CONCURRENCE IN SENATE AMENDMENTS

CSA2 Bill Id:AB 979

Author:(Holden, et al.)

As Amended Ver:August 20, 2020

Majority vote

SUMMARY:

Requires each publicly held corporation whose principal executive offices are located in California to have a minimum number of directors from underrepresented communities on its board of directors, as specified.

The Senate Amendments:

Delete the Assembly version of this bill and replace with the following:

1. Defines "director from 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, or who self-identifies as gay, lesbian, bisexual, or transgender.
2. Defines "publicly held corporation" as a corporation with outstanding shares listed on a major United States stock exchange.
3. By the end of calendar year 2021, requires each publicly held corporation whose principal executive offices are located in California to have a minimum of one director from an underrepresented community on its board. Clarifies that a corporation may increase the number of directors on its board to comply with this requirement.
4. By the end of calendar year 2022, requires each publicly held corporation whose principal executive offices are located in California to comply with the following:
   1. If its number of directors is nine or more, the corporation shall have a minimum of three directors from underrepresented communities.
   2. If its number of directors is more than four but fewer than nine, the corporation shall have a minimum of two directors from underrepresented communities.
   3. If its number of directors is four or fewer, the corporation shall have a minimum of one director from an underrepresented community.
5. Requires the Secretary of State to report on corporations subject to the requirements summarized in 3) and 4), above, and those corporations' compliance with the requirements.
6. Authorizes the Secretary of State to impose fines for violations of the requirements in 3) and 4), above, as specified.
7. Makes findings and declarations regarding the lack of racial and ethnic diversity on corporate boards of directors and the benefits of more equitable representation on corporate boards.

Existing Law:

Establishes nearly identical requirements as this bill related to the representation of women on corporate boards.

COMMENTS:

As stated in the findings and declarations of the bill, according to 2018 data from Deloitte and the Alliance for Board Diversity, the percentages of Fortune 500 company board seats held by people identified as African American/Black, Hispanic/Latino(a), and Asian/Pacific Islander were 8.6%, 3.8%, and 3.7%, respectively.^[1] The same study showed that 84% of board seats were held by people identified as white, which over-represents the group's share of the general population by 22 percentage points.

This relative lack of diversity may have consequences that negatively affect all stakeholders in a corporation, including workers, customers, and investors. Workers from communities that are not represented on the board may find limited opportunities for advancement through the executive ranks, as boards hire CEOs who look like themselves and CEOs surround themselves with other executives who also look like them. With a lack of diversity throughout the board and senior management, customers or potential customers from underrepresented communities may find that products or services offered by the corporation do not consider the preferences of their communities. A failure to capitalize on a diverse range of consumer preferences harms investors who would benefit from higher returns if corporations were meeting their full potential.

The lack of diversity in corporate America is not a product of happenstance; rather, it is a product of systemic discrimination and bias that affects so many facets of our society – housing, education, criminal justice, and employment. This bill seeks to remedy one specific discriminatory outcome by ensuring that corporate boards meet a minimum standard of diversity.

This bill is modeled after SB 826 (Jackson), Chapter 954, Statutes of 2018, which established similar requirements related to the representation of women on corporate boards. As that measure advanced through the Legislature, a variety of business groups opposed the bill and argued that provisions of the bill violated the California and United States (U.S.) Constitutions. Specific concerns focused on alleged violations of the Equal Protections clauses in both constitutions and the so-called "internal affairs doctrine" which emanates from the Commerce Clause of the U.S. Constitution. Subsequent to its enactment, the 2018 law has been challenged at least twice with one case being dismissed due to the plaintiff's lacking standing and the other case remains pending. If this bill is enacted, the pending lawsuit against the 2018 law will not directly affect the legitimacy of the contents of this bill, but the outcome in that case could set a precedent that would apply to a complaint alleging a similar constitutional violation related to this bill.

According to the Author:

Since the beginning of recent social unrest, corporations have publicly messaged their support for diversity and Black lives. However, critics have pointed out this public support does not translate to diversity within a company and will not lead to long-term structural change. AB 979 will serve as a springboard to: address the ethnic pay gap, facilitate employment and outreach opportunities, promote board diversification, establish pipeline creation and upward mobility of diverse technical talent, and retention of that talent through company culture and development.

Arguments in Support:

The California Hispanic Chambers of Commerce writes:

We are pleased to support AB 979 because California company boards of directors do not reflect the diversity of our great state. A recent study by the Latino Corporate Directors Association determined that 233 of the 662 public-company boards in California have no ethnic or racial representation… Latinos, who make up 39.4% of the state of California, are severely underrepresented in the boardroom. Of the 662 public California companies, 571 corporations, or 87%, do not have a Latino on their board… Greater boardroom equity that is inclusive of Latinos will lead to greater results for business and our state. I appreciate your consideration of these views.

Chinese for Affirmative Action writes:

The Missing Pieces Report and multiple other research, document how Asian Americans are often an overlooked group for management and executive level positions and in representation at the corporate board of director's level. The Report demonstrates that Asians/Pacific Islander make up the lowest percentage of underrepresented groups in both Fortune 100 (3.8%) and Fortune 500 (3.7%) board of directors. This persistent lack of representation in corporate boardrooms needs continuous focus, oversight, and change. CAA believes AB 979 creates a cultural shift in California's board seats towards that end.

Arguments in Opposition:

Keith Bishop, a corporate law attorney, is opposed to the bill on grounds that it is unconstitutional and will adversely affect the participation of male and non-binary persons on the boards of directors of publicly held corporations. Observing that the provisions of AB 979 will layer on top of the provisions of SB 826, Mr. Bishop states,

Publicly held corporations will be required to comply with both sets of quotas. Therefore, individuals who self-identify as both female and as African American, Hispanic, or Native American will undoubtedly be preferred as director candidates because they will satisfy both quotas. The easily predictable result of enactment of AB 979 would be a decrease in the over-all number of directors on publicly held company boards who self-identify as male or non-binary and as being from an underrepresented community.

FISCAL COMMENTS:

According to the Senate Appropriations Committee, this bill will result in ongoing costs in the hundreds of thousands of dollars to gather demographic information and compile a report on this data on its internet website.

VOTES:

ASM PUBLIC EMPLOYMENT AND RETIREMENT: 4-1-2

YES: Rodriguez, Cooley, Cooper, Fong

NO: O'Donnell

ABS, ABST OR NV: Voepel, Cervantes

ASM APPROPRIATIONS: 17-0-1

YES: Gonzalez, Bigelow, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

ABS, ABST OR NV: Megan Dahle

ASSEMBLY FLOOR: 73-0-7

YES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Chau, Chiu, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, O'Donnell, Obernolte, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood

ABS, ABST OR NV: Cervantes, Chen, Choi, Megan Dahle, Kiley, Patterson, Rendon

SENATE FLOOR: 26-8-6

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Chang, Durazo, Galgiani, Lena Gonzalez, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Umberg, Wiener

NO: Bates, Borgeas, Grove, Melendez, Moorlach, Morrell, Nielsen, Wilk

ABS, ABST OR NV: Dahle, Dodd, Glazer, Jones, Stern, Wieckowski

UPDATED:

VERSION: August 20, 2020

CONSULTANT: Michael Burdick / B. & F. / (916) 319-3081 FN: 0003612

1. https://corpgov.law.harvard.edu/2019/02/05/missing-pieces-report-the-2018-board-diversity-census-of-women-and-minorities-on-fortune-500-boards/ ↑

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 979

Author:(Holden, et al. )

As Amended Ver:August 20, 2020

Majority vote

SUMMARY:

Requires each publicly held corporation whose principal executive offices are located in California to have a minimum number of directors from underrepresented communities on its board of directors, as specified.

