California Court Invalidates Second Board Diversity Law

A California law mandating the appointment of women on corporate boards was struck down in court, but not before having an impact as the measure appears to have encouraged female board representation. Meanwhile, additional states, shareholders, and institutional investors continue to push board diversity by other means.

Despite imposing steep fines for non-compliance, the law was “essentially voluntary,” argued a California Official testifying during the trial. Deputy Attorney General Ashante Norton said, “The secretary of state has no plans to draft regulations or implement fines in furtherance of the act.” The law required companies to be in full compliance by the end of 2021. 

Yet female representation on corporate boards in California more than doubled since the law’s enactment in 2018, and all-male boards fell from more than 30% to less than 2%. 

Last month, a separate California law requiring public companies in the state to demonstrate ethnic board diversity was struck down by a Los Angeles County judge, who found that the law violated the state constitution by mandating quotas. The law, enacted in 2020, reportedly led to a significant increase in minority-held board seats (from 13.9% to 22.6%).

Pressure to achieve diversity on corporate boards growing: State Street Global Advisors, BlackRock Inc., and The Vanguard Group Inc. updated their proxy voting policies this year with board diversity items, including disclosure of corporate board diversity representation. Meanwhile, ISS and Glass, Lewis & Co., will recommend that clients vote against corporate board directors not doing enough to increase board diversity. And, famously, Nasdaq received approval by the SEC to require public companies to either have one diverse board member or explain why their board has no diverse representation. 

A dozen states and counting have passed or considered board diversity legislation. These laws all require reporting of board diversity metrics—not mandating board diversity like the California law. 

Outlook: The apparent path for policies pushing board diversity runs through board diversity disclosure requirements. However, the trend is largely driven by other factors, including pressure by stakeholders, institutional investors—and efforts by public companies themselves.