The march toward board diversity continues despite judicial setbacks.

The laws that the state of California established to mandate diversity on corporate boards are now officially gone. However, the movement to diversify boards in the Golden State and beyond remains present and accounted for. 

On May 13, Los Angeles Superior Court judge Maureen Duffy-Lewis found that California’s Senate Bill 826, which required publicly listed corporations to have women on their boards, violated the Equal Protection Clause of the California Constitution. This came less than two months after Los Angeles County Superior Court Judge Terry Green submitted the same finding on California’s Assembly Bill 979, which required public companies to include at least one member from underrepresented groups, including people of numerous races and ethnic groups as well as people who identified as gay, lesbian, bisexual or transgender. 

A Close Decision

Addressing the finding on Senate Bill 826, Thomas O’Neil, a governance expert and managing director of global consulting firm Berkeley Research Group in Washington, D.C., stated that the case is politically charged and that he would not have been surprised if judges on the same bench had viewed the same facts in different ways.

“The opinion laid out its rationale, and it certainly went through all of the requisite steps. But I think you could easily find another jurist who would apply the same steps – perhaps not strict scrutiny, perhaps with strict scrutiny – but reach a different conclusion with the same set of facts.”

The Future of Diversity Legislation

The finding by Judge Duffy-Lewis in tandem with the decision on mandating board diversity of underrepresented communities would appear to greatly compromise the possibility of future attempts to diversify boards by legislative means. While O’Neil predicts that we have not seen the last of legislative and regulatory attempts to make progress in diversity, he does not believe that legislation that applies a punitive element for failure to comply is the way to go. For a better way forward, he points to state and federal agencies that have called attention to the practices of boards, including reports and summaries on recruiting policies and practices around director diversity.

“I do think the initiatives that seek not to punish but rather to shine a light on policies and practices have a better process,” says O’Neil. “Those kinds of models really hold boards accountable to their stakeholders, and at the end of the day I believe that boards, as a general matter, want to do the right thing.”

O’Neil believes boards will continue to become more diverse, even without legislation that mandates diversity.
 
“I don’t think that the court’s ruling will result in boards suddenly saying, ‘We don’t have to do this anymore, so we won’t.’ We’re in a situation now where we in the governance world, and more broadly from a societal perspective, are trying to address a problem that has been 50 to 100 years in the making. You can’t move too quickly under those circumstances. You have to accelerate everything that you do.”

Long-Term Legacy

While it’s difficult to discuss the legacy of two bills that were in effect for less than four years, O’Neil stated that they will be “a hot topic in constitutional law classes all over the country for quite some time.” Beyond that, however, he thinks the two laws have had a great impact on board diversity, as is evidenced by the number of federal and state agencies now concentrating on the issue, as well as the attention now being paid by numerous stakeholder groups. 

“I don’t think these rulings will have a long-term adverse impact on these initiatives that are underway, primarily because there are so many other stakeholder groups that are pushing for this change. There are regulatory agencies, there are shareholders, there are customers and there are business partners. At long last, we’ve entered a new era with powerful expectations and a sense of urgency to address this issue in a high-quality way.”