Corporate diversity, like diversity in education and other arenas, is an ongoing issue. Certain communities are underrepresented in corporate management and, in particular, on corporate boards around the country. The homogeneity at the top trickles down into corporate culture and many other areas, creating a vicious cycle that perpetuates the problem. In recent years, lawmakers have stepped in to try to address the issue. As with education, however, the best intentions of lawmakers may conflict with judicial interpretations of constitutional mandates. A California Superior Court judge recently tossed out California Assembly Bill 979 as an unconstitutional manifestation of racial “quotas,” the bogeyman of opponents to diversification efforts.
AB 979 was signed into law on September 30, 2020. The law required publicly held corporations with headquarters in California to diversify their boards of directors by December 31, 2021. Specifically, the law requires that boards must have “a minimum of one director from an underrepresented community.” By 2022, boards with more than four members must have more than one director from an underrepresented community; at least two such directors for boards with four to eight directors, and at least three such directors for boards with nine or more members. Underrepresented communities include communities of color (Black, African American, Hispanic, Asian, etc.) as well as LGBT communities. Corporations that fail to comply are subject to fines.
Three California taxpayers filed a lawsuit challenging the law, alleging that forcing corporations to include a minimum (or quota) of certain communities is a violation of the Equal Protection Clause of the California Constitution. The state argued that the law is expressly meant to remedy past and present instances of discrimination and to enhance the benefits that diverse corporate boards offer to the public.
On April 1, 2022, a Los Angeles County Superior Court struck down AB 979. According to the court, while demographically homogeneous boards may be a problem, the “immediate and obvious” solution of mandating heterogeneous boards is not a tenable solution. “The California Constitution protects the right of individuals to equal treatment,” so says the court, so the legislature must “first try to create neutral conditions under which qualified individuals from any group may succeed” (emphases in original).
In this instance, the law treats “similarly situated individuals” --meaning otherwise qualified candidates for a board position--differently based on their race, sexual orientation, or gender identity groups. A law that expressly applies to suspect classes such as race or gender must face strict scrutiny, meaning it must be narrowly tailored to serve a compelling government interest. The court found that while remediating discrimination may be compelling, the state failed to identify the specific arena in which the discrimination has occurred. Their other purported interest--promoting “healthy business” --was not found compelling. Moreover, such a quota requirement is not narrowly tailored to serve the goal. There are other, less restrictive means to promote corporate board diversity.
The court accordingly ruled that the law is facially unconstitutional as currently drafted, meaning a different set of facts or challengers would have saved the law. The court suggested alternate means the legislature might employ to promote their goals, such as maintaining a database of qualified candidates from underserved communities and forcing corporate disclosure of the demographic makeup of their boards.
Notably, AB 979 law mirrors section 301.3 of the Corporations Code (former Senate Bill 826) which requires gender diversity on corporate boards. SB 926 has faced similar legal challenges. In this case, the court briefly mentioned that legislative materials concerning statistical disparities and the impact of network effects were useful in addressing gender discrimination, but did not directly translate to the issue of discrimination based on race, sexual orientation, or gender discrimination. Regardless, the court’s reasoning calls into question the constitutionality of that law as well as similar laws in other states around the country.
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