Double Trouble: California Set To Challenge Two Decisions Rejecting Diversification Of Corporate Boards

• Published date: 08 August 2022
• Subject Matter: Corporate/Commercial Law, Employment and HR, Corporate and Company Law, Discrimination, Disability & Sexual Harassment, Employee Rights/ Labour Relations, Diversity, Equity & Inclusion
• Law Firm: Arnold & Porter
• Author: Ms Teresa Johnson, Sean M. SeLegue, Amy Endicott and Ernesto M. Hern'ndez

Last week, the California Secretary of State appealed a decision by the Los Angeles County Superior Court striking down the second of California's two board diversity laws, which required all publicly traded companies headquartered in California to include a minimum number of female directors. The appeal will challenge the court's finding that the board diversity legislation violates the Equal Protection Clause of the California Constitution because its classification of director candidates based on gender does not further a compelling government interest.

In addition, the same court'acting through a different judge'has also overturned California's other board diversity statute, which required boards of publicly traded companies headquartered in California to include at least one director from an 'underrepresented community' on their board. This decision was appealed in June.

The rulings, if not overturned on appeal, spell an end to California's board diversity requirements as currently framed. Both courts rejected arguments by the state that remediating discrimination against women and members of underrepresented communities, and enhancing corporate performance through board diversity, constitute compelling state interests justifying the statutes' diversity requirements. These rulings come even as institutional investors and activist shareholders apply mounting pressure to diversify corporate boards.¹

Below, we provide additional background on the two trial court rulings and a summary of what will likely happen next in the two cases.

Background

In 2018 and 2020, California enacted two statutes mandating diversification of boards of publicly traded companies with 'principal executive offices' in California. These statutes authorized the state to track the composition of those boards and to issue fines for non-compliance. Senate Bill 826 (SB 826), enacted in 2018 and codified as Corporations Code section 301.3, required publicly traded companies headquartered in California to appoint a minimum number of female directors. Two years later, Assembly Bill 979 (AB 979), codified as Corporations Code Section 301.4, imposed a similar regime for directors from 'underrepresented communities,' defined in the statute to include members of racial minorities and the LGBTQ+ community.

Champions of both initiatives emphasized that legislative action was necessary to correct discrepancies in the composition of boards, which were disproportionately white, cisgender, and male. Supporters emphasized that...