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The 'name and shame' game: How 2 state laws tackle corporate racial diversity

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"Companies are responding to the public shame and making changes," Illinois State Representative Chris Welch said, explaining how the 2019 state law he sponsored requiring companies to report on their race metrics will be effective in increasing board diversity. "Public shaming works."

Listen to this episode of ESG Insider on SoundCloud, Spotify or Apple podcasts.

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Illinois State Rep. Chris Welch
Source: Rep. Chris Welch

Welch is one of two state legislators we interviewed for the latest episode of ESG Insider, an S&P Global podcast about environmental, social and governance issues. The episode examines how corporate diversity laws enacted in Illinois in 2019 and in California in September 2020 aim to make publicly traded companies embrace racial diversity on their boards.

In the U.S., the national dialogue has turned to race in 2020. Following the death of George Floyd while in police custody, companies have paid more attention to systemic racism and diversity in their own ranks. Investors are also increasingly talking about this topic as a human capital management issue.

While the Illinois law does not mandate companies be racially diverse, it directs them to publicly disclose the racial, ethnic and gender diversity of their boards of directors by the end of this year. And then, starting in March 2021, the University of Illinois will publish a report card evaluating how companies are faring, which Welch said will be used to name and shame companies that are not up to snuff.

"Everyone appreciates collecting data and making further decisions based on that data," Welch said. "I think this is going to become model legislation that you'll see in other states."

California has also taken action to promote corporate board diversity. In the episode, we interview California Assemblyman Chris Holden, who co-authored a new law that expands the state's diversity requirements for the boards of publicly traded companies to include people who identify as being a part of a racial minority, an Indigenous community or the LGBTQ community. Holden said that companies should have no trouble finding qualified director candidates and noted that studies have shown companies with diverse boards generally perform better.

The California law also includes a disclosure mandate. Specifically, it requires the California Secretary of State to track and publicly report compliance with the law as well as levy fines for noncompliance.

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