Will California's Board Quota Law Change Diversity Disclosures In Proxy Statements?
The Securities and Exchange Commission's proxy rules require the following disclosure with respect to board diversity:
"Describe the nominating committee's process for identifying and evaluating nominees for director, including nominees recommended by security holders, and any differences in the manner in which the nominating committee evaluates nominees for director based on whether the nominee is recommended by a security holder, and whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominees for director. If the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy;"
Item 407(c)(2)(vi) of Regulation S-K. Notably, the SEC did not define "diversity" for purposes of this disclosure and issuer therefore are not required to disclose the racial, ethnic or gender of their directors or nominees:
"We recognize that companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race,
gender and national origin. We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate. As a result we have not defined diversity in the amendments."
SEC Release No. 33-9089 (Dec. 16, 2009).
As a result of California's recent enactment of AB 979 imposing specific racial, ethnic and gender related quotas on boards, some issuers may elect to provide more specific information as to the race, ethnicity and gender of their directors. For example, a recently filed preliminary proxy statement, included a table that included the "key qualifications, skills and attributes" of board candidates. One of the columns is captioned "Gender/Ethnic/Racial/Sexual Orientation Diversity" which includes the following footnote "Categories covered under California law AB 979". The table does not identify which of these multifarious categories pertains to particular director - only that the candidate satisfies at least one of the categories.
Note that issuers subject to AB 979 will likely be required to disclose compliance with that law in the Statements of Information that they file with the California Secretary of State. When California enacted SB 826, which imposes a female director quota, the Secretary of State modified the corporate disclosure statement (Form SI-PT). See this post from March 2019.
Companies endeavoring to comply with AB 979 may be inclined to require board nominees to self-identify whether they are members of an "underrepresented community", as defined in the California law. However, requiring individuals to self-identify may run violate the First Amendment of the U.S. Constitution. Because AB 979 may effectively turn issuers into "state actors", issuers may become liable under 42 U.S. Code § 1983.