Illinois-Headquartered Publicly Listed Corporations Must Report on Board Diversity By 2021

Last week Illinois Gov. J.B. Pritzker signed H.B. 3394 into law, which requires publicly listed companies with principal executive offices located in Illinois to disclose information in Illinois state filings about (1) the racial, ethnic and gender diversity of their boards of directors, (2) how demographic diversity is considered in their processes for identifying and appointing director nominees and executive officers, and (3) their policies and practices for promoting diversity, equity and inclusion among the board of directors and executive officers. The new law, which took effect on August 27, 2019, applies to corporations with outstanding shares listed on a major U.S. stock exchange, regardless of where they are incorporated. The stated goal of the new law is to use the reported data to correct the underrepresentation of women and minorities on corporate boards, which may boost the Illinois economy, expand workplace opportunities for women and minorities, and ensure that the business community is representative of Illinois’ residents.

The enacted law is dramatically pared down from previous versions of the legislation, which would have required Illinois-headquartered publicly listed corporations to have at least one woman, one African-American and one Latino on their boards and would have imposed penalties for violations modeled after California’s board gender diversity mandate signed into law last year. The California law, summarized in the Sidley Update available here, requires California-headquartered publicly listed corporations to have at least one woman on the board by the end of 2019 and, depending on board size, up to three female directors by the end of 2021.

Under the new Illinois law, as soon as practical and no later than January 1, 2021, an Illinois-headquartered publicly listed corporation must include the following information in its annual report filed with the Illinois Secretary of State:

• data on specific qualifications, skills and experience the corporation considers for its directors, director nominees and executive officers.
• the self-identified gender of each of its directors. A “female” is defined as a citizen or lawful permanent resident of the U.S. who self-identifies as a woman, without regard to the individual’s designated sex at birth. (The law does not define the term “male.”)
• whether any of its directors self-identifies as a minority person and, if so, the applicable race or ethnicity identified. A “minority person” is defined as a citizen or lawful permanent resident of the U.S. who is one of the following races or ethnicities: American Indian or Alaska Native, Asian, Black or African American, Hispanic or Latino and Native Hawaiian or Other Pacific Islander. The new law defines these races or ethnicities as persons having origins in original peoples of certain regions or certain racial groups, or being of a certain culture or origin regardless of race, but does not define what is meant by “origins,” “original peoples” or “culture.”
• a description of the corporation’s process for identifying and evaluating director nominees and for identifying and appointing executive officers, including in both cases whether and how demographic diversity is considered.
• a description of the corporation’s policies and practices for promoting diversity, equity and inclusion among its board of directors and executive officers.

Annual reports must be filed by January 1 of each year and will be made publicly available on the Illinois Secretary of State’s website.

The new law also requires the University of Illinois to establish a rating system assessing the representation of women and minorities on the boards of Illinois-headquartered publicly listed corporations based on the demographic information reported. A corporation’s rating will take into account, among other things (1) compliance with the new demographic reporting obligations, (2) its policies and practices for encouraging diversity in recruitment, board membership and executive appointments and (3) the demographic diversity of its board seats and executive positions. The law also requires the University of Illinois to publish on its website by March 1, 2021, and annually thereafter a report providing aggregate data on the demographic information reported as well as an individualized rating for each Illinois-headquartered publicly listed corporation. The report will also identify strategies for promoting diversity and inclusion among boards of directors and executive officers.

Publicly listed companies headquartered in Illinois should evaluate their board composition in light of the new law. To prepare for the new reporting requirement, Illinois-headquartered publicly listed corporations may consider adding a question to their D&O questionnaires asking each director to provide, confirm or correct demographic information about that director, with an explanation that the corporation plans to disclose that information in its annual report filed with the Illinois Secretary of State. These corporations should also begin thinking about how they will describe their director nomination processes and diversity policies and initiatives, which should be consistent with their proxy statement disclosures.

All public companies – regardless of where they are headquartered – face greater pressure to diversify their boards. The new Illinois law follows an increased focus on board diversity by key institutional investors, which are continuing to scrutinize board composition and refreshment. All public companies should familiarize themselves with the guidelines and policies of their institutional investors and other stakeholders, as well as proxy advisory firms, relating to board diversity.