California installs diversity quotas for publicly traded companies

California Governor Gavin Newsom has recently signed a piece of legislation forcing publicly traded companies based in the state to have at least one "racially, ethnically or otherwise diverse" director by 2021, according to the Wall Street Journal.

The law is expected to have wide-ranging impact within the state's borders and elsewhere, likely 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,” Assemblyman Chris Holden, a co-author of the bill, said. “This is an opportunity to get people of color at the table where the decisions are made, where the culture is set.”

Under this new law, people 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 with 56 in favor and only 8 opposed. Those who voted against said that the new law would violate equal protection provisions under the law.

The new diversity rule will require a large number of underrepresented minorities required on boards starting in 2022, and it has been reported that about 83 percent—or 423 public companies in California—would not be able to satisfy the requirement with the boards they have currently.

Additionally, the Journal reported that "more than 35 percent 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," adding that "by comparison, 20 percent 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."

While California's attempt to install racial, ethnic, and other types of diversity at the board level is unprecedented in the US, companies are now being forced to increase pressure to diversify and make such disclosures "in the midst of a growing emphasis by institutional investors on environmental, social and governance metrics," according to the Journal.

Sheryl Sandberg, the chief operating officer of Facebook Inc. and founder of LeanIn.org, said that quotas are not cure-alls, adding that “legal mandates can work ... But I do think we have to realize the limitations."