A California law prescribing diversity on boards of directors has been struck down as a blow to the state’s efforts to address racial and gender inequality in the workplace.
In response to a lawsuit filed by Judicial Watch, a conservative nonprofit advocacy group, Los Angeles County Superior Court Judge Terry Green ruled Friday that the law violated the state’s constitution.
The law, Assembly Bill 979, came into effect in 2020. It requires publicly traded companies in California to have board members from underrepresented communities, including people of different races and ethnicities and people who identify as gay, lesbian, bisexual or transgender. Governor Gavin Newsom called the bill a victory for racial justice and empowerment when it signed into law.
Judicial Watch’s lawsuit, filed a month after the bill was signed, argued it was unconstitutional because it mandated quotas.
Judge Green did not specify the reasons for his decision. During a hearing, he described the law as “a bit arbitrary” for which groups he wanted to help, according to Law360.
In a statement following the ruling, Tom Fitton, president of Judicial Watch, condemned the law as part of “one of the most egregious and significant attacks in modern times against constitutional prohibitions against discrimination.”
California has led the country to push companies to diversify their top positions, starting with a 2018 law requiring boards of directors to have at least one woman. Companies that do not comply with the rules risk fines.
Since the 2018 law was passed, the number of women on boards of directors has more than doubled, according to a report by California Partners Project, a nonprofit focused on gender equality co-founded by Governor Newsom’s wife, Jennifer Siebel. newsom. Last year, more than half of the new board members were women, the group said.
In a statement, California Partners Project called the decision “disappointing but not decisive.” The group pointed to studies showing that business results were better “when all of our rich talent is represented in leadership positions” and noted that investors motivated by these results would continue to pressure companies to have different boards.
The Securities and Exchange Commission has approved a Nasdaq rule, effective this year, requiring companies listed on the stock exchange to disclose the ethnic and gender makeup of their boards and have at least two “diverse” members. or explain why they don’t. Other states, including Maryland and New York, have required companies to disclose diversity statistics, but none have introduced mandatory quotas.
Judicial Watch has filed a separate lawsuit over California’s gender diversity law, making the same argument against quotas. It has also pressured the Securities and Exchange Commission to refrain from adopting diversity rules.
It was not clear whether California would appeal against Judge Green’s ruling. The Secretary of State’s office, Shirley Weber, did not respond to a request for comment.
The decision wasn’t a complete surprise, and California’s gender diversity law could suffer a similar fate, said David A. Bell, the co-chair of corporate governance at the law firm Fenwick & West. “Under constitutional principles, the courts have generally been hostile to quotas,” Bell said.
But if Judge Green’s decision stands up to possible appeals, Mr. Bell said he didn’t expect it to change much for companies already being forced to diversify their top positions.
“It has already set a benchmark for the expectations of many different stakeholders — institutional investors, employees, customers,” he said. “The benchmark exists and those expectations will be carried out in the world.”
