Over the past few years, California has enacted legislation that requires public companies in California to meet certain diversity metrics with respect to their boards of directors. These board-specific requirements follow the development of empirical data that supports the following conclusions: (1) diversity in public corporations’ boards of directors was severely lacking and (2) diversity at a top level can make a company perform better. But diversity, equity and inclusion (“DE&I”) does not end at the top, though that is a great place to start.
To that end, in 2018, Senate Bill 826 was signed into law to advance equitable gender representation on California corporate boards. The law required that by the end of 2019, all domestic general corporations and foreign public corporations whose principal offices are located in California must have a minimum of one female on its board of directors. By the end of 2021, the law requires an increase to a minimum of two female directors if the corporation has five directors, or a minimum of three female directors if the corporation has six or more directors. And in order to add teeth, the California Secretary of State is authorized to impose fines for violations of these requirements: $100,000 for a first violation, or for failure to timely file board member information with the Secretary of State, and $300,000 for a second or subsequent violation. See Cal. Corp. Code Sections 301.3 and 2115.5.
In September 2020, Assembly Bill 979 was signed into law, requiring boards of California public corporations to include directors from underrepresented communities by the end of 2021. An individual from an underrepresented community is defined 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.” By the end of 2022, those requirements grow to two board seats if there are five to eight board seats total, and three board seats for companies with nine or more board seats. Similar fines are available for non-compliance ($100,000/$300,000). See Cal. Corp. Code Sections 301.3, 301.4 and 2115.6.
While there is ample justification for these board-specific legislative changes, DE&I go far beyond the make-up of a board of directors and impact the entirety of a company. Recently, we spoke with Melynnie Rizvi, Deputy General Counsel and Senior Director of Employment, Inclusion and Impact at SurveyMonkey on our podcast, The Performance Review, to discuss how DE&I can make a company thrive. (Check out the episode here – where you can also get MCLE self-study credit. You can also listen to more episodes on Apple Podcasts and Spotify).
Among the salient points: To thrive with DE&I, it cannot just happen in the boardroom – it’s the whole company. According to Ms. Rizvi, companies should let those initiatives permeate further into the company culture and be included in a company’s business plans. There are a number of reasons companies should focus on developing programs and policies to enrich DE&I efforts:
Reason 1: It is the right thing to do.
Though business can be cutthroat, more often than not, the right business decision is also just the right thing to do. Put simply, developing an environment that champions diversity is not only consistent with California law, it is good for your employees and good for your consumers. This dovetails with an ancillary benefit – it is good for a company’s image. Brand loyalty and awareness is more important than ever, both for recruiting solid talent, and making consumers happy. More and more employees and consumers are making choices about which company to support based on the company’s outward facing DE&I initiatives or protocols. As this data becomes clearer, we see more and more employees sharing positive sentiment toward racial justice and racial equality. According to Ms. Rizvi, a SurveyMonkey poll recently found that the majority of employees in the tech sector want to work for companies that take a stand on social issues.
Reason 2: It is good for business.
Indeed, research and data have shown that a focus on DE&I, along with other initiatives related to environmental, social and governmental programs, actually result in better financial performance for companies. Here are some examples cited in SB 826 and AB 979:
- “According to a report by [an international consulting firm], for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8 percent.”
- “A study by [a research firm] found that the high tech industry could generate an additional $300 billion to $370 billion each year if the racial or ethnic diversity of tech companies’ workforces reflected that of the talent pool.”
- “In 2014, [a large financial institution] found that companies with at least one woman on the board had an average return on equity (ROE) of 12.2 percent, compared to 10.1 percent for companies with no female directors. Additionally, the price-to-book value of these firms was greater for those with women on their boards: 2.4 times the value in comparison to 1.8 times the value for zero-women boards.”
- “A 2017 study by [a finance company] found that United States’ companies that began the five-year period from 2011 to 2016 with three or more female directors reported earnings per share that were 45 percent higher than those companies with no female directors at the beginning of the period.”
- “[A large financial institution] conducted a six-year global research study from 2006 to 2012, with more than 2,000 companies worldwide, showing that women on boards improve business performance for key metrics, including stock performance. For companies with a market capitalization of more than $10 billion, those with women directors on boards outperformed shares of comparable businesses with all-male boards by 26 percent.”
There are a number of ways to measure performance but, at minimum, seeing an increase in profitability is usually top of mind. Moreover, focusing on recruiting and training a more diverse talent pool can open a company up to a wider range of backgrounds and ideas, which can lead to better products and services.
Reason 3: It may keep you out of court.
DE&I initiatives can help prevent companies from facing discrimination or pay equity lawsuits. These lawsuits can be costly, time-consuming, and an overall business distraction – not to mention – bad for publicity. By addressing any deficiencies in diversity now, you may prevent your company from litigation heartache in the future. Moreover, SB 973, another of California’s recent laws, requires covered employers (100+ employees) to file a pay data report (Form EEO-1) with the Department of Fair Housing and Employment on or before March 31, 2021, and each year thereafter, that states the number of employees by race, ethnicity, and sex for the prior calendar year in 10 covered job categories. See Gov. Code Section 12999.
So perhaps that leaves you wondering, what should my company do? Systemic changes take time and can be difficult to get started and/or sustain. They require buy-in from the top all the way down. This will typically require a multi-faceted approach, but according to Ms. Rizvi (seriously, go listen to the podcast) here are a few ideas:
- Integrate DE&I into your business goals/objectives. Make this a priority with specific benchmarks and deliverables, just as you would set a profit target.
- Hold people accountable for lack of progress, and reward achievements. Just as you would hold someone accountable for missing a sales goal, or releasing a product behind schedule, companies could consider measuring job performance, at least in part, on how DE&I initiatives are performing.
- Look for ways to implement across the company, not just at the top. And this should go between departments as well. For example, it is one thing if your workforce is majority female, but if they all work only in one department, have you really created the diverse environment across the company to make it thrive? Not likely.
- Find ways to improve DE&I advocacy. This can be within the organization, or external, such as partnering with different social justice groups, or engaging in efforts to develop new legislation.
- Implement policies consistent with these goals. This means fine-tuning anti-discrimination policies, developing diversity initiatives, and crafting policies related to social justice initiatives.
There are a number of ways employers can create an environment that champions DE&I. But at minimum, California has spoken and requires covered companies to start this process in the boardroom. But as data continues to show, the need for DE&I runs all the way through a company, and can drastically transform not just the public’s perceptions, but your company’s bottom line.
If you missed it, check out The Performance Review Episode 8: Part I – How Companies Thrive with DE&I, and stay tuned for Part 2, in which we will continue the discussion of how companies should continue developing these initiatives, when we speak with Cherise Latortue, Associate General Counsel at Flynn Restaurant Group. It is MCLE-eligible for self-study, and a great way to stay connected to the major issues impacting California employers.