A California law mandating diversity on the boards of directors of public companies has been ruled to be in violation of that state's constitution by Judge Terry Green of the Los Angeles County Superior Court, in a ruling made on April 1, 2022. The law applies to corporations whose principal executive offices are in that state.
California Assembly Bill 979 went into effect in 2020. It mandates that a minimum number of board seats, varying by the size of the board, be filled by women and members of "underrepresented communities." The ruling was in response to a suit brought by Judicial Watch, which describes itself as "a conservative, non-partisan educational foundation, which promotes transparency, accountability and integrity in government, politics and the law."
- A California law mandating minimum numbers of women and members of "underrepresented communities" on corporate boards has been struck down.
- "The courts have generally been hostile to quotas," observed a legal expert.
- Whether the decision will be appealed and its possible impact on ESG investing remain open questions.
Bill 979 in Brief
Each company subject to the law must have at least one female director. Boards with five directors must have at least two females. Boards with six or more directors must have at least three females.
"Underrepresented communities" include people who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender. Corporations subject to the law must have at least one such person on the board. By the end of 2022, boards with five to eight members must include at least two such persons, while boards with nine or more directors must have at least three such persons.
Judicial Watch filed its suit on Oct. 2, 2020, on behalf of three California taxpayers. It argued that any expenditure of taxpayer funds or taxpayer-financed resources on AB 979 is illegal under the California Constitution. Its motion for summary judgment stated, in part: "Laws that explicitly distinguish between individuals on racial or ethnic, sexual preference, and transgender status grounds fall within the core of the prohibition of the equal protection clause."
Attorneys for Judicial Watch argued that the law acts to "embody stereotypes," assessing individuals' "very worth as citizens" according to their membership in various categories. This, they asserted, amounts to applying criteria "barred to the Government by history and the Constitution."
Judicial Watch President Tom Fitton called the law "one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination." He added, "In its ruling today, the court upheld the core American value of equal protection under the law."
It was not immediately clear whether California would appeal Judge Green's ruling. California's governor, secretary of state, and attorney general have yet to issue comments.
The ruling was not a complete surprise, and California's gender diversity law may face a similar fate, according to David A. Bell, the co-chairman of corporate governance at the law firm Fenwick & West. "Under constitutional principles, the courts have generally been hostile to quotas," he observed. Indeed, shortly after the enactment of Bill 979, The National Law Review predicted that it was likely to be challenged on constitutional and other grounds.
The impact on environment, social, and governance (ESG) investing principles remains an open question at this point.