Will California corporate diversity laws last? Lawsuits challenge anti-discrimination mandates

Two recent California laws directing public corporations to appoint more diverse leaders to their boards of directors are facing tough legal challenges, raising questions about whether they’ll endure.

One law, signed by former Gov. Jerry Brown in 2018, requires a certain number of women to serve on public boards.

The other law, signed by Gov. Gavin Newsom last year, directs corporations to appoint more racial minorities or gay directors to join their boards.

The Democratic lawmakers behind the laws said they sponsored them to address the lack of women, people of color and sexual minorities in corporations. Companies face stiff penalties of up to $300,000 if they fail to comply with the laws.

“I hope that we continue to see how these corporations respond because it only makes them better, makes them stronger and actually ... makes them more profitable,” said Assemblyman Chris Holden, D-Pasadena, who authored the law that mandates the number of under-represented and gay directors, AB 979.

Right-leaning legal organizations took aim at both laws, contending they compel corporations to discriminate on the basis of gender or ethnicity.

The Pacific Legal Foundation filed a lawsuit contesting the gender diversity law in 2019 on behalf of a shareholder in OSI Systems of Hawthorn.

Meanwhile, Judicial Watch, a conservative legal group, filed lawsuits against each of the two laws in 2019 and 2020.

Last month, the 9th Circuit Court of Appeals allowed Judicial Watch’s legal challenge against what it calls the “gender quota law,” or Senate Bill 826, to move forward.

Tom Fitton, president of Judicial Watch, is confident both laws will be struck down.

“The irony of both of these mandates (is) to fight alleged discrimination – they mandate discrimination,” he said. “I don’t think it’s going to survive court scrutiny and the government is nervous about it and they should be. The way to end discrimination is to stop discriminating.”

His remark echoed a 2007 opinion written by Supreme Court Chief Justice Roberts in a case on public school busing. “The way to stop discrimination on the basis of race,” Roberts wrote, “is to stop discriminating on the basis of race.”

Opportunities for women

Brian Soucek, a law professor at UC Davis School of Law, said the recent ruling will allow shareholders to challenge the gender diversity law, too. He anticipates that corporations will not challenge the mandates to avoid public criticism.

He said even though both laws call for more diversity on the boards of directors of California companies, legal challenges may result in different outcomes.

“There’s a world in which the gender law could survive, while the race law gets struck down,” Soucek said. “But there’s no world in which the gender law gets struck down and the race law survives.”

Soucek said it’s due to the fact that the Supreme Court has allowed gender classifications “when they’re intended to make up for economic opportunities that women have been denied in the past.”

In one 1996 legal case, for instance, the Supreme Court ruled that Virginia Military Institute’s male-only admissions policy was unconstitutional. In her court opinion, according to Soucek, late-Justice Ruth Bader Ginsburg argued that gender classifications aren’t always impermissible.

“It’s a really close call what the result of these cases will be,” he said.

Racial diversity lacking on California corporate boards

Holden said the racial protests sparked by the death of George Floyd, a Black man killed by a white Minnesota police officer last year, started a national dialogue about systemic racism in various sectors, including in corporate America.

“I think that created the opportunity for us to have this conversation around corporate boardrooms and how we need to increase diversity there,” Holden said.

Supporters say the gender diversity law, authored by former Sen. Hannah-Beth Jackson, D-Santa Barbara, is already working.

A report by the California Partners Project, an organization founded by First Partner Jennifer Siebel Newsom, showed that 30% of public board corporations were all male in 2018. Today, less than 3% of public board corporations are all male, according to the report.

The other law, so far, has not had the same impact. A 2021 report by the Latino Corporate Directors Association found that many board seats of California’s public corporations were still held by white people.

Latinos, who represent 40% of the state population, make up just 2.3% of board room seats, according to an analysis of 678 public companies headquartered in California by the Latino Corporate Directors Association. Whites continue to make up the majority of board seats, the report found, accounting for 81% of the positions.

Even if the gender diversity law gets struck down in court, Soucek the laws have boosted the diversity in California’s public boards of directors.

“I don’t see corporations backsliding on those changes. I think now that corporations have taken steps and expanded their scope when they search for directors and now that there are women on pretty much every board of California corporations, I just can’t imagine them going back to the old world of white men,” he said. “Even having this law in effect for a certain amount of time before it gets struck down could affect huge change in California.”

This story was originally published August 2, 2021 at 5:25 AM.