Column: California’s landmark corporate diversity law was overturned. What happens next?

Former State Senator Hannah-Beth Jackson
Former state Sen. Hannah-Beth Jackson sponsored a law requiring more female board members at California companies, which passed in 2018. Her bill and another requiring greater diversity on boards drew legal attacks.
(Al Seib / Los Angeles Times)

Critics of the movement to make corporate boards more diverse by adding women and ethnic minorities to what used to be a white, male sandbox may take it as vindication that a California judge recently overturned as unconstitutional the 2020 state law mandating board diversity.

They’re in for a disappointment.

Although California’s diversity mandate was the first such state law, it was more a bellwether than a driver of the trend. Corporate boards are becoming more diverse, for sound business reasons and because of pressure from investors and other stakeholders.

There is no corporation seeking to avoid compliance. There is no prospective board member seeking an order awarding them a vacant seat.

— Los Angeles Judge Terry Green, referring to California laws mandating diverse corporate boards


Some companies even brag about the inclusiveness of their leadership because they know it makes them look good to investors, workers and customers, and because it’s a sign that they’re serious about finding new ways to improve their bottom line.

Indeed, diversity is increasingly becoming ingrained in corporate policy. But the battle isn’t close to being won. And that makes efforts like California’s more important than ever.

Let’s take a look at the latest legal developments and their context.

California first stepped into the board diversity issue in 2018, when then-Gov. Jerry Brown signed a law requiring public companies incorporated or headquartered in the state to have at least one female board member by the end of 2019.

By the end of last year, California companies with boards of six or more members had to have at least three female directors, and five-member boards had to have at least two women.

The 2018 law, SB 826, sponsored by then-Sen. Hannah-Beth Jackson (D-Santa Barbara), was a response to decades of discrimination against women in corporate board appointments. In 2011, only 21% of U.S. corporate directors were women, according to the executive search firm Spencer Stuart. The ratio among California public companies was even lower — about 15%.


Although the share of women on corporate boards rose to 43% in 2021, according to Spencer Stuart, that’s still below the 51% ratio of women in the general population.

That represents not only a dearth of diverse voices around a board table, but a limitation on women’s ability to network and to recruit other women into corporate management. Only 8% of independent board chairs and 13% of lead or presiding directors in Standard & Poor’s 500 companies are women.

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Merely placing a woman on the board isn’t enough; a study by the Wellesley Centers for Women concluded that no fewer than three women on a board constituted a “critical mass” that would give their voices the weight to really influence policy.

The state Legislature augmented the diversity rules in 2020, mandating that by the end of last year, subject companies had to place at least one member from an “underrepresented community” on their board; by the end of this year, boards with nine or more directors had to have three such members and those with four to nine directors had to have two.

Underrepresented communities included Black, Latino, Asian and Pacific islander, Native American and self-identified gay, lesbian, bisexual or transgender people. Indeed, representation of ethnic minorities is even worse compared with the size of their communities than is the case of women.

Only 21% of all S&P 500 directors are Black, Hispanic, American Indian or multiracial, although those groups together constitute 42% of the U.S. population.


Conservative legal groups took arms against both laws. Lawsuits brought by the Pacific Legal Foundation and Judicial Watch challenged the gender standards. A trial in Los Angeles County Superior Court concluded in February, and a judge’s verdict is expected within weeks. Another lawsuit in federal court is on hold pending the plaintiff’s appeal of an adverse ruling in federal court.

In his April 1 ruling invalidating the 2020 diversity standard, Judge Terry A. Green of Los Angeles County Superior Court suggested that the groups named in the law were somewhat arbitrary, and in any event the state hadn’t sufficiently identified a “compelling state interest” needing to be addressed by giving preference to groups ostensibly suffering discrimination in board appointments.

He labeled the law unconstitutional and found for the plaintiffs in summary judgment. State officials haven’t yet announced any further legal steps.

Whether Green’s ruling will influence his fellow Los Angeles Judge Maureen Duffy-Lewis, who presided over the gender standards trial, is unclear. But it shouldn’t, in Jackson’s view.

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“Because of the differences in these cases,” Jackson told me, “we’re confident that SB 826 will survive challenges in the courts. It’s our intention to continue to fight to end discrimination in California boardrooms.” That’s the way to “assure greater financial success for our shareholders, retirees and the economy of our state and the economy of our nation.”

Judicial Watch, as might be expected, hailed Green’s ruling as a victory for “the core American value of equal protection under the law” and a blow against “the left’s pernicious efforts to undo anti-discrimination protections,” in the words of Tom Fitton, its president.


Let’s just say that if Fitton really believes that the board diversity movement is a product of a campaign by the left to promote discrimination, he’s not living in the real world. Pressure on public companies to diversify their boards isn’t the product of wild-eyed leftists, but institutional investors and financial regulators, who are traditionally bulwarks of conservatism.

Goldman Sachs & Co., for example, has said that it won’t bring a company public unless it has at least two board members who are women or members of underrepresented communities. Nasdaq requires its listed companies to have at least one board member from an underrepresented community by Aug. 7, 2023, and two by Aug. 6, 2026, or explain in writing why it hasn’t met the standard.

Big institutional investors such as BlackRock have signaled that they expect their portfolio companies to meet board diversity standards, and retail investors have shