Board Diversity Push Continues After California Mandate Struck

Public companies will keep facing pressure from stakeholders and the public to diversify their boards of directors despite a California court ruling that voided that state’s diversity requirement.

The ruling isn’t likely to have a significant impact on corporate board diversity trends, said Paul Washington, executive director of the Conference Board ESG Center. Institutional investors, employees, and customers have been pushing for corporate board diversity in the past few years, he said.

“There are other drivers of board diversity, quite apart from this legislation, that are not going away,” Washington said.

According to an October Conference Board analysis, 59% of the S&P 500 disclosed the racial composition of their boards in 2021, up from 24% in 2020. The number of women on corporate boards skyrocketed, while the number of racial minorities on boards continued to lag, the analysis found.

Los Angeles Superior Court Judge Terry Green April 2 struck down a California law passed in 2020 as part of a push for corporate diversity after the police killing of George Floyd. Green did not elaborate on his reason for siding with the conservative advocacy group Judicial Watch, which argued that it was unconstitutional to use “taxpayer funds or taxpayer-financed resources” to enforce the rule.

The California Secretary of State’s office did not immediately respond to a request for comment about whether the state planned to appeal the ruling.

Outside Pressure

Aside from the California law, Goldman Sachs & Co. has upped its diversity requirements for companies that it backs. The major investor is now expecting portfolio companies to have at least one diverse director from an underrepresented ethnic minority group and at least two women on boards of 10 or more.

The California State Teachers’ Retirement System said March 30 that it would vote against board directors and corporate proposals at companies deemed to have inadequate environmental, social, and governance goals. CalSTRS, the second-largest U.S. pension fund, said the move is part of a campaign to pressure corporations to diversify boardrooms and address climate change.

“That to me has more power and more practical implications than a legislative approach,” said Denis Demblowski, a legal analyst at Bloomberg Law.

Some other states, including New York and Illinois, require companies to disclose their board diversity statistics.

It’s important for companies to at least disclose the gender and racial makeup of their boards so that investors and customers can make informed decisions, said Esther Aguilera, CEO of the Latino Corporate Directors Association.

“Disclosure is really a sensible and a commonsense approach,” Aguilera said. “The bottom line is transparency and disclosure. It’s part of our financial markets it’s a good way of doing business.”

Small Pools

Board members are already chosen from smalls pools of candidates, with most boards requiring members to be current or former CEOs and CFOs. Most companies don’t allow lower-level executives to serve on other corporate boards, further narrowing the pool.

Some boards began swapping those requirements for more industry-specific qualifications, which led to more women on boards. Meanwhile, ethnic and racial diversity has lagged, largely because networks among corporate board members are mostly White.

“First, specify criteria, but the second part is where are you looking?” said Stephanie Creary, a professor at the University of Pennsylvania.

A March report from the California Secretary of State found that out of 716 publicly traded companies in the state, only 301 were in compliance by the end of 2021. Half of the companies impacted by the law did not file the required disclosure statement.

The U.S. Securities and Exchange Commission in August approved a Nasdaq Inc. proposal requiring companies traded on the exchange to disclose the gender and ethnic makeup of their boards, and to meet a diversity quota or explain why they couldn’t. The federal agency is already facing legal challenges to its move.

Even without legal liability, the push for board diversity will likely persist. Creary, who studies board diversity and has interviewed dozens of board members as part of her research, said “not a single one had suggested that any kind of legal action was driving board diversity.”

“It was actually the broader social push toward equality that was driving that change,” Creary said. “Perhaps for the most reluctant boards the removal of that provision will invite them to do less, but there were already boards who were doing more.”