The Senate Amendments:

Delete the Assembly version of this bill and replace with the following:

1. Defines "director from 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, or who self-identifies as gay, lesbian, bisexual, or transgender.
2. Defines "publicly held corporation" as a corporation with outstanding shares listed on a major United States stock exchange.
3. By the end of calendar year 2021, requires each publicly held corporation whose principal executive offices are located in California to have a minimum of one director from an underrepresented community on its board. Clarifies that a corporation may increase the number of directors on its board to comply with this requirement.
4. By the end of calendar year 2022, requires each publicly held corporation whose principal executive offices are located in California to comply with the following:
   1. If its number of directors is nine or more, the corporation shall have a minimum of three directors from underrepresented communities.
   2. If its number of directors is more than four but fewer than nine, the corporation shall have a minimum of two directors from underrepresented communities.
   3. If its number of directors is four or fewer, the corporation shall have a minimum of one director from an underrepresented community.
5. Requires the Secretary of State to report on corporations subject to the requirements summarized in 3) and 4), above, and those corporations' compliance with the requirements.
6. Authorizes the Secretary of State to impose fines for violations of the requirements in 3) and 4), above, as specified.
7. Makes findings and declarations regarding the lack of racial and ethnic diversity on corporate boards of directors and the benefits of more equitable representation on corporate boards.

Existing Law:

Establishes nearly identical requirements as this bill related to the representation of women on corporate boards.

COMMENTS:

As stated in the findings and declarations of the bill, according to 2018 data from Deloitte and the Alliance for Board Diversity, the percentages of Fortune 500 company board seats held by people identified as African American/Black, Hispanic/Latino(a), and Asian/Pacific Islander were 8.6%, 3.8%, and 3.7%, respectively.^[1] The same study showed that 84 %of board seats were held by people identified as white, which over-represents the group's share of the general population by 22 percentage points.

This relative lack of diversity may have consequences that negatively affect all stakeholders in a corporation, including workers, customers, and investors. Workers from communities that are not represented on the board may find limited opportunities for advancement through the executive ranks, as boards hire CEOs who look like themselves and CEOs surround themselves with other executives who also look like them. With a lack of diversity throughout the board and senior management, customers or potential customers from underrepresented communities may find that products or services offered by the corporation do not consider the preferences of their communities. A failure to capitalize on a diverse range of consumer preferences harms investors who would benefit from higher returns if corporations were meeting their full potential.

The lack of diversity in corporate America is not a product of happenstance; rather, it is a product of systemic discrimination and bias that affects so many facets of our society – housing, education, criminal justice, and employment. This bill seeks to remedy one specific discriminatory outcome by ensuring that corporate boards meet a minimum standard of diversity.

This bill is modeled after SB 826 (Jackson), Chapter 954, Statutes of 2018, which established similar requirements related to the representation of women on corporate boards. As that measure advanced through the Legislature, a variety of business groups opposed this bill and argued that provisions of the bill violated the California and United State (U.S.) Constitutions. Specific concerns focused on alleged violations of the Equal Protections clauses in both constitutions and the so-called "internal affairs doctrine" which emanates from the Commerce Clause of the U.S. Constitution. Subsequent to its enactment, the 2018 law has been challenged at least twice with one case being dismissed due to the plaintiff's lacking standing and the other case remains pending. If this bill is enacted, the pending lawsuit against the 2018 law will not directly affect the legitimacy of the contents of this bill, but the outcome in that case could set a precedent that would apply to a complaint alleging a similar constitutional violation related to this bill.

According to the Author:

Since the beginning of recent social unrest, corporations have publicly messaged their support for diversity and Black lives. However, critics have pointed out this public support does not translate to diversity within a company and will not lead to long-term structural change. AB 979 will serve as a springboard to: address the ethnic pay gap, facilitate employment and outreach opportunities, promote board diversification, establish pipeline creation and upward mobility of diverse technical talent, and retention of that talent through company culture and development.

Arguments in Support:

The California Hispanic Chambers of Commerce writes:

We are pleased to support AB 979 because California company boards of directors do not reflect the diversity of our great state. A recent study by the Latino Corporate Directors Association determined that 233 of the 662 public-company boards in California have no ethnic or racial representation… Latinos, who make up 39.4% of the state of California, are severely underrepresented in the boardroom. Of the 662 public California companies, 571 corporations, or 87%, do not have a Latino on their board… Greater boardroom equity that is inclusive of Latinos will lead to greater results for business and our state. I appreciate your consideration of these views.

Chinese for Affirmative Action writes:

The Missing Pieces Report and multiple other research, document how Asian Americans are often an overlooked group for management and executive level positions and in representation at the corporate board of director's level. The Report demonstrates that Asians/Pacific Islander make up the lowest percentage of underrepresented groups in both Fortune 100 (3.8%) and Fortune 500 (3.7%) board of directors. This persistent lack of representation in corporate boardrooms needs continuous focus, oversight, and change. CAA believes AB 979 creates a cultural shift in California's board seats towards that end.

Arguments in Opposition:

Keith Bishop, a corporate law attorney, is opposed to the bill on grounds that it is unconstitutional and will adversely affect the participation of male and non-binary persons on the boards of directors of publicly held corporations. Observing that the provisions of AB 979 will layer on top of the provisions of SB 826, Mr. Bishop states.

Publicly held corporations will be required to comply with both sets of quotas. Therefore, individuals who self-identify as both female and as African American, Hispanic, or Native American will undoubtedly be preferred as director candidates because they will satisfy both quotas. The easily predictable result of enactment of AB 979 would be a decrease in the over-all number of directors on publicly held company boards who self-identify as male or non-binary and as being from an underrepresented community.

FISCAL COMMENTS:

According to the Senate Appropriations Committee, this bill will result in ongoing costs in the hundreds of thousands of dollars to gather demographic information and compile a report on this data on its internet website.

VOTES:

ASM PUBLIC EMPLOYMENT AND RETIREMENT: 4-1-2

YES: Rodriguez, Cooley, Cooper, Fong

NO: O'Donnell

ABS, ABST OR NV: Voepel, Cervantes

ASM APPROPRIATIONS: 17-0-1

YES: Gonzalez, Bigelow, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

ABS, ABST OR NV: Megan Dahle

ASSEMBLY FLOOR: 73-0-7

YES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Chau, Chiu, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, O'Donnell, Obernolte, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood

ABS, ABST OR NV: Cervantes, Chen, Choi, Megan Dahle, Kiley, Patterson, Rendon

UPDATED:

VERSION: August 20, 2020

CONSULTANT: Michael Burdick / B. & F. / (916) 319-3081 FN: 0003619

1. https://corpgov.law.harvard.edu/2019/02/05/missing-pieces-report-the-2018-board-diversity-census-of-women-and-minorities-on-fortune-500-boards/ ↑

 THIRD READING  

Bill No: AB 979

Author: Holden (D) and Cristina Garcia (D), et al.

