On the heels of the April 1, 2022 court ruling voiding the California Vanguard law demanding underrepresented community mandates for corporate boards, another trial court dealt another blow to the state’s corporate governance diversity efforts. On May 13, 2022, a trial court issued a verdict discovery female representation on the board straight similarly violates California’s Equal Protection Clause.
Now that both statutes have been struck down – AB 979 (members of underrepresented communities) on summary judgment and SB 826 (women) following a trial on the merits – boards and stakeholders and communities that these councils serve are asking what’s next for statutory governance initiatives?
California Statutory Governance Initiatives
In 2018, California enacted a mandate for female representation on California-based public company boards. Two years later, the California legislature expanded the mandate for women’s representation on the board of directors to require that a specified number of board seats be allocated to members of underrepresented communities specified by law. Immediately after the two laws were enacted, taxpayers filed separate lawsuits claiming that the laws violated the Equal Protection Clause of the California Constitution.
The First Legal Acts – Cancellation of the Underrepresented Community Act
Following a hearing on the taxpayer’s motion for summary judgment, Los Angeles Superior Court Judge Terry Green declared AB 979 unconstitutional and prohibits the state from enforcing it. The Court found that the state was unable to demonstrate that the racial and other classifications of AB 979 were sufficiently tailored to address the specifically identified harms that the state had a compelling interest in repairing. The Court found that the state failed to consider “racially neutral” measures to address the discrimination that the state says occurs on corporate boardrooms. Although the Court did not cite Nasdaq’s diversity initiative which requires its listed companies to disclose the gender and racial makeup of their boards of directors, the Court did refer to disclosure as an avenue that the State could have considered during the assessment legal remedies to remedy the under-representation of the community on the boards of directors. . Judge Green has yet to issue a final judgment, and the state has not said whether it will appeal the decision.
Second court overturns gender warrant after trial
While the decision on AB 979 was made on a motion for summary judgment, the separate legal challenge to SB 826, the state’s gender mandate, was resolved with a post-trial verdict. Similar to the AB 979 decision, Los Angeles Superior Court Judge Maureen Duffy-Lewis found that the state had failed to demonstrate that the law was narrowly tailored to meet the compelling interests of the state, noting that there was no compelling governmental interest in addressing widespread non-specific societal discrimination. The Court concluded that the statutory mandate for female representation on the board of directors was not a remedy intended to restore the victims of specific, deliberate or intentional, unlawful discrimination to the positions they would have occupied in the absence of such illegal actions. The Court also rejected evidence that there was a link between female representation on boards and improved company performance. Instead, the Court found that the legislative purpose in enacting SB 826 was to create gender parity, not to remedy past discrimination.
Similar to the AB 979 decision – but oddly without citing Judge Green’s decision striking down AB 979 – Judge Duffy-Lewis rejected evidence of “like stereotyping, affinity bias, like picking like and l ‘gender matching’ as justification for the law. She also did not find these issues unique or associated with California-based public companies. Similarly, and again similarly to the AB 979 decision, the Court found significant the lack of compelling evidence that California-based public companies had engaged in intentional and willful unlawful discrimination in the past when board selection process. Justice Duffy-Lewis concluded (similar to Justice Green’s decision) that the state had failed to meet its burden of demonstrating that the legislature had considered a gender-neutral alternative to remedy the deliberate discrimination in the selection process for the advice. Justice Duffy-Lewis did not offer possible statutory alternatives in the same way that Justice Green did in his decision striking down AB 979. But the Court unambiguously ordered the application of the law qu she ruled against the Equal Protection Clause of the California Constitution. The state has not yet indicated whether it intends to appeal the verdict.
Both statutory warrants are now void, and California-based public companies are not obligated to comply with them. For Nasdaq issuers, however, on or after August 8, 2022 (or the date the issuer’s 2022 proxy is filed, whichever is later), an initial board matrix must be filed. reflecting issuer board diversity statistics using a Nasdaq model. The rule also requires (after a transition period) issuers to explain whether or not they have at least two different directors and if not, why. This declaration required by the issuer is not a mandate. Issuers that fail to provide or meet stated diversity goals may choose to explain missed goals in a proxy statement or through other public disclosures. The Nasdaq rule is the subject of an ongoing Fifth Circuit lawsuit challenging the SEC’s legal authority to approve the rule’s implementation (with oral argument currently tentatively scheduled for the same week the rule enters in force).
In addition to the Nasdaq initiative, other states such as Washington, Illinois and New York adopted a law on representation on the board of directors. Although the Washington state law most closely resembles the California model in that it requires that the board be made up of a certain percentage of female representation, the law differs significantly in that there are no penalties. is imposed for breaches of compliance. In reality. the Washington law works like the Nasdaq initiative in requiring a transparent report in the form of board diversity discussion and analysis that is delivered to shareholders and that requires detail regarding the representation of various nominees for election as directors and other board refresher disclosures. It would seem that this model is more likely to withstand a legal challenge: instead of creating suspect classifications that face difficult constitutional challenges, the transparent reporting model is both administrative and informative – two components that meet the requirements responsibility of shareholders, in the same way that financial reporting keeps stakeholders informed whether or not a company is meeting its financial and other objectives.
Legislative initiatives can move the needle toward inclusiveness, but they should not be the primary drivers of board diversity. The California experience shows how legal challenges can derail important initiatives. Boards should not base inclusiveness on statutory mandates. ESG stakeholders and initiatives demand meaningful process-driven governance to sit on a board that not only reflects the expertise the company needs, but a fuller representation of the community the company serves .
©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.National Law Review, Volume XII, Number 137