California, one of the first states to require companies to include women on their boards of directors, may see its ability to enforce director diversity laws upended depending on the outcome of multiple lawsuits.
One of those lawsuits is a complaint from three California taxpayers over enforcement of SB 826, which requires public companies with principal executive offices in the state to incrementally increase the number of women on their boards. It will head to trial on Oct. 25 after Los Angeles Superior Court Judge Maureen Duffy-Lewis denied each side’s motion for summary judgment.
SB 826 was signed into law in 2018 by then-Democratic Gov. Jerry Brown. By the end of 2021, companies must have at least two female directors if they have five people on a board, or three women if the corporation has six or more directors.
Robin Crest, Earl De Vries and Judy De Vries, who are represented by conservative activist group Judicial Watch, filed their complaint in 2019. They claim that the law’s mandate is an unconstitutional gender-based quota and that the secretary of state’s office should not use taxpayers’ money to implement the statute.
“Corporations are prohibited from placing someone on a board because of their sex, and there is no evidence that there’s improper discrimination on boards, or illegal discrimination on boards that require government intervention,” Judicial Watch President Tom Fitton said in an interview. “And the intervention is unlawful.”
Jenna Dresner, a spokeswoman for Secretary of State Shirley Webber, said the office does not comment on pending litigation.
Last year, Democratic Gov. Gavin Newsom signed Assembly Bill 979. It builds off of SB 826 by requiring corporations to have at least one person from an underrepresented background — such as a person of color or a member of the LGBTQ+ community — on their board by the end of this year. By the end of 2022, that number increases to two for boards with five to eight members and three for boards with at least nine people.
Legislators on the California State Assembly’s Select Committee on Corporate Board and California Workforce Diversity are considering how else they can support diversity and inclusion efforts across boardrooms as corporations face statutory deadlines for SB 826 and AB 979, including expanding those mandates or pursuing additional legislation.
“My goal was to start a conversation about diversity and create a matrix that sets a floor for diversity, not a ceiling,” co-chair Chris Holden, a Democrat who spearheaded AB 979, said during a committee hearing on Oct. 1. “Our efforts through AB 979 and SB 826 here in California have been crucial to supporting diversity and inclusion policies on a national scale.”
Washington state last year adopted a similar mandate to require public companies to either have at least a quarter of their board of directors be women by the start of 2022 or comply with new board diversity disclosure requirements. Ten other states have passed similar rules. The Securities and Exchange Commission in August approved Nasdaq Inc.’s requirement for listed companies to have at least one female director and at least one person from an underrepresented minority or LGBTQ+ group, or explain why they don’t.
Alongside the government action, institutional investors have pressured companies to diversify boards and disclose their efforts. More organizations are pushing asset managers and funds to think of board diversity and other environmental, social and governance issues as material factors to consider in investment decisions.
Experts say the legislation and shareholder pressure are adding to national momentum to transform corporate boards to reflect the general population. Prior to the mandates’ implementation, the number of new female directors added to California public company boards rose from 87 in 2016 to 121 in 2017 and 176 in 2018, according to the California Partners Project. In 2019, when SB 826 required at least one female director on a company’s board, 346 women were added to California companies’ boards of directors.
The laws and legal challenges underscore