California Corporate Diversity Law Ruled Unconstitutional

In a disappointing blow to all DEI professionals, a California law known as AB 979 has been ruled unconstitutional by a judge in the state.

The law was designed to increase representation of underrepresented communities (including individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender).

In announcing his decision to block the state law from legally continuing, Los Angeles Superior Court Judge Terry Green said that even though diverse boards may be beneficial to corporations and good for business, the state has no business trying to mandate this diversity into existence and should have sought out other means to try and achieve their goals, including mandatory disclosure requests.

“If demographically homogeneous boards are a problem, then heterogenous boards are the immediate and obvious solution,” Green wrote in his decision. “But that doesn’t mean the Legislature can skip directly to mandating heterogenous boards.”

In other words: even if we know lack of diversity is a problem, the state can’t mandate rules to address that issue. But how did we get to this point?

How AB 979 Came to Be

On September 30, 2020, California Gov. Gavin Newsom signed Assembly Bill (AB) 979 into state law. Controversial even at the time between people of varying political beliefs, the bill stated that all publicly held corporations headquartered within the state would be required to diversify their boards of directors with individuals from underrepresented communities by December 31, 2021.

Specifically, the law required that corporations with five directors must have at least two female directors and those with six or more directors must have at least three directors who were women.

The bill also stated that, by the end of the 2021 calendar year, these same corporations must have one director from an underrepresented community.

With the ongoing COVID-19 pandemic at its peak at the time, the California law went into effect, and the country still reeling from the tragic murder of George Floyd, the push for change in the country at the time the bill was approved was at an all-time high. While signing the bill into law, Gov. Newsom said it was imperative for minorities to have a voice on the boards of powerful corporations — and that’s what he hoped this bill could help to bring about.

“When we talk about racial justice,” he said, “we talk about empowerment, we talk about power, and we need to talk about seats at the table.”

Inside the Case and Verdict Against the Law

On the same day that Gov. Newsom signed AB 979 into law, the conservative activist group Judicial Watch filed a lawsuit claiming the state’s newly enacted corporate diversity law was unconstitutional and violated the idea of equal protection for all under federal law. The group also claimed that the law violated California’s Constitution because it required corporations to have a specific number of directors based upon race, ethnicity, sexual preferences and transgender status.

In counter filings, the Associated Press wrote that in responding to the lawsuit, lawyers for the State of California also challenged the Plaintiffs’ legal standing in the case and argued that AB 979 did not violate the California Constitution and that the measure didn’t “discriminate against, or grant preferential treatment to, any individual or group of the basis of race, sex, color, ethnicity, national origin of public employment, public education, or public contracting.”

While the new law was being fought over in the courts, California businesses quickly began working to meet its requirements. A report issued at the start of 2022 by the California secretary of state’s office revealed that approximately 42% of the more than 700-plus publicly held corporations within the state were already in compliance with the law’s requirements.

Still, despite the state’s arguments and the impressive process the law had already helped to bring about, Judge Green ultimately decided the law did go against the state’s constitution. In a 24-page decision, he wrote that California lawmakers did not provide enough statistics about discrimination and its effects to support their position, or to illustrate why the law was necessary or beneficial. He also said that they did not explore alternative “identity-neutral” methods for selecting board members such as requiring board members to be selected publicly.

Judicial Watch President Tom Fitton said in a statement that the decision was “one of the most important civil rights decisions in recent memory.” He added that the California court system had “declared unconstitutional one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination.”

Also Under Attack

While representatives for California have yet to publicly state whether they will appeal Judge Green’s decision, or what they hope will happen next with AB 979, the law isn’t the only corporate diversity measure in the state currently being litigated against.

In 2018, then-California Gov. Jerry Brown approved another Senate bill, AB 826, which also impacted board diversity for California-based corporations. This law required that all publicly held corporations in the state bolster female representation on their board of directors and required that each of these corporations appoint at least one board member who identified as a woman by the end of 2019.

Expanding on that, the law then required that by the end of 2022, boards with five directors must have at least two women while six directors or more must have at least three members who are women. Fines for failing to comply with the mandate were hefty: $100,000 for first-time violations and $300,000 for subsequent violations.

Watch also has a lawsuit pending against AB 826 right now and is hoping that it too will successfully be overturned. However, even though it has existed for just a couple of years, and despite that pending lawsuit, AB 826 does appear to be working. The nonprofit group Cal Partners Project has reported that female representation on boards has increased by more than 14% in the last two years, rising from 15.5% to 29.6%, largely as a result of that law alone.

What Happens Next?

Even with diversity initiatives regularly under attack, DEI supporters know there will always be a need for diversity, equity, inclusion and representation, and one rule being overturned will not stop corporations from focusing on this as well as sustainability initiatives that plug into their ESG strategies.

In the short term, industry experts believe Judge Green’s ruling will likely cause some turmoil in corporate boardrooms, according to corporate news site Chief Executive.

Many companies in the state have started following the law and adding women and underrepresented groups to their corporate boards, so Judge Green saying the law is illegal could create negative feelings between board members about the need for diversity.

Chief Executive added that this could lead to “heated debates over whether to slow or discontinue diversity efforts” started in the last few years, but board and management teams will likely come together to successfully confirm a company’s ultimate position on diversity and inclusion and their overall importance to the success of the business.