After a federal judge struck down a California law that required diversity quotas for corporate boards, it’s raising questions about the degree to which the state should regulate business policy, and how such laws align with the Equal Protection Clause of the Fourteenth Amendment.
U.S. District Judge John Mendez was relying on established U.S. Supreme Court precedent in the AB 979 ruling, said Stephanie Lindemuth, a disputes & investigations partner with the law firm of Akin Gump, in an email response to the Northern California Record.
Mendez issued the decision in Alliance for Fair Board Recruitment v. Weber last month. That ruling followed the decision last year of a Los Angeles Superior Court judge to strike down a different state diversity mandate from 2018.
It’s unclear if the California cases will send any message to other states, Lindemuth said.
“What is clear is that issues such as boardroom diversity and other initiatives intended to foster diversity, equity and inclusion (DEI) are likely to remain hot-button issues for the foreseeable future,” Lindemuth said.
Edward Blum, president of the Alliance for Fair Board Recruitment – the organization that filed the legal challenge to AB 979 – told the Record by email that corporations and shareholders should be permitted to assemble a board of directors of their choosing.
“Without being forced to impose racial and gender quotas by the state in which they reside,” Blum said.
While California was one of the first states to enact legislation aimed at fostering boardroom diversity, Lindemuth noted that the state of Washington enacted SB 6037 in 2020, requiring public companies headquartered there to have gender-diverse boards of directors.
“Washington’s law requires certain disclosures about board diversity for all such companies unless they have met and maintained a set quota for directors who self-identify as women,” Lindemuth said. “The law included a January 2022 compliance date, requiring at least one-quarter of board members must be/identify as women by January 22, 2022, unless before that time they had such a demographically diverse composition for at least 270 days beforehand. The law does not impose fines for non-compliance, but boards that do not meet this level must issue a diversity report. We are not aware of an active litigation challenging the measure at this time.”
Blum noted that Maryland and Illinois are among other states that have corporate board mandates but the penalties vary.
“Other states have adopted legislation requiring disclosures regarding demographic diversity or have taken steps to encourage boardroom diversity,” Lindemuth said. “Certain states, like California and Washington, have pushed for these legislative enactments, and, as we noted, it is unclear how the California rulings may affect those initiatives in other states."
It’s also possible that California could file an appeal with the Ninth Circuit.
Lindenmuth said it’s important to keep in mind that states are not the only stakeholders considering ways to enhance demographic diversity in boardrooms,.
“Corporations themselves, as well as various private stakeholders, including large asset managers, proxy advisory firms, and shareholder activists, have committed to or considered ways to push companies to embrace demographic diversity in boardrooms and C-suites,” Lindemuth said. “On the flip side, there has also been push-back against some of these efforts in both the public and private sectors.”