Court Overturns California Law Requiring Women on Boards of Directors

​A recent ruling in Los Angeles Superior Court overturned California's law requiring companies to include women on their boards of directors.

The court found that the state's gender diversity rule violates the equal protection clause of the California Constitution. The court's decision prevents the law from being enforced.

The court case is likely to go to appeal. "The Secretary of State has indicated the state will appeal the order, which will then put the case in the California Court of Appeals," said Ian Michalak, a Los Angeles-based attorney with SheppardMullin.

Women and racial minorities tend to be underrepresented on corporate boards of directors, not just in California but across the country. The California law sought to increase diversity on corporate boards of directors generally.

In 2020, 28 percent of corporate board members in the U.S. were women and 66 percent of corporate boards had at least three or more women, according to Catalyst, a New York City-based nonprofit focused on inclusion of women in business.

California's SB 826, now blocked, requires publicly listed corporations headquartered in California to have at least two female directors if the board is made up of five people or less, or at least three female directors if the board is made up of at least six people.

Under the law, noncompliance could result in a fine of $100,000 for the first violation and $300,000 for each later violation, plus another $100,000 fine for failing to provide required information to the state. No fines have been levied yet, and no state regulations have been implemented.

No Compelling Government Interest

After California passed the law in 2018, taxpayers sued, arguing that it violated the state's equal protection law by creating a gender-based quota system that would impact men and women unequally.

California argued that eliminating and remedying discrimination in selecting boards of directors is a compelling state interest. It also claimed that the gender requirement would benefit the public and the state economy.

To show that a law remedies past discrimination, the defendant must show "a purposeful or intentional, unlawful discrimination," not general discrimination in a region or industry, noted Virginia Milstead, a Los Angeles-based attorney with Skadden. The court found the state did not meet that standard.

The court also found that the California Legislature failed to consider revising the existing discrimination laws or passing more-narrow legislation to stop discrimination in the board selection process.

Nasdaq, Investors Have Interest in Diversity

Nasdaq-listed companies are required to disclose their diversity statistics for boards of directors, and many companies are including their board member diversity in the proxy statements filed for their 2022 annual meetings. Nasdaq could delist a company that fails to comply with its diversity rule.

Beyond the legal compliance, companies need to be concerned about their public reputation and what their investors expect to see.

"Institutional investors have indicated that board diversity is a topic that they prioritize when engaging with companies, so companies should understand the board diversity policies of their key investors and be prepared to discuss any deficiencies in board diversity, regardless of the court's recent decision," said David Bell, a Mountain View, Calif.-based attorney with Fenwick. "We expect that the benchmarks established in SB 826 will continue to be influential in the expectations of stakeholders, even if they are ultimately struck down after any final appeals."

Leah Shepherd is senior legal editor at SHRM.