California court strikes down another law seeking to diversify corporate boards
By Jeanne Sahadi, CNN Business
California’s efforts to mandate board diversity have been dealt another blow.
Late last week, a California judge in the Superior Court of Los Angeles ruled that the state’s 2018 law requiring public companies headquartered in California to have a minimum number of women on their board violates the state’s constitution.
The law required companies to place at least one woman on their board by the end of 2019 — or face a penalty. The California legislation also required companies with five directors to have at least two women by the end of 2021, and companies with six or more directors to have at least three women by the end of the same year.
Among the reasons the judge gave for overturning the law: The state “failed to sufficiently prove that [the law’s] use of a gender-based classification was necessary to boost California’s economy, improve opportunities for women in the workplace, and protect California taxpayers, public employees, pensions, and retirees.”
“This disappointing ruling is a reminder that sometimes our legalities don’t match our realities,” said California Senate President pro Tempore Toni Atkins, who coauthored the law, in a statement. “More women on corporate boards means better decisions and businesses that outperform the competition — that’s a studied, proven fact.”
Last month, another California judge struck down the state’s 2020 law requiring companies to have a minimum number of directors from underrepresented groups. That would include people identifying as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or gay, lesbian, bisexual or transgender.
When the laws, which both phased in their mandates over time, were passed, the expectation was that their effect would be felt beyond just company boards in California since so many companies headquartered there also operate in other states and internationally.
Even though both laws have now been overturned, “the effect of the two statutes largely has already been felt,” said David Bell, co-chair of the corporate governance practice at the law firm Fenwick & West.
Bell noted that a longstanding Fenwick annual survey on gender diversity at Silicon Valley firms shows a notable tick upward in women board members since the passage of the 2018 law, which required companies to be in full compliance by the end of last year.
Meanwhile, the push for greater board diversity at many US corporations continues thanks to pressure from institutional investors and other stakeholders. Plus, companies listed on the Nasdaq must publicly disclose how diverse their boards are, and if they don’t have at least one board member who is a woman and one who is a member of an “underrepresented” group, they must explain why.
Like Bell, Julie Hembrock Daum, who leads the North American Board Practice of executive and board search firm Spencer Stuart, said both California laws did boost the number of women and minorities on corporate boards, particularly on boards that before were very homogenous. “Most companies decided to take action even though they knew the laws might be struck down,” Daum said.
Now without the California mandates, companies may not diversify their boards as quickly as they were obligated to under the struck-down laws, she and Bell said.
But they both expect corporations will continue to diversify, if not of their own accord then under pressure from shareholders. “The baseline [for diversity] has moved up,” Daum said.
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