Amended: 8/20/20 in Senate

Vote: 21

PRIOR VOTES NOT RELEVANT

SENATE BANKING & F.I. COMMITTEE: 6-0, 8/13/20

AYES: Bradford, Chang, Caballero, Durazo, Hueso, Portantino

NO VOTE RECORDED: Dahle

SENATE APPROPRIATIONS COMMITTEE: 4-2, 8/20/20

AYES: Portantino, Bradford, Hill, Leyva

NOES: Bates, Jones

NO VOTE RECORDED: Wieckowski

SUBJECT: Corporations: boards of directors: underrepresented communities

SOURCE: Author

DIGEST:

This bill requires publicly held corporations to fill their board seats with a minimum number of directors from underrepresented communities, as specified.

ANALYSIS:

Existing law:

1. Provides, for purposes of the requirements below, that “female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth, and that “publicly held corporation” means a corporation with outstanding shares listed on a major United States stock exchange (Corporations Code Section 301.3).
   
2. Requires, no later than the close of the 2019 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to have a minimum of one female director on its board and clarifies that a corporation may increase the number of directors on its board to comply with this requirement (Corporations Code Section 301.3).
   
3. Requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to comply with the following (Corporations Code Section 301.3):
   
   1. If its number of directors is six or more, the corporation is required to have a minimum of three female directors.
      
   2. If its number of directors is five, the corporation is required to have a minimum of two female directors.
      
   3. If its number of directors is four or fewer, the corporation is required to have a minimum of one female director.
      
4. Requires the Secretary of State (SOS) to publish a report on its website by March 1, 2020, and annually thereafter, regarding all of the following, at a minimum (Corporations Code Section 301.3):
   
   1. The number of corporations subject to the aforementioned rules that were in compliance with the requirements of the rules during at least one point during the preceding calendar year.
      
   2. The number of publicly held corporations that moved their United States headquarters to California from another state or out of California into another state during the preceding calendar year.
      
   3. The number of publicly held corporations that were subject to the aforementioned rules during the preceding year, but are no longer publicly traded.
      
5. Authorizes the SOS to impose fines on corporations that violate the aforementioned provisions, as specified, and provides that, for purposes of determining whether a violation has occurred, each director seat that required to be held by a female, which is not held by a female during at least a portion of a calendar year, counts as a violation (Corporations Code Section 301.3).
   
6. Applies the aforementioned rules in Corporations Code Section 301.3 to foreign corporations that are publicly held corporations to the exclusion of the laws of the jurisdictions in which those foreign corporations are incorporated (Corporations Code Section 2115.5). Defines a publicly held corporation for purposes of this provision as a foreign corporation with outstanding shares listed on a major United States stock exchange.

This bill:

1. Adds two new sections to the Corporations Code that are virtually identical to Corporations Code Sections 301.3 and 2115.5 and applies these sections to directors from underrepresented communities. Defines a director from 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 or as gay, lesbian, bisexual, or transgender. Specifically,
   
   1. Contains extensive findings and declarations supporting the need for the bill.
      
   2. Requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to have a minimum of one director from an underrepresented community on its board and clarifies that a corporation may increase the number of directors on its board to comply with this requirement.
      
   3. Requires, no later than the close of the 2022 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to comply with the following:
      
2. If its number of directors is nine or more, the corporation is required to have a minimum of three directors from underrepresented communities.
   
   • 1. If its number of directors is more than four but fewer than nine, the corporation is required to have a minimum of two directors from underrepresented communities.
        
     2. If its number of directors is four or fewer, the corporation is required to have a minimum of one director from an underrepresented community.
        
   1. Requires the SOS to publish a report on its website by March 1, 2022, and annually thereafter, regarding all of the following, at a minimum:
      
3. The number of corporations subject to the aforementioned rules that were in compliance with the requirements of the rules during at least one point during the preceding calendar year.
   
   • 1. The number of publicly held corporations that moved their United States headquarters to California from another state or out of California into another state during the preceding calendar year.
        
     2. The number of publicly held corporations that were subject to the aforementioned rules during the preceding year, but are no longer publicly traded.
        
   1. Requires the reports described in d) above to be included with the reports required by SB 826 (Jackson, Chapter 954, Statutes of 2018) (thus, rather than having to issue separate reports regarding women and underrepresented communities, the SOS will be able to issue a single report annually that includes data on both woman and underrepresented communities).
      
   2. Authorizes the SOS to impose fines on corporations that violate the aforementioned provisions, as specified, and provides that, for purposes of determining whether a violation has occurred, each director seat that required to be held by a director from an underrepresented community, which is not held by a director from an underrepresented community during at least a portion of a calendar year, counts as a violation. Further clarifies that a director from an underrepresented community who holds a seat for at least a portion of the year does not represent a violation.
      
4. Applies all of the aforementioned rules to foreign corporations that are publicly held corporations to the exclusion of the laws of the jurisdictions in which those foreign corporations are incorporated.

Background

According to the author’s office, “since the beginning of recent social unrest, corporations have publicly messaged their support for diversity and Black lives. However, critics have pointed out this public support does not translate to diversity within a company and will not lead to long-term structural change. According to the USC Race and Equity Center, black employees in every industry tend to be concentrated in the lowest paying, least powerful positions… All of this strongly conveys to black professionals that their lives do not matter at work — hence their doubtful reactions to company statements about George Floyd. (https://www.washingtonpost.com/outlook/2020/06/16/corporations-say-they-support-black-lives-matter-their-employees-doubt-them/)”

Several reports provided by the author’s office identify the relative lack of racial and ethnic diversity on corporate boards and support the value that diverse boards have to corporate performance. For example, the 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards (https://corpgov.law.harvard.edu/2019/02/05/missing-pieces-report-the-2018-board-diversity-census-of-women-and-minorities-on-fortune-500-boards/) found that 80% of the 1,033 available board seats in Fortune 500 companies were filled by white directors. Similarly, out of the 1,222 new board members of Fortune 100 companies, 77% were white.

A report in the Harvard Business Review (https://hbr.org/2020/06/how-diverse-is-your-board-really) concluded that a diverse board can contribute to better decision making, improve company governance, and can respond to market shifts more effectively. The McKinsey & Company Consulting Firm (https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters#) suggests that these benefits are not restricted to the board of directors, but can benefit entire companies; for example, McKinsey found that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians.

Comments

The provisions of this bill are based very closely on SB 826 (Jackson). That bill, which required publicly traded companies to place a minimum number of women on their boards of directors, has been the subject of at least two lawsuits challenging its constitutionality (“This state requires company boards to include women. A new lawsuit says that’s unconstitutional,” by Kayla Epstein, Washington Post, November 14, 2019 and “California sued over law requiring women on corporate boards,” by Levi Sumagaysay, San Jose Mercury News, August 10, 2019).

