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California Diversity Board Law Struck Down by Trial Court

In 2020, California passed a law requiring publicly traded companies based in the state to incrementally add diverse board members. Specifically, the law mandated that companies add board members from underrepresented communities, including different races and ethnic groups and individuals identifying as gay, lesbian, bisexual, or transgender. In 2018, California passed a similar law requiring the addition of women to corporate boards. Studies show that since the gender diversity law passed, the representation of women on corporate boards has doubled.

Judicial Watch, a conservative advocacy group, filed suit not long after the Governor signed the most recent bill into law. The group argued that the law was unconstitutional because it mandated quotas. Superior Court Judge Terry Green agreed. He said the statute treats qualified board members differently based on their racial, ethnic, or sexual identity, and California failed to identify a “compelling state interest” to justify the differential treatment. California would need to enumerate specific past acts to justify its remediation through this bill. The judge commented, “If demographically homogenous boards are a problem, then heterogeneous boards are the immediate and obvious solution. But that doesn’t mean the Legislature can skip directly to mandating heterogenous boards.” Judicial Watch is also challenging the earlier gender diversity law.

The Securities and Exchange Commission will soon require companies listed on its exchange to share the ethnic and gender makeup of their boards and to have at least two “diverse” members (or explain why they do not). Major shareholder groups and institutional investors have been putting pressure on corporations to increase board diversity. For example, BlackRock, Inc., The Vanguard Group Inc., and State Street Global Advisors reportedly updated their proxy voting policies this year to increase pressure on companies to improve board diversity. Even without a state law mandating it, some believe the benchmark for expectations has been set. California has not yet indicated whether it intends to appeal.