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On April 1, a state court judge in Los Angeles ruled that the California law (AB 979) mandating publicly traded companies include people from underrepresented communities on their boards violates the California Constitution. We initially reported on AB 979 here, noting that it was the first law of its kind in the US and was the second time California sought to mandate diversification of public company boards through legislation. In 2018, the first piece of California legislation (SB 826) aimed at increasing gender diversity; in 2020, AB 979 sought to increase diversity from underrepresented communities.

AB 979

The 2020 law requires publicly held corporations headquartered in California to include at least one person on their boards from an underrepresented community by the end of last year, with additional appointments required in future years. People from underrepresented communities are defined as anyone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.

Under AB 979, the California Secretary of State must report annually on companies’ compliance with the law and may impose fines of $100,000 for an initial violation and $300,000 for each subsequent violation.

Judicial Watch’s Challenge

In response to a lawsuit brought by Judicial Watch, a non-profit conservative advocacy group, Judge Terry Green of Los Angeles County Superior Court found that the law violated the state constitution but did not specify the reasoning behind his decision. Judicial Watch’s lawsuit was filed a month after the law was signed and argued that it violated the equal protection clause of California’s constitution because it mandated quotas.

Judicial Watch filed a separate lawsuit over California’s gender diversity law, making the same argument against quotas. A nearly month-long trial in that case concluded in February before a different Los Angeles judge who has yet to issue a ruling.

What’s Next?

So far, it is not clear whether California will appeal Judge Green’s ruling. While it is a clear setback for proponents of advancing board diversity, public pressure on companies to do so is unlikely to subside. And, although the decision might discourage other state-level efforts to mandate diversity on boards, the broader movement is likely undeterred. In Board Diversity | A Corporate Imperative, we propose that a convergence of forces is changing the public face of the boardroom. Legislation is just one of the drivers. Perhaps even more importantly, employees, customers, institutional investors and shareholder groups have been loudly protesting the lack of diversity on corporate boards in recent years.

Further, and perhaps more reflective of the current trend towards advancing diversity, is last summer’s decision by the Securities and Exchange Commission (SEC) to approve Nasdaq’s board diversity listing standards. The new rules are set to go in effect this year. They will require companies listed on Nasdaq to disclose the ethnic and gender makeup of their boards and have at least two “diverse” members or explain why they do not. Thus, separate and apart from the ultimate outcome of the cases challenging California’s board diversity rules, Nasdaq-listed companies will be subject to their board diversity rules.

In sum, despite this setback, and potential challenges that lie ahead, the movement for inclusion and diversity persists. In addition to rulings like this one, shareholders at several large multinationals are pressuring the companies to withdraw diversity policies for employees, suppliers and outside law firms that they claim violate federal and state anti-discrimination laws. Also, the pending decision in the Harvard and University of North Carolina Admissions lawsuits before the US Supreme Court is likely to have major implications for employers. With that said, there is much evidence that companies with the most ethnically / culturally diverse boards worldwide are correlated with higher profits. (See e.g., McKinsey’s Delivering Through Diversity) And, with requirements like Nasdaq’s, as well as heavy pressure from institutional investors like BlackRock, the tide of public opinion continues to push for a more fair and equitable society. Stay tuned!