Corporate Board Diversity Backslides as Mandate Laws Flounder

The latest court finding that a California corporate board diversity mandate is unconstitutional comes as companies are lagging in diversifying boards on their own.

California statutes directing companies based there to appoint women and minority or LGBTQ board members are still unsettled in state and federal courts following a Sacramento federal judge’s May 16 decision against mandating directors from underrepresented groups. In tandem with those legal setbacks, there’s doubt how far companies will pursue diversity after the percentage of board seats filled by minorities has dropped since 2021.

Diversity law challenges pending in the courts underscore that “just trying to achieve an inclusive work environment, management environment and board and leadership environment that is also reflective of the communities that companies serve is going to continue to be an ongoing challenge,” said Tyree Jones, a Reed Smith LLP partner, who leads the firm’s global labor and employment group.

Board diversity efforts dragged last year, according to research from consulting firm Heidrick & Struggles. Companies had moved to create more inclusive boards in 2020 and 2021, following racial justice protests sparked by the murder of George Floyd. The report shows a new decrease in appointments for underrepresented groups last year, however.

Open seats going to women decreased to 40% in 2022 from 45% in 2021, according to the report, and seats that went to racial or ethnic minorities dropped to 34% from 41% in 2021. The seats going to Black and African American directors dipped to 17% in 2022 compared to 26% in 2021, the report said.

Setting Goals

The recent decision out of California in Alliance for Fair Board Recruitment v. Weber won’t stop companies that want to add more minorities or women to their boards, said Jonathan Richman, a Proskauer Rose LLP partner who advises companies on corporate governance.

“There’s nothing in this decision that undermines the goal of diversity, if a company wants to further that goal,” Richman said. “It just says the state can’t require it.”

But Michael Buschbacher, a Boyden Gray & Associates PLLC partner representing the Alliance, said the ruling puts companies on notice. Senior Judge John A. Mendez of the US District Court for the Eastern District of California found the 2020 law, AB 979, violated the Civil Rights Act of 1866, which covers both state and private discrimination, Buschbacher added.

“Woke corporations that impose diversity mandates on their own are thus just as liable,” Buschbacher said in a statement.

California Secretary of State Shirley Weber (D) hasn’t said whether the state will appeal the Alliance decision. A Weber spokesperson didn’t immediately respond to requests for comment.

More aspirational objectives, like seeking a 30% increase of underrepresented groups on a board, Jones said, “will more likely withstand scrutiny” because they’re not specific to a racial or other protected group.

Focusing efforts on how to “access the broadest base of talent,” that will likely include more diverse candidates, is one way for companies to get a wider range of perspectives on a board without focusing on specific numbers, Jones said.

Others that have a close eye on corporate diversity efforts are concerned that companies won’t make changes quickly enough without rules like the California law. “If you don’t make ‘em do it, they’re not going to do it,” said Gilbert Garcia, managing partner at asset management firm Garcia Hamilton & Associates.

Garcia has advocated for diversity in his role advising the Securities and Exchange Commission as chair of the Diversity and Inclusion Subcommittee on the Asset Management Advisory Committee. Without requirements to improve diversity, Garcia said “it could take generations” to create more diverse leadership across industries.

Pending Cases

The case over California’s AB 979 is one of several court challenges to that law, as well as SB 826, the state’s 2018 gender diversity law for directors.

AB 979 directed companies to build up to at least two or three directors of an underrepresented community, depending on the size of the board. SB 826 also phased in requirements for companies to have at least two or three women directors, in correlation to board size.

California state court judges last year struck down both statutes, but the decisions are on appeal.

Mendez, who issued the recent decision against AB 979 in Alliance, also is handling cases against SB 826 from conservative advocacy group National Center for Public Policy Research and Creighton Meland Jr., a shareholder of California-based OSI Systems Inc.

Mendez has ruled against the National Center for Public Policy Research and Meland on various procedural issues, but they appealed those rulings to the US Court of Appeals for the Ninth Circuit.

SEC-backed rules intended to increase board diversity at companies listed on the Nasdaq Inc. stock exchange also are under review at the US Court of Appeals for the Fifth Circuit.

The Alliance for Fair Board Recruitment and National Center for Public Policy Research are challenging the SEC’s approval of rules for Nasdaq-listed companies to generally have at least one woman and at least one minority or LGBTQ director on their boards—or explain why they don’t.

Despite adverse court rulings against California’s mandates, some are optimistic that companies will understand the business value of having a broader range of views in their leadership. Carolynn Johnson at human capital data platform Fair360 said she hopes companies will voluntarily pick more diverse board members, whether or not it’s mandated through laws like the ones in California.

“This ruling gives companies with headquarters in California, should they accept it, an opportunity to prove that fairness should not have to come with a judicial mandate,” Johnson said. “We in a free market society do not have to wait for legislation to be fair.”