such boards, up from 18.3% five years ago.
While bolstering diversity at corporations is now part of the national conversation, it won’t amount to much without action.
“For all the good will and good intentions out there, most of us believe if you don’t count it, it doesn’t happen. You have to have measurable goals,” said Aida Alvarez, a founding member of the Latino Corporate Directors Association, who herself sits on the boards of four public companies, including HP Inc.
Alvarez noted that despite Hispanics making up nearly 40% of California’s population, 86% of the public companies based there don’t have a Latino on their boards. “There’s clearly underrepresentation right now. And there’s a lot of great talent out there,” said Alvarez.
Correction: An earlier version of this story misidentified the company where Aida Alvarez serves as a board member.