By adding the provisions of this bill to two new code sections rather than amending the existing code sections added by SB 826, this bill’s author may avoid legal fallout that could result from court cases filed challenging the constitutionality of SB 826. Under this logic, even if a court were to enjoin enforcement of the provisions of SB 826 or find all or a portion of it unconstitutional, the provisions of AB 979 would remain in force. This protection would not shield AB 979 from future lawsuits or from amendments to existing lawsuits, but could prevent it from being struck down by a ruling specific to the provisions of SB 826.

Potential constitutional issues posed by this bill are discussed immediately below:

Equal Protection analysis.  This bill requires certain corporations to appoint a certain number of directors who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaskan Native. Both the federal constitution and the California state constitution contain Equal Protection clauses. (U.S. Const., Amend. XIV, § 1 (“No state shall … deny to any person within its jurisdiction the equal protection of the laws.”); Cal. Const., art. I, § 7 (“A person may not be… denied equal protection of the laws.”).) Under the current, prevailing judicial interpretation of both the federal and California constitutions’ Equal Protection clauses, a statute that draws a distinction based upon race or ethnicity in this fashion – whether remedial or punitive in intent – is suspect and only passes constitutional muster if it can meet the strict scrutiny test: that the statute is narrowly drawn to meet a compelling government interest. (Fisher v. Univ. of Tex. (2013) 570 U.S. 297, 307-308; Coral Construction, Inc. v. City and County of San Francisco (2010) 50 Cal.4th 315, 337.) By contrast, this bill would not be subject to the California constitution’s absolute bar on consideration of race in public education, contracting, and employment (Cal. Const., art. I, § 31), even if California voters retain that bar this fall, because the bill only addresses private corporations, not public entities.

Strict scrutiny is a notoriously high bar to meet, but it is not insurmountable. Remedying past discrimination can be a sufficiently compelling government interest to withstand strict scrutiny. However, the existence of general societal discrimination will not ordinarily satisfy the courts. Instead, courts conducting strict scrutiny review typically require some showing of specific discrimination that the statute remedies. (See Chemerinsky, Constitutional Law Principles and Policies (2nd ed. 2002), pp. 709-711.) To show that a statute is sufficiently narrowly-tailored to survive strict scrutiny review, the government usually must prove that the interest in question cannot be achieved through a different method that does not require drawing distinctions based on race and ethnicity to the same degree. (Wygant v. Jackson Board of Education (1986) 476 U.S. 267, 280 n. 6.).

Internal Affairs Doctrine analysis. This bill applies to corporations headquartered in California, even if they are incorporated under the laws of another state (typically, though not exclusively, Delaware). Some critics of this bill, and of SB 826, contend that such attempts by one state to impose board composition requirements on corporations incorporated in another state run afoul of the so-called “internal affairs doctrine” which emanates from the U.S Constitution’s Commerce Clause. Under that doctrine, only the state of incorporation may dictate how a corporation conducts its internal affairs. Were it otherwise, the U.S. Supreme Court has explained, corporations might be subjected to conflicting rules coming from several different states at once. (Edgar v. MITE Corp. (1982) 457 U.S. 624). It is likely that, if enacted, this bill would, like SB 826, face legal challenges alleging that it violates the internal affairs doctrine. Supporters of SB 826 argued that there are limits to the internal affairs doctrine. They pointed out, among other things, that existing California law, Corporations Code § 2115, already imposes certain requirements on what are arguably the internal affairs of corporations incorporated in other states. Section 2115 was upheld by the California courts against a Commerce Clause challenge (Wilson v. Louisiana-Pacific Res. (1982) 138 Cal.App.3d 216, 225), though it should be noted that this ruling preceded the U.S. Supreme Court decision in Edgar v. MITE Corp. referenced above.

Related/Prior Legislation

AB 931 (Boerner-Horvath, Chapter 813, Statutes of 2019) required, on and after January 1, 2030, cities with populations of 50,000 or more to appoint individuals to local boards and commissions in a manner that ensures gender diversity, as specified.

SB 826 (Jackson, Chapter 954, Statutes of 2018) required domestic and foreign publicly traded corporations with their principal executive offices in California to have minimum numbers of women on their boards.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, this bill will result in ongoing costs in the hundreds of thousands of dollars to gather demographic information and compile a report on this data on its internet website.

SUPPORT: (Verified 8/25/20)

State Controller Betty Yee

State Treasurer Fiona Ma

ActiveSGV

American Civil Liberties Union of California

Ascend

Asian American Bar Association of the Greater Bay Area

Asian American Unity Alliance

Asian Law Alliance

Asian Pacific American Leadership Institute

Asian Pacific Islander American Public Affairs Association

Association of Asian American Attorney and CPA Firms

Bay Area Asian American General Counsels

Bloom Energy

California Asian Pacific Islander Legislative Caucus

California Black Chamber of Commerce

California Employment Lawyers Association

California Hispanic Chambers of Commerce

Chinatown Community Development Center, San Francisco, CA

Chinese for Affirmative Action

Civic Leadership USA

Consumer Attorneys of California

Equal Rights Advocates

Greater Sacramento Urban League

HP Inc.

Insurance Commissioner Ricardo Lara

Japanese American Bar Association

League of California Cities Asian Pacific Islander Caucus

Minority Corporate Counsel Association

Monte Jade West

National Asian American United

National Asian Pacific American Bar Association

New America Alliance

Philippine American Bar Association

Sacramento Latina Leaders Network

Silicon Valley Leadership Group

Vietnamese American Bar Association of Northern California

OPPOSITION: (Verified 8/25/20)

One individual

ARGUMENTS IN SUPPORT: A broad coalition of groups promoting Asian American inclusions writes, “The Harvard Business Review argues that a diverse board contributes to better decision making, improve company governance, and can respond to market shifts more effectively. These benefits are not restricted to the board of directors; the benefits of greater diversity contribute to the overall health of the company. A cultural shift in the boardroom cultivates an environment that values different perspectives and visibly signals a commitment to more equitably hire, retain, and promote women and minorities.

The California Hispanic Chambers of Commerce write, “We are pleased to support AB 979 because California company boards of directors do not reflect the diversity of our great state. A recent study by the Latino Corporate Directors Association determined that 233 of the 662 public-company boards in California have no ethnic or racial representation. Latinos, who make up 39.4% of the state of California, are severely underrepresented in the boardroom. Of the 662 public California companies, 571 corporations, or 87%, do not have a Latino on their board. These low numbers are in stark contrast to the size and economic strength of California’s Latino population. California is home to 15.5 million Latinos with $320 billion in annual purchasing power, and 800,000 Latino business owners.”

ARGUMENTS IN OPPOSITION: Keith Bishop, a corporate law attorney who previously serviced as Commissioner of Corporations, is opposed to the bill on grounds that it is unconstitutional and will adversely impact the participation of male and non-binary persons on the boards of directors of publicly held corporations. Observing that the provisions of AB 979 will layer on top of the provisions of SB 826, Mr. Bishop states, “publicly held corporations will be required to comply with both sets of quotas. Therefore, individuals who self-identify as both female and as African American, Hispanic, or Native American will undoubtedly be preferred as director candidates because they will satisfy both quotas. The easily predictable result of enactment of AB 979 would be a decrease

in the over-all number of directors on publicly held company boards who self-identify as male or non-binary and as being from an underrepresented community.”

