A California law requiring diversity on corporate boards has been struck down, dealing a blow to state efforts to address racial and gender disparities in the workplace.
Responding to a lawsuit by Judicial Watch, a conservative nonprofit advocacy group, Los Angeles County Superior Court Judge Terry Green ruled on Friday that the law violates the state constitution.
The law, Assembly Bill 979, took effect in 2020. It requires California-based publicly traded companies to have board members from underrepresented communities, including people from multiple races and ethnicities. and people who identify as gay, lesbian, bisexual or transgender. Governor Gavin Newsom, in signing the bill, proclaimed it a victory for racial justice and empowerment.
The Judicial Watch lawsuit, filed a month after the law was signed, argued that it was unconstitutional because it imposed quotas.
Judge Green did not elaborate on the reasoning for his decision. In a hearing, he described the law as “a bit arbitrary” about the groups it was intended to help, according to Law360.
In a statement after the ruling, Tom Fitton, president of Judicial Watch, denounced the law as part of “one of the most flagrant and far-reaching attacks of the modern age on constitutional prohibitions against discrimination.”
California has led the country in pushing companies to diversify their senior ranks, starting with a 2018 law that required boards to have at least one woman. Companies that do not comply face fines.
Since the 2018 law was passed, the number of women on corporate boards has more than doubled, according to a report by the California Partners Project, a gender-focused nonprofit that has been founded in part by Governor Newsom’s wife, Jennifer Siebel Newsom. Last year, more than half of new board members were women, the group said.
In a statement, California Partners Project called the decision “disappointing but not groundbreaking.” The group pointed to studies showing that business results are better “when all of our rich talent is represented in leadership positions” and noted that investors motivated by these results would continue to pressure companies to have diverse boards of directors.
The Securities and Exchange Commission has approved a Nasdaq rule, which will take effect this year, that will require companies listed on its exchange to disclose the ethnic and gender composition of their boards of directors and to have at least two ‘diverse’ members. or to explain why they don’t. Other states, including Maryland and New York, have required companies to disclose statistics on board diversity, but none have mandated quotas.
Judicial Watch filed a separate lawsuit against California’s gender diversity law, making the same argument against the quotas. He also lobbied the Securities and Exchange Commission to drop its approval of the diversity rules.
It was unclear whether California would appeal Judge Green’s decision. The office of Secretary of State Shirley Weber did not respond to a request for comment.
The decision didn’t come as a complete surprise, and California’s gender diversity law could meet a similar fate, said David A. Bell, co-chair of corporate governance at law firm Fenwick & West. “Under constitutional principles, the courts have generally been hostile to quotas,” Bell said.
Still, if Judge Green’s ruling holds after any potential appeal, Bell said he doesn’t expect it to change much for companies that are already being pressured to diversify their senior ranks.
“It has already set a benchmark for the expectations of many different stakeholders – institutional investors, employees, customers,” he said. “The benchmark exists and those expectations will continue around the world.”