California Bill Requiring Additional Board Diversity Is Overturned
The bill mandated ethnic, racial and LGBT diversity on boards.
Assembly Bill 979, a California law that required public companies to include at least one member from underrepresented groups – including people of a number of races and ethnic groups plus people who identified as gay, lesbian, bisexual or transgender – was struck down recently by Judge Terry Green of Los Angeles County Superior Court.
The decision came down after a lawsuit was brought by nonprofit conservative advocacy group Judicial Watch, which argued that the law was unconstitutional because of its mandating of quotas. The law was just one part of California’s push to get corporate boards to further diversify their rosters, with their 2018 legislation requiring that corporate boards include at least one woman being another component. In the wake of the decision, Doug Raymond, partner at the law firm of Faegre Drinker Biddle & Reath LLP, provides insight into the decision and its aftermath.
According to Raymond, many legal observers were concerned that the requirement to include at least one underrepresented director violated the provision of the California constitution that forbids disparate treatment of similarly situated individuals based on race, sexual orientation or gender identity. The law defines an underrepresented person as a director who identifies as African American, Asian, Hispanic or Latino, Pacific Islander, Native American, Alaskan Native, Native American, gay, lesbian, transgender or bisexual. Although the law was aimed at promoting diversity, by specifying certain classifications of persons to be appointed to board seats, the law necessarily required discrimination based on these classes.
“While California does recognize that under ‘compelling circumstances,’ different treatment can be permitted, the court found that the state had not met that burden,” says Raymond.
Law Requiring Gender Diversity Also in Question
According to California Partners Project, a nonprofit focused on gender diversity, the Golden State’s 2018 law requiring women on boards has been a major success, with the number of women on boards doubling since its inception. However, that piece of legislation is also under fire from Judicial Watch, with the group making the same argument about the law utilizing quotas. Raymond says that while such a decision could mark the end of states working to create similar laws in their jurisdictions, the decision would depend greatly on the makeup of individual state constitutions.
“California Bill 979 was overturned based on the state’s constitution, which in general is broader than the current understanding of the U.S. Constitution and broader than the constitutions of many states,” says Raymond. “So, it will be a case-by-case analysis.”
While the decision would seem to complicate future attempts to establish legislation that mandates certain individuals be included on boards, Raymond suggests tax credits as a possible way that states could entice corporations to bolster inclusivity in their leadership groups.
“It’s conceivable that a state could offer a benefit for corporations that increase board diversity without running afoul of the equal treatment requirement.”
The state of California does have the right to appeal the decision on Assembly Bill 979, but at the time of this writing, it is not clear whether it will choose to do so.