California Law Mandating Diversity of Corporate Boards Ruled Unconstitutional

On April 1, 2022, Judge Terry Green, a California Superior Court judge ruled a California law passed in 2020 to be unconstitutional. The law, Assembly Bill 979 or AB 979, required corporate boards of publicly traded companies headquartered in California to have a member from an "underrepresented community,” including individuals of different races, ethnic groups, or those who identify as LGBTQ.

The measure would have required at least two minority directors by the end of 2022 on boards with four to nine directors. Three directors were required for boards with nine or more directors.

Businesses that failed to comply with the measure would face fines of $100,000 for first violations and $300,000 for repeated violations. According to NPR, firms that did not comply could face fines of $100,000 for the first violation and $300,000 for repeated violations.

A "Diversity on Boards" report issued in March by California’s Secretary of State Shirley Weber found that about 300 out of some 700 corporations had complied. However, half of the corporations did not file the required disclosure statement.

According to a report from The New York Times, Judge Green wrote in his summary judgment that the law improperly mandated heterogeneous boards and must protect the right of individuals to equal treatment.

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

Why California AB 979 Matters

California may be the first state to pass laws requiring diversity at the board of director level, but many states require corporations to provide diversity data as part of their annual reporting and/or actively encourage businesses to embrace diversity and inclusion at all levels.

The state of California argued that the law should not be interpreted as a way to discriminate against any individuals currently on leadership boards; instead, it should be interpreted as a way to expand executive leadership committees. The state also argued in favor of the law, saying it was necessary “to reverse a culture of discrimination that favored me and was only put in place after other measures failed.”  

Opponents to the bill, however, argued it could be used to discriminate against qualified board members if they did not meet a specific racial or ethnic criterion.

What’s Next for Diverse Board Leadership?

Although there has been some backlash from a few businesses, many organizations are implementing changes at the highest levels of leadership. These changes have been encouraged by the government and from an internal drive for more diverse voices. Many organizations believe–and research reflects–that more diversity in background, experiences, and perspectives can lead to better decisions.

Regardless of the future of AB 979, employers interested in creating quality leadership teams should not abandon their diversity, equity, and inclusion initiatives. Businesses should always select the most qualified board candidates, regardless of their race, gender, or ethnicity. But, at the same time, employers and hiring managers must recognize that diverse opinions based on different experiences and perspectives will help prevent blind spots.

If anything, the ruling underscores the need for companies to create opportunities for employees of all backgrounds organically.

While companies have made strides in creating more inclusive work environments, 75% of employees still feel like they aren’t reaping the benefits from diversity, equity, and inclusion programs.

If you’re an employer or HR professional, check out our complete guide to the best practices to support DEI in the workplace. This information can help you strategically build a more diverse and inclusive organization.  

Looking for more exclusive content? Check out “The Pros and Cons of Unlimited PTO” and “By the Numbers: DEI and the Hybrid Workplace.”

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