Prepared by: Eileen Newhall / B. & F.I. / and Timothy Griffiths/Judiciary

8/25/20 14:26:35

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 979 (Holden) - Corporations: boards of directors: underrepresented communities

Bill Summary:

AB 979 requires a publicly held domestic or foreign corporation whose principal executive office is located in California to have a minimum number of members from an underrepresented community on its board, as specified.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on August 20, 2020

Fiscal Impact:

Estimated ongoing costs in the hundreds of thousands of dollars for the Secretary of State (SOS) to gather demographic information and compile a report on this data on its internet website.

Author Amendments:

• Strike the requirement for the SOS to include in its July 1, 2021 report, the number of domestic and foreign corporations who have at least one director from an underrepresented community.
• Add a coauthor.
• Make clarifying and technical changes.
• State additional findings and declarations.

Committee Amendments:

• Revises the definition of “director from an underrepresented community” to also include an individual who self-identifies as gay, lesbian, bisexual, or transgender.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 979 (Holden) - Corporations: boards of directors: underrepresented communities

Bill Summary:

AB 979 requires a publicly held domestic or foreign corporation whose principal executive office is located in California to have a minimum number of members from an underrepresented community on its board, as specified.

Fiscal Impact:

Unknown, potentially significant General Fund costs to the Secretary of State (SOS) to collect the required data, produce the annual report, investigate claims, and enforce violations of the bill’s provisions.

Background:

SB 826 (Jackson, Chapter 954, Statutes of 2018) required domestic and foreign publicly traded corporations with their principal executive offices in California to have minimum numbers of women on their boards. This bill is modeled after the provisions of SB 826.

Proposed Law:

This bill:

• Requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California, as specified, have a minimum of one director from an underrepresented community on its board and authorizes the corporation to increase the number of directors on its board to comply with this requirement.
• Requires, no later than the close of the 2022 calendar year, a corporation to include members of underrepresented communities on its board according to the following ratios:
  • Minimum of three directors if the total number of directors is nine or more.
  • Minimum of two directors if the total number of directors is between four and nine.
  • Minimum of one director if the total number of directors is four or fewer.
• Requires the SOS to include, in its report on women on corporate boards, the number of corporations who have at least one director from an underrepresented community by July 1, 2021.
• Requires the SOS, by March 1, 2022 and annually thereafter, to additionally include in its report:
  • The number of corporations compliant with the proscribed board membership requirements;
  • The number of public health corporations that moved their United States headquarters in to or out of California from another state; and
  • The number of publicly held corporations that were subject to these requirements during the preceding year but are no longer publicly traded.
• Authorizes the SOS to adopt regulations and impose fines for violations, as specified.
• Defines “director from an underrepresented community” as an individual who self-identifies as Black, African America, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native.
• States findings and declarations.

-- END --

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: Hearing Date: August 13, 2020

Subject: Corporations: boards of directors: underrepresented communities

SUMMARY

This bill requires publicly held corporations to fill their board seats with a minimum number of directors from underrepresented communities, as specified.

EXISTING LAW

1. Provides, for purposes of the requirements below, that “female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth, and that “publicly held corporation” means a corporation with outstanding shares listed on a major United States stock exchange (Corporations Code Section 301.3).
   
2. Requires, no later than the close of the 2019 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to have a minimum of one female director on its board and clarifies that a corporation may increase the number of directors on its board to comply with this requirement (Corporations Code Section 301.3).
   
3. Requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to comply with the following (Corporations Code Section 301.3):
   
   1. If its number of directors is six or more, the corporation is required to have a minimum of three female directors.
      
   2. If its number of directors is five, the corporation is required to have a minimum of two female directors.
      
   3. If its number of directors is four or fewer, the corporation is required to have a minimum of one female director.
      
4. Requires the Secretary of State (SOS) to publish a report on its website by March 1, 2020, and annually thereafter, regarding all of the following, at a minimum (Corporations Code Section 301.3):
   
   1. The number of corporations subject to the aforementioned rules that were in compliance with the requirements of the rules during at least one point during the preceding calendar year.
      
   2. The number of publicly held corporations that moved their United States headquarters to California from another state or out of California into another state during the preceding calendar year.
      
   3. The number of publicly held corporations that were subject to the aforementioned rules during the preceding year, but are no longer publicly traded.
      
5. Authorizes the SOS to impose fines on corporations that violate the aforementioned provisions, as specified, and provides that, for purposes of determining whether a violation has occurred, each director seat that required to be held by a female, which is not held by a female during at least a portion of a calendar year, counts as a violation (Corporations Code Section 301.3).
   
6. Applies the aforementioned rules in Corporations Code Section 301.3 to foreign corporations that are publicly held corporations to the exclusion of the laws of the jurisdictions in which those foreign corporations are incorporated (Corporations Code Section 2115.5). Defines a publicly held corporation for purposes of this provision as a foreign corporation with outstanding shares listed on a major United States stock exchange.

THIS BILL

1. Adds two new sections to the Corporations Code that are virtually identical to Corporations Code Sections 301.3 and 2115.5 and applies these sections to directors from underrepresented communities. Defines a director from 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. Specifically,
   
   1. Contains findings and declarations regarding the low percentage of African American/Black, Hispanic/Latino(a), and Asian/Pacific Islanders that hold Fortune 500 board seats, the high percentage of chief executives who are white, the low percentage of African-American and Latino computer science and engineering graduates hired by the high-tech sector, and the value of racial and ethnic diversity to corporate earnings.
      
   2. Requires, no later than the close of the 2021 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to have a minimum of one director from an underrepresented community on its board and clarifies that a corporation may increase the number of directors on its board to comply with this requirement.
      
   3. Requires, no later than the close of the 2022 calendar year, a publicly held domestic or foreign corporation whose principal executive offices are located in California to comply with the following:
      
2. If its number of directors is nine or more, the corporation is required to have a minimum of three directors from underrepresented communities.
   
   • 1. If its number of directors is more than four but fewer than nine, the corporation is required to have a minimum of two directors from underrepresented communities.
        
     2. If its number of directors is four or fewer, the corporation is required to have a minimum of one director from an underrepresented community.
        
   1. Requires the SOS to publish a report on its website by July 1, 2021, documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California and who have at least one director from an underrepresented community.
      
   2. Requires the SOS to publish a report on its website by March 1, 2022, and annually thereafter, regarding all of the following, at a minimum:
      
3. The number of corporations subject to the aforementioned rules that were in compliance with the requirements of the rules during at least one point during the preceding calendar year.
   
   • 1. The number of publicly held corporations that moved their United States headquarters to California from another state or out of California into another state during the preceding calendar year.
        
     2. The number of publicly held corporations that were subject to the aforementioned rules during the preceding year, but are no longer publicly traded.
        
