California Rolls Out Diversity Quotas for Corporate Boards

California Gov. Gavin Newsom signed legislation Wednesday that will require the boards of publicly traded companies based in the state to have at least one racially, ethnically or otherwise diverse director by 2021.

The new quota is the first of its kind in the U.S. and follows a similar California measure enacted two years ago that mandated female directors on all boards of the state’s public companies. The law is expected to have wide-ranging impact within the state’s borders and beyond, potentially sparking fresh debate and legislative efforts in other parts of the country.

“We have a vision about how this state could be an example for the rest of the country,” said Assemblyman Chris Holden, a co-author of the bill. “This is an opportunity to get people of color at the table where the decisions are made, where the culture is set.”

Under the new law, individuals who identify as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who identify as gay, lesbian, bisexual or transgender, would be considered eligible for meeting the requirement.

The bill passed 56-8 in the assembly at the end of August; dissenters said it would violate equal protection provisions of the law.

More than 35% of California’s 513 public-company boards—185 companies—wouldn’t meet the new requirement of one director from a diverse background when it goes into effect in 2021, according to Equilar, a research firm that gathers data on executives and boards. By comparison, 20% of California-based public companies in the Russell 3000 index, which includes the majority of companies traded on major U.S. stock exchanges, had no female directors when the state mandated that women get directorships, according to Equilar.

The new diversity rule requires a greater number of underrepresented minorities required on boards starting in 2022, and approximately 83%—or 423 public companies in California—wouldn’t be able to satisfy the requirement with their current boards, according to Equilar. In 2022, corporate boards with four or more members would have to include two people from underrepresented groups; boards with at least nine directors would have to include a minimum of three diverse directors.

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While California’s move to mandate racial, ethnic and other types of diversity at the board level is unprecedented in the U.S., companies are facing increased pressure to diversify and make such disclosures in the midst of a growing emphasis by institutional investors on environmental, social and governance metrics, or so-called ESG.

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In July, New York City Comptroller Scott Stringer called on 67 public companies to disclose the composition of their workforces by race, ethnicity and gender. Earlier this week, 34 companies in the S&P 100 index complied, among them Amazon.com Inc., General Motors Co., PayPal Holdings Inc., Coca-Cola Co. and Pfizer Inc.

Mr. Stringer, who serves as investment adviser to the city’s retirement systems, which includes city employees and teachers, said he believes in the business case for more inclusion. “Greater diversity means greater long-term value for shareowners,” he said.

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