California laws meant to ensure diversity on corporate boards overturned by judges. What’s next for companies?

In a race to ensure diversity at the top of corporations, California has run headlong into two judges with a simple warning.

Not so fast.

Judge Terry Green of Los Angeles County Superior Court spoke up first. He had an unwelcome April 1 surprise for the Golden State, ruling that 2020’s Assembly Bill 979 was unconstitutional. According to New York Times reporter Erin Griffith, the bill “requires publicly traded companies based in California to have board members from underrepresented communities including people of several races and ethnic groups” and people who identify as gay, lesbian, bisexual or transgender.”

Responding to a lawsuit from the conservative group Judicial Watch, Green said these requirements – meant to combat discrimination at the top levels of companies – were themselves discriminatory.

“The statute treats similarly situated individuals – qualified potential corporate board members differently based on their membership (or lack thereof) in certain listed racial, sexual orientation, and gender identity groups,” the judge wrote, according to JD Supra. “It requires that a certain specific number of board seats be reserved for members of the group on the list – and necessarily excludes members of other groups from those seats.”

In other words, the judge said, promoting diversity would require the state to encourage discrimination.

Out Leadership’s Fabrice Houdart testified in favor of the law and told Reuters news service that he wanted the state to keep pressing for change. According to his group, LGBTQ folks hold less than .4% of seats on the boards of Fortune 500 companies.

Change happens slowly, he said, which requires action from the government. "Without the regulator, it is going to take an enormous amount of time.”

But this setback for advocates of diversity was quickly followed by another.

In May, Los Angeles County Superior Court judge Maureen Duffy-Lewis ruled against Senate Bill 826. That law required companies based in California to have women as members of the board of directors. She said both that the state’s reasoning behind the law – that it would help the economy – couldn’t be proven and that it didn’t address “specific, purposeful, intentional and unlawful” discrimination.

This was a difficult pill to swallow for advocates, given that the law appeared to have had its intended effect. “The number of companies in California with no female directors at all dropped to 1 percent in 2021, from 28 percent before the law was passed in 2018, according to data from California Partners Project, a gender equity nonprofit that was co-founded by Jennifer Siebel Newsom, the wife of California’s governor, Gavin Newsom,” wrote the Times’ Alisha Haridasani Gupta.

 Both rulings have been appealed by the state.

 Despite the setback, institutions have taken notice and are making progress in different ways. Griffith reported the Securities and Exchange Commission has given the go-ahead to a new rule from Nasdaq. It requires members of the technology-focused stock exchange to share information about their boards’ diversity. 

 If they didn’t have two “diverse” members, they would need to say why they didn’t. New York and Maryland, among other states, require companies to disclose board diversity information, but none took the California approach.

Megan Wange, CEO at Boardlist, a company that locates director candidates for boards, told Gupta in the Times that the issue wasn’t going away.

“There’s no boardroom in America that isn’t talking about diversity,” she said. “The law certainly accelerated something we had been talking about for decades. But we’re in a moment in time where legislation is one lever, and there are many other things at play right now.”

David A. Bell, the co-chairman of corporate governance at the law firm Fenwick & West, told the Times in April that the die has already been cast. While the diversity requirements law might be overturned, “It has already set a benchmark for expectations by a lot of different stakeholders — institutional investors, employees, customers,” he said. “The benchmark exists and those expectations are going to carry forth in the world.”

Indeed. States might be limited by courts in how they enforce diversity requirements at the top ranks of companies. But no one can say they’re unaware of the issue now, and our country is in a different place than it was even five or ten years ago. 

That means looking for ways to embrace and enhance diversity throughout companies, even if a statute isn’t holding your feet to the fire.