   1. Requires the reports described in d) and e), above to be included with the reports required by SB 826 from 2018 (thus, rather than having to issue separate reports regarding women and underrepresented communities, the SOS will be able to issue a single report annually that includes data on both woman and underrepresented communities).
      
   2. Authorizes the SOS to impose fines on corporations that violate the aforementioned provisions, as specified, and provides that, for purposes of determining whether a violation has occurred, each director seat that required to be held by a director from an underrepresented community, which is not held by a director from an underrepresented community during at least a portion of a calendar year, counts as a violation. Further clarifies that a director from an underrepresented community who holds a seat for at least a portion of the year does not represent a violation.
      
4. Applies all of the aforementioned rules to foreign corporations that are publicly held corporations to the exclusion of the laws of the jurisdictions in which those foreign corporations are incorporated.

COMMENTS

1. Purpose: This bill is sponsored by the author to help address the ethnic pay gap, facilitate employment and outreach opportunities for underrepresented communities, promote board diversification, establish pipeline creation and upward mobility of diverse technical talent, and facilitate retention of that talent through company culture and development.
   
2. Background: According to the author’s office, “since the beginning of recent social unrest, corporations have publicly messaged their support for diversity and Black lives. However, critics have pointed out this public support does not translate to diversity within a company and will not lead to long-term structural change. According to the USC Race and Equity Center, black employees in every industry tend to be concentrated in the lowest paying, least powerful positions… All of this strongly conveys to black professionals that their lives do not matter at work — hence their doubtful reactions to company statements about George Floyd. (https://www.washingtonpost.com/outlook/2020/06/16/corporations-say-they-support-black-lives-matter-their-employees-doubt-them/)”
   
   Several reports provided by the author’s office identify the relative lack of racial and ethnic diversity on corporate boards and support the value that diverse boards have to corporate performance. For example, the 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards (https://corpgov.law.harvard.edu/2019/02/05/missing-pieces-report-the-2018-board-diversity-census-of-women-and-minorities-on-fortune-500-boards/) found that 80% of the 1,033 available board seats in Fortune 500 companies were filled by white directors. Similarly, out of the 1,222 new board members of Fortune 100 companies, 77% were white.
   
   A report in the Harvard Business Review (https://hbr.org/2020/06/how-diverse-is-your-board-really) concluded that a diverse board can contribute to better decision making, improve company governance, and can respond to market shifts more effectively. The McKinsey & Company Consulting Firm (https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters#) suggests that these benefits are not restricted to the board of directors, but can benefit entire companies; for example, McKinsey found that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians.
   
3. Pending Litigation: The provisions of this bill are based very closely on SB 826 (Jackson), Chapter 954, Statutes of 2018. That measure, which required publicly traded companies to place a minimum number of women on their boards of directors, has been the subject of at least two lawsuits challenging its constitutionality (“This state requires company boards to include women. A new lawsuit says that’s unconstitutional,” by Kayla Epstein, Washington Post, November 14, 2019 and “California sued over law requiring women on corporate boards,” by Levi Sumagaysay, San Jose Mercury News, August 10, 2019).
   
   According to the cited articles, the first lawsuit was filed in August, 2019 by Judicial Watch, a Washington-based conservative activist group, and alleges that spending taxpayer money to enforce the law is illegal under the California Constitution. That case remains pending.
   
   The second lawsuit, filed in November 2019 by the Pacific Legal Foundation, claimed that the state’s mandate is unconstitutional and in violation of the equal protection clause of the U.S. Constitution, because it discriminates on the basis of sex. The lawsuit alleges that requiring the plaintiff (shareholder Creighton Meland) to consider gender when voting to add members to OSI System’s all-male, seven member board of directors forces him to discriminate. A federal District Court dismissed this case in April, 2020, on the basis that the plaintiff lacked standing to bring the action. The court did not rule on the constitutionality of the provisions of SB 826.
   
   By adding the provisions of this bill to two new code sections rather than amending the existing code sections added by SB 826, this bill’s author may avoid legal fallout that could result from court cases filed challenging the constitutionality of SB 826. Under this logic, even if a court were to enjoin enforcement of the provisions of SB 826 or find all or a portion of it unconstitutional, the provisions of AB 979 would remain in force. This protection would not shield AB 979 from future lawsuits or from amendments to existing lawsuits, but could prevent it from being struck down by a ruling specific to the provisions of SB 826.
   
4. Input from Senate Judiciary Committee Staff: Due to the COVID-19 Pandemic and the unprecedented nature of the 2020 Legislative Session, all Senate policy committees are working under a compressed timeline. This timeline does not allow this bill to be referred to and heard by more than one committee, as a typical timeline would allow. In order to fully vet the contents of this measure for the benefit of Senators and the public, this analysis includes the following information from Senate Judiciary Committee staff:

This bill implicates the application of two constitutional principles that would ordinarily fall within the purview of the Senate Judiciary Committee: equal protection of the law and the internal affairs doctrine.

a) Equal Protection analysis

This bill requires certain corporations to appoint a certain number of directors who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaskan Native. Both the federal constitution and the California state constitution contain Equal Protection clauses. (U.S. Const., Amend. XIV, § 1 (“No state shall … deny to any person within its jurisdiction the equal protection of the laws.”); Cal. Const., art. I, § 7 (“A person may not be… denied equal protection of the laws.”).) Under the current, prevailing judicial interpretation of both the federal and California constitutions’ Equal Protection clauses, a statute that draws a distinction based upon race or ethnicity in this fashion – whether remedial or punitive in intent – is suspect and only passes constitutional muster if it can meet the strict scrutiny test: that the statute is narrowly drawn to meet a compelling government interest. (Fisher v. Univ. of Tex. (2013) 570 U.S. 297, 307-308; Coral Construction, Inc. v. City and County of San Francisco (2010) 50 Cal.4th 315, 337.) By contrast, this bill would not be subject to the California constitution’s absolute bar on consideration of race in public education, contracting, and employment (Cal. Const., art. I, § 31), even if California voters retain that bar this fall, because the bill only addresses private corporations, not public entities.

Strict scrutiny is a notoriously high bar to meet, but it is not insurmountable. Remedying past discrimination can be a sufficiently compelling government interest to withstand strict scrutiny. However, the existence of general societal discrimination will not ordinarily satisfy the courts. Instead, courts conducting strict scrutiny review typically require some showing of specific discrimination that the statute remedies. (See Chemerinsky, Constitutional Law Principles and Policies (2nd ed. 2002), pp. 709-711.) To show that a statute is sufficiently narrowly-tailored to survive strict scrutiny review, the government must prove that the interest in question cannot be achieved through less-discriminatory means. (Wygant v. Jackson Board of Education (1986) 476 U.S. 267, 280 n. 6.).

