In what amounts to state-orchestrated discrimination, California is using bizarre grounds to mandate racial and gender diversity on corporate boards.
The trial commenced this week in Crest v. Padilla, a lawsuit filed by Judicial Watch to enjoin California from requiring that publicly held corporations headquartered in California include at least one director who “self-identifies” as a woman. Pursuant to California’s SB 826, by the end of 2021, up to three self-identified women will be required, depending on the size of the board.
In September 2020, two years after enacting SB 826, California went even further, when Governor Newsom signed AB 979 into law. That law requires that California-headquartered public companies also include at least one director from an “underrepresented community,” and by the end of 2022, up to three such directors, depending on the size of the board. The statute defines a “director from an underrepresented community” to be an individual who “self‑identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self‑identifies as gay, lesbian, bisexual, or transgender.” Arabs, Armenians, Persians, and Turks, who often are viewed as non-European whites, are excluded from the list of favored minority groups.
A small board could appoint a Rachel Dolezal who self-identifies as an African-American woman to satisfy both requirements. Or, if the board can find biological white males who identify as Alaskan Natives or use the pronoun “she,” they (meaning all of them, not “they” in the royal or gender fluid sense) could satisfy both statutes with a board consisting only of confused white males.
California’s corporations are rejecting this social engineering. In March 2021, the California secretary of state reported that of 647 companies to which SB 826 applies, only 311 reported compliance. At least 50 companies avoided compliance with both statutes by leaving the state or going private.*
Judicial Watch has also sued to enjoin AB 979. That action is in its discovery phase. Both Judicial Watch actions were filed in state court and assert that California laws pertaining to race, ethnicity, sexual preference, and transgender status are presumptively invalid, and taxpayer-funded resources may not be used to implement such laws absent a compelling government interest. Judicial Watch alleges that the California legislature knew these bills to be unlawful when enacted and that the laws cannot pass strict scrutiny.
Though a Judicial Watch victory on SB 826 likely would presage a victory in its similar action against AB 979, three federal lawsuits have potentially greater national implications. Merland v. Weber and Alliance for Fair Board Recruitment (AFBR) v. Weber allege that both statutes violate the 14th Amendment and federal civil-rights laws. The National Center for Public Policy Research last week filed a complaint with the novel premise that the California statutes violate shareholder rights to vote for board nominees based on merit, free of government-imposed race, sex, and sexual orientation quotas.
When it passed SB 826, California’s legislature did not claim that California companies discriminate against female candidates for director. Instead, the legislature cited reports that gender diversity may improve a corporation’s financial performance. For AB 979, the legislature cited reports suggesting that racial diversity among executives might enhance earnings. The legislature did not cite any evidence that racial diversity on corporate boards improves performance, and academic studies have failed to establish that link.All Our Opinion in Your Inbox
The AFBR lawsuit alleges that the reports supporting AB 826 were not peer reviewed, or the result of sound statistical analysis. By contrast, numerous peer-reviewed studies analyzed by Jonathan Klick of the American Enterprise Institute have found no effect, or even a negative effect, from increased board diversity. And a study published last week found “a robust and significantly negative stock market reaction” to California’s gender quota mandate.
Beyond the lack of factual evidence, it is remarkable that progressives now identify profit as a “compelling interest” that overrides the heavy burden of using race, ethnicity or gender as the basis for state-orchestrated discrimination. And, despite the legislature’s rationale for the benefits of diversity, both statutes permit a board to exclude all whites and men. The hypocrisy is stunning.
California is not alone. By 2020, a dozen states had enacted or were poised to enact requirements to enhance diversity on boards, though most of the proposals stop at disclosure. Superficially, that is the approach taken by Nasdaq, which recently received SEC approval to require companies trading on Nasdaq to publicly disclose board diversity statistics and explain any failure to have at least two “diverse” directors, including one who self-identifies as female and one who self-identifies as either an “underrepresented minority” or LGTBQ+.
It has been axiomatic that the purpose of a board is to maximize shareholder value. Doing so requires experience and acumen. The Sarbanes–Oxley Act and the Dodd–Frank Act place onerous obligations on directors, particularly independent directors and members of the audit committee. The SEC has long required public companies to disclose biographical information about each director. In 2009, the SEC also required companies to explain “the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director.”
Until fairly recently, a hugely disproportionate share of individuals with the necessary experience and skills to serve as directors were white men. But, by 2018, 25 percent of Fortune 100 board seats were held by women and 19.5 percent by minorities. Without government mandates, the boards of public companies have continued to become more diverse. The percentage of Fortune 500 boards with greater than 40 percent diversity has more than doubled in the last ten years.
Not only is this progress insufficient for progressives, but they reject the premise that corporations should maximize shareholder value, or that directors should be selected based on talent. Rather, their priority is “equity,” meaning that jobs are awarded to achieve parity with each group’s percentage in the population, regardless of qualifications.
It is difficult to see how the California laws comply with the Constitution, or federal law.
Racial balancing can never satisfy the compelling-interest requirement for racial and gender preferences. Chief Justice John Roberts succinctly reiterated this in Parents Involved in Community Schools v. Seattle School District No. 1 (2007):
Accepting racial balancing as a compelling state interest would justify the imposition of racial proportionality throughout American society, contrary to our repeated recognition that at the heart of the Constitution’s guarantee of equal protection lies the simple command that the Government must treat citizens as individuals, not as simply components of a racial, religious, sexual or national class.
The U.S. Supreme Court also has held that “racial classifications are antithetical to the Fourteenth Amendment, whose ‘central purpose’ was ‘to eliminate racial discrimination emanating from official sources in the States’” (Shaw v. Hunt , quoting McLaughlin v. Florida ). More than once the Court observed that “distinctions between citizens solely because of their ancestry are by their very nature odious to a free people” (e.g., Rice v. Cayetano  and Hirabayashi v. United States ).
Though the criteria for gender is somewhat more flexible, as Justice Ruth Bader Ginsburg explained in United States v. Virginia (1996), the “inherent differences between men and women” cannot justify the “denigration of the members of either sex,” support the imposition of “artificial constraints on an individual’s opportunity,” or permit government to “rely on overbroad generalizations about the different talents, capacities, or preferences of males and females.” Last year, in Bostock v. Clayton County, the Supreme Court extended the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 to include employment discrimination on the basis of sexual orientation and transgender status.
The Supreme Court has applied prohibitions on state action to a private company when the state requires the unlawful act. In California, the improper acts are specifically mandated by the state, at risk of escalating fines.
The destructive fixation on race and gender has had profoundly negative effects on education, the military, government, science, and other sectors. With the quality of corporate boards at America’s largest corporations now under siege, the outcome will not be any better.