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California Judge Strikes Down Board Diversity Law

Annie Erling Gofus - May 06 2022
Published in: Public Policy
Since the law was passed in 2018, the number of women on boards more than doubled.

In a blow to California's efforts to reduce racial and gender disparities in the workplace, a court ruling has struck down a requirement that corporate board members represent various backgrounds. In response to a lawsuit filed by Judicial Watch, a conservative advocacy group, Los Angeles County Superior Court Judge Terry Green ruled on Friday that the legislation was unconstitutional.

In 2020, the new law, Assembly Bill 979, came into effect. Companies incorporated in California that are listed on the NYSE, Nasdaq, or OTC Markets must have board members from underrepresented communities, including people of various races and ethnicities and individuals who identify as gay, lesbian, bisexual, or transgender. Gov. Gavin Newsom called the bill's passage a victory for racial equality and empowerment, calling it "a historic day for California."

Judicial Watch's lawsuit, filed a month after the law was signed, claimed that it was illegal because it imposed quotas. Judge Green wrote that the state had made no effort to address the problem by changing the selection procedure for board of director seats.

“If demographically homogeneous boards are a problem, then heterogenous boards are the immediate and obvious solution,” he wrote. “But that doesn’t mean the Legislature can skip directly to mandating heterogenous boards.”

California has been a national leader in encouraging businesses to diversify their top ranks, starting with a 2018 legislation that required corporate boards to include at least one woman. Fines may be levied against those who do not follow the law.

Since the passage of the 2018 law, the number of women on boards more than doubled, according to a study from California Partners Project. Last year, it was reported that over half of the new board members were women.

The Securities and Exchange Commission has given the Nasdaq exchange permission to implement a rule that requires businesses listed on its market to disclose the racial and gender make-up of their boards and have at least two "diverse" members, among other things. Several states, including Maryland and New York, have required firms to report board diversity statistics, but none have established statutory quotas.

Judicial Watch filed a separate lawsuit regarding California's gender diversity law, which also challenges quotas. It has also compelled the Securities and Exchange Commission to drop its diversity rules proposal. It's uncertain whether the state will appeal Judge Green's decision.

The benefits of board diversity

So many aspects of corporate governance under the DEI umbrella have been given greater attention in this new era of business, including hiring practices and board diversity, compensation, and workplace laws. Today's boards must produce strong value, ask the right questions, and assist CEOs and top leaders think creatively, according to current expectations.

When board members all think and act similarly, including if they have similar backgrounds, ethnicities, genders, or areas of expertise, a company's value cannot be delivered. A diversified team, led by different viewpoints, can stimulate creative thinking and collaboration while also revealing new possibilities, reducing risk, and discovering overlooked realms

There is discomfort associated with mandates and legislation since they put pressure on individuals and groups to effect change, which is particularly relevant given the many boards in need of a makeover.

The greatest boards of directors—those who grasp the duty of care and who strive to make a difference in the world by fostering diversity—are those that are diverse themselves. They recognize that difficult questions are excellent ones since they push for improvement.

Mandates and regulations have the capacity to cause significant societal change. History has proven this with laws like the women’s right to vote in 1920, the Civil Rights Act in 1964, and the Pregnancy Discrimination Act in 1978.

Following the repeal of California Assembly Bill 927, officials must be reminded that there are alternative methods to start and embrace change. Leaders should not only fill one spot on their board with a “token” woman. Women need at least three seats on a board to achieve critical mass, where they are no longer seen as mere outsiders, according to research. Diversity goals are critical to long-term success, but change comes about when we all participate.