SB 826 (Jackson, Ch. 954, Stats. 2018), after which this bill is modelled, presented extensive findings regarding the dearth of women on corporate boards. That bill also set forth information about prior legislative attempts to address the problem of unequal access to the corporate boardroom. The court currently considering the constitutionality of SB 826 will presumably look to those findings when analyzing the bill under the strict scrutiny test. This bill also contains findings and declarations regarding the absence of racial and ethnic diversity in the corporate workforce and in corporate leadership. To further fortify the bill against an equal protection challenge, the author may wish to provide greater detail regarding the specific discrimination that has allowed white people to occupy corporate board seats in percentages that far exceed what would be expected if the opportunity to serve on corporate boards were genuinely available on an equal basis. For similar reasons, the author may wish to include additional information in the findings and declarations about why other approaches to diversifying corporate boards have not been, or would not be, sufficiently effective.

b) Internal Affairs Doctrine analysis

This bill would apply to corporations headquartered in California even if they are incorporated under the laws of another state (typically, though not exclusively, Delaware). Some critics of this bill, and of SB 826 (Jackson, Ch. 954, Stats. 2018) on which it is modeled, contend that such attempts by one state to impose board composition requirements on corporations incorporated in another state run afoul of the so-called “internal affairs doctrine” which emanates from the U.S Constitution’s Commerce Clause. Under that doctrine, only the state of incorporation may dictate how a corporation conducts its internal affairs. Were it otherwise, the U.S. Supreme Court has explained, corporations might be subjected to conflicting rules coming from several different states at once. (Edgar v. MITE Corp. (1982) 457 U.S. 624). It is likely that, if enacted, this bill would, like SB 826, face legal challenges alleging that it violates the internal affairs doctrine. Supporters of SB 826 argued that there are limits to the internal affairs doctrine. They pointed out, among other things, that existing California law, Corporations Code § 2115, already imposes certain requirements on what are arguably the internal affairs of corporations incorporated in other states. Section 2115 was upheld by the California courts against a Commerce Clause challenge (Wilson v. Louisiana-Pacific Res. (1982) 138 Cal.App.3d 216, 225), though it should be noted that this ruling preceded the U.S. Supreme Court decision in Edgar v. MITE Corp. referenced above.

1. Support:
   

This bill’s author states, “Black and Brown communities have historically faced barriers to education, have been subject to bias in hiring practices, and been excluded from access to start-up capital and small business loans (https://www.bloomberg.com/news/articles/2018-04-23/4-ways-to-help-close-the-racial-startup-gap) Without a diverse board it is increasingly difficult to attract diverse talent which then reinforces unconscious biases at the managerial and staff level. Even when staff from underrepresented communities are hired, the turnover rate is high due to feelings of isolation and prevalence of microaggressions. A culture shift in the boardroom cultivates an environment that values different perspectives and is more likely to hire and retain racial and gender minorities.

• 1. HP writes that it “has the most diverse Board of Directors in the U.S. technology industry, with 54% minorities, 38% women, and 30% of members from underrepresented communities....While this demonstrates important progress, we also recognize that we have much more to do...At HP, we know that having a diverse board enables us to better serve our customers and position for future success. Even more broadly, fostering a culture of diversity and inclusion across our company enables us to attract, develop, and retain the talent we need to innovate.”
     
  2. Chinese for Affirmative Action echoes the sentiments of several other supporters when it says that the “persistent lack of representation in corporate boardrooms needs continuous focus, oversight, and change. CAA believes AB 979 creates a cultural shift in California’s board seats towards that end.”
     

1. Opposition:
   
   1. Keith Bishop, a corporate law attorney who previously serviced as Commissioner of Corporations, is opposed to the bill on grounds that it is unconstitutional and will adversely impact the participation of male and non-binary persons on the boards of directors of publicly held corporations. Observing that the provisions of AB 979 will layer on top of the provisions of SB 826, Mr. Bishop states, “publicly held corporations will be required to comply with both sets of quotas. Therefore, individuals who self-identify as both female and as African American, Hispanic, or Native American will undoubtedly be preferred as director candidates because they will satisfy both quotas. The easily predictable result of enactment of AB 979 would be a decrease in the over-all number of directors on publicly held company boards who self-identify as male or non-binary and as being from an underrepresented community.”
      
      Mr. Bishop’s letter of opposition also opines that the bill violates the Equal Protection Clauses of the California and U.S. Constitutions, the First Amendment to the U.S. Constitution, and the Commerce Clause of the U.S. Constitution.
      
2. Amendments: At the request of the SOS, the author plans to present amendments in committee to delete the report due by July 1, 2021, documenting the number of domestic and foreign corporations whose principal executive offices are located in California and who have at least one board director from an underrepresented community (see This Bill 1d on page 3).
   
3. Prior and Related Legislation:
   
   1. SB 826 (Jackson), Chapter 954, Statutes of 2018 required domestic and foreign publicly traded corporations with their principal executive offices in California to have minimum numbers of women on their boards.
      
   2. AB 931 (Boerner-Horvath), Chapter 813, Statutes of 2019 requires, on and after January 1, 2030, cities with populations of 50,000 or more to appoint individuals to local boards and commissions in a manner that ensures gender diversity, as specified.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

ActiveSGV

American Civil Liberties Union of California

Bloom Energy

California Employment Lawyers Association

Chinese for Affirmative Action

Consumer Attorneys of California

Equal Rights Advocates

Greater Sacramento Urban League

HP Inc.

Insurance Commissioner Ricardo Lara

League of California Cities Asian Pacific Islander Caucus

New America Alliance

Opposition

Private individual

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 979

Author:(Reyes)

As Amended Ver:January 6, 2020

Majority vote

SUMMARY:

Requires the Board of Administration of the California Public Employees' Retirement System (CalPERS) and the Teachers' Retirement Board of the California State Teachers' Retirement System (CalSTRS) to each provide an annual report to the Legislature on the use of emerging managers.

Major Provisions

1. Requires, beginning March 1, 2021, and annually thereafter, CalPERS and CalSTRS each to submit a report to the Legislature on the status of achieving appropriate objectives and initiatives regarding participation of emerging managers responsible for asset management within their respective portfolios of investments. The report must identify and include all of the following:
   1. The name of each emerging manager providing investment portfolio or asset management services, at the end of the prior fiscal year, including, but not limited to, fund of fund contracts, for all applicable asset classes.
   2. The amount managed by each emerging manager by asset class at the end of the prior fiscal year.
2. Provides that the reporting requirements apply to new contracts with emerging managers entered into by CalPERS and CalSTRS, respectively, on January 1, 2020, and based on information from the prior fiscal year.

COMMENTS:

Pursuant to SB 294 (Price), Chapter 701, Statutes of 2011, CalPERS and CalSTRS were required to provide a five-year strategic plan for emerging manager participation across all asset classes, and to submit an annual report to the Legislature regarding the progress of the strategic plan. This law was automatically repealed on January 1, 2018, due to a sunset clause which was not repealed nor extended.

The term "emerging manager" is left to the respective Boards of CalPERS and CalSTRS to define. Generally, this term typically relates to start-up, relatively new, and minority and women-owned investment firms.

For numerous years, CalPERS and CalSTRS each have used emerging managers to assist not only in the diversity of investment firms for purposes of asset management, but also in the diversity of assets as part of their respective investment portfolios. The emerging manager programs serve as incubators for these firms towards gaining valuable experience in managing investment assets of the pension funds.

Please see the policy committee analysis for a full discussion of this bill.

