California hasn’t had a racial majority since 2000, according to census data.
But you wouldn’t know it from looking in boardrooms. Of the 662 publicly traded companies in the state, 233 have all-white boards, according to the Latino Corporate Directors Association.
Those numbers could change dramatically if Gov. Gavin Newsom signs a bill, AB979, recently passed by the Legislature. The bill would mandate public companies headquartered in California have at least one director from an underrepresented community by the end of next year, and more for larger companies with larger boards. Supporters say its impact could go beyond boardrooms, prompting wider searches for people with diverse talents and backgrounds to lead companies, while critics say it’s the wrong way to solve broader societal problems.
The bill defines a person 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.
AB979’s supporters believe it is an important step toward equality in the corporate setting. Some researchers believe it oversimplifies a complex problem.
The bill would add desperately needed perspective to boardrooms that remain overwhelmingly white, said Esther Aguilera, CEO of the Latino Corporate Directors Association.
“More diverse boards and voices lead to better-informed decisions and decision-making and also produce better results for the company,” Aguilera said.
“You can still have groupthink among a diverse set of individuals,” said Vincent Intintoli, an associate professor of finance at Clemson University’s College of Business who has studied another California law, SB826, which requires women in boardrooms.
“More important is if those members are independent of the board CEO,” Intintoli said, noting that a chief executive could appoint board members from underrepresented groups merely to avoid the $100,000 to $300,000 fines set out in the bill, without shifting the perspective of the group and thereby benefiting the company and its shareholders.
Benefits could include attracting employees who increasingly care about the makeup of company leadership and being able to cater more meaningfully to customers from a variety of backgrounds, Aguilera said.
“You need to have folks across the employment spectrum (who) know how to connect and relate with your customers,” she added, noting the large and growing Latino consumer base in California. “That’s true also in the boardroom.”
Some research, including one study from McKinsey & Company in 2017, has shown that companies with more ethnically diverse executive groups do better in terms of profitability than those with less diverse leadership.
While that research shows a correlation between diversity and profit, it doesn’t establish that one caused the other, said Kathy Kahle, a professor at the University of Arizona who co-authored the study on California’s law on women in the boardroom with Intintoli and Daniel Greene, also at Clemson.
Kahle said AB979 could also disproportionately affect smaller businesses with smaller boards, potentially forcing them to add board members at not inconsiderable expense.
Given widespread protests over racial inequality across the U.S. this summer, many companies are not waiting to see if Newsom signs the bill to focus on diversity and inclusion.
Investment giant Goldman Sachs said it would only take firms public with at least one diverse board member. Other institutional investors including State Street Global Advisors and BlackRock have made statements about the need for diversity in the companies they invest in.
In June, online news discussion site Reddit named Michael Seibel, the CEO of Bay Area startup incubator Y Combinator, who is Black, to its board. He joined after co-founder Alexis Ohanian stepped down, asking that the company make room for a person of color.
And some large corporations in California already have at least one person of color on their boards, including Facebook, Tesla, Google parent Alphabet, Salesforce, Wells Fargo and others.
AB979 could touch off change in the makeup of boardrooms beyond the letter of the legislation, according to Shannon Gordon, CEO of online talent marketplace theBoardlist, which connects women and underrepresented communities with board opportunities.
Gordon said SB826, the law requiring women in boardrooms, had a “halo” effect that led to more women entering leadership positions across the state, and that AB979 could do the same.
Similarities between the two pieces of legislation could also lead to similar legal challenges.
The Pacific Legal Foundation is challenging the gender diversity law in court. Anastasia Boden, a senior attorney at the organization, said it would consider bringing or supporting a legal challenge over the bill if it becomes law.
“Nobody’s opportunities should be determined by the color of their skin or their sex or sexual orientation,” Boden said. The purpose of the ongoing lawsuit is not to deny discrimination or disparities exist, she said: “It’s to say that racial quotas are the most pernicious way to go about resolving those problems.”
Boden and others have also criticized legally mandated quotas as superficially solving the diversity problem without getting to root causes.
Aguilera of the Latino Corporate Directors Association said such requirements galvanize companies to search more broadly for talent.
“When you talk about quotas it’s ... extra incentive to see who’s out there from diverse communities,” she said. “Until then they aren’t looking around.”
Chase DiFeliciantonio is a San Francisco Chronicle staff writer. Email: chase.difeliciantonio@sfchronicle.com Twitter: @ChaseDiFelice
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Bill requiring diverse boards in California could have broader impact - San Francisco Chronicle
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