According to the Author:

"Previously, CalPERS and CalSTRS were required to provide a five-year strategic plan for emerging manager participation across all asset classes of their investments, and to submit an annual report to the Legislature regarding the progress of their strategic plans.

'Although CalPERS and CalSTRS submitted reports to the Legislature last year, that law sunset on January 1, 2018. This bill simply places back into law, required annual reports to the Legislature from CalPERS and CalSTRS regarding their use of emerging managers for purposes of investment and asset management."

Arguments in Support:

According to the California Judges Association, "[f]or numerous years, each system has utilized emerging managers to assist not only in the diversity of investment firms for purposes of asset management, but also in the diversity of their respective investment portfolios. The emerging manager programs also serve as incubators for these firms towards gaining valuable experience in the investment arena. [This bill] would recodify required annual reporting to the Legislature relating to the use of emerging managers within the investment portfolio."

Arguments in Opposition:

None on file.

FISCAL COMMENTS:

According to the Assembly Appropriations Committee, this bill would result in a moderate fiscal impact, less than $150,000 annually, for CalPERS and CalSTRS to produce the report each year.

VOTES:

ASM PUBLIC EMPLOYMENT AND RETIREMENT: 4-1-2

YES: Rodriguez, Cooley, Cooper, Fong

NO: O'Donnell

ABS, ABST OR NV: Voepel, Cervantes

ASM APPROPRIATIONS: 17-0-1

YES: Gonzalez, Bigelow, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

ABS, ABST OR NV: Megan Dahle

UPDATED:

VERSION: January 6, 2020

CONSULTANT: Michael Bolden / P.E. & R. / (916) 319-3957 FN: 0002618

Date of Hearing: January 23, 2020

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 979

Author:(Reyes) – As Amended Ver:January 6, 2020

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill requires, each year, beginning on March 1, 2021, the Boards of Administration of the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to each provide an annual report to the Legislature on the use of emerging managers.

FISCAL EFFECT:

Moderate fiscal impact, less than $150,000 annually, for CalPERS and CalSTRS to produce the report each year. However, because AB 979’s primary purpose is to develop a report, this bill is eligible for the committee's Suspense File, per committee rules.

COMMENTS:

1. Background and purpose. “Emerging managers” are newly formed investment managers with a small asset base. A policy that encourages working with emerging mangers is one important part of a strategy to increase diversity of the industry and to expand work with minority and women-owned investment firms. Prior to 2011, both CalPERS and CalSTRS had emerging manager programs. SB 294 (Price), Chapter 701, Statutes of 2011, codified that work by requiring CalPERS and CalSTRS to provide a five-year strategic plan for emerging manager participation across asset classes and to submit an annual report to the Legislature regarding the progress of that plan. While that statutory requirement has expired, both CalPERS and CalSTRS still submit this report voluntarily.
2. Previous legislation. This bill is nearly identical to AB 181 (Rodriguez), of the 2019-20 Legislative Session, which was gutted and amended in the Senate after passing through the Assembly.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: January 8, 2020

ASSEMBLY COMMITTEE ON PUBLIC EMPLOYMENT AND RETIREMENT

Freddie Rodriguez, Chair

ABPCA Bill Id:AB 979 (

Author:Reyes) – As Amended Ver:January 6, 2020

SUBJECT: Asset Management: Emerging Managers

SUMMARY: Requires the Board of Administration of the California Public Employees’ Retirement System (CalPERS) and the Teachers’ Retirement Board of the California State Teachers’ Retirement System (CalSTRS) to each provide an annual report to the Legislature on the use of emerging managers, as specified. Specifically, this bill:

1. Requires, beginning March 1, 2021, and annually thereafter, CalPERS and CalSTRS each to submit a report to the Legislature on the status of achieving appropriate objectives and initiatives regarding participation of emerging managers responsible for asset management within their respective portfolios of investments.

The report must identify and include all of the following:

1. The name of each emerging manager providing investment portfolio or asset management services, at the end of the prior fiscal year, including, but not limited to, fund of fund contracts, for all applicable asset classes.
2. The amount managed by each emerging manager by asset class at the end of the prior fiscal year.
3. Provides that the reporting requirements apply to new contracts with emerging managers entered into by CalPERS and CalSTRS, respectively, on January 1, 2020, and based on information from the prior fiscal year.
4. Provides that CalPERS and CalSTRS must define the term “emerging manager” for these purposes.
5. Provides that CalPERS and CalSTRS are not required to take action unless their respective boards determine in good faith that the action, as provided, is consistent with their fiduciary duties as described in the California Constitution.
6. Provides that CalPERS and CalSTRS are not required to disclose information that is excepted from disclosure as provided under existing law.

EXISTING LAW:

1. As provided in Article XVI of Section 17 of the California Constitution, the boards of California's public retirement systems have "plenary authority and fiduciary responsibility for investment of monies and administration of the system." In addition, "[t]he members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system."
2. Pursuant to Chapter 701, Statutes of 2011 (Senate Bill 294, Price), required CalPERS and CalSTRS to provide a five-year strategic plan for emerging manager participation across all asset classes, and to submit an annual report to the Legislature regarding the progress of the strategic plan.

This law was automatically repealed on January 1, 2018, due to a sunset clause which was not repealed nor extended.

FISCAL EFFECT: Unknown. This bill is flagged as fiscal by Legislative Counsel.

COMMENTS: According to the author, “[p]reviously, CalPERS and CalSTRS were required to provide a five-year strategic plan for emerging manager participation across all asset classes of their investments, and to submit an annual report to the Legislature regarding the progress of their strategic plans.

‘Although CalPERS and CalSTRS submitted reports to the Legislature last year, that law sunset on January 1, 2018. Assembly Bill 979 simply places back into law, required annual reports to the Legislature from CalPERS and CalSTRS regarding their use of emerging managers for purposes of investment and asset management.”

1. CalPERS’ and CalSTRS’ Emerging Manager Programs

For numerous years, CalPERS and CalSTRS each have utilized emerging managers to assist not only in the diversity of investment firms for purposes of asset management, but also in the diversity of their respective investment portfolios. The emerging manager programs serve as incubators for these firms towards gaining valuable experience in managing investment assets of the pension funds.

The term “emerging manager” is left to the respective Boards of CalPERS and CalSTRS to define. Generally, this term typically relates to start-up, relatively new, and minority and women-owned investment firms.

1. Comments by Supporters

According to the California Judges Association, “[f]or numerous years, each system has utilized emerging managers to assist not only in the diversity of investment firms for purposes of asset management, but also in the diversity of their respective investment portfolios. The emerging manager programs also serve as incubators for these firms towards gaining valuable experience in the investment arena. [This bill] would recodify required annual reporting to the Legislature relating to the use of emerging managers within the investment portfolio.”

1. Prior or Related Legislation

Assembly Bill 181 (Rodriguez, 2019) was substantially similar to the current measure. This bill subsequently was gutted and amended in the Senate to address an unrelated matter.

Assembly Bill 462 (Rodriguez, 2019) was substantially similar to the current measure and held in the Senate Rules Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Judges Association

Opposition

None on file

Analysis Prepared by: Michael Bolden / P.E. & R. / (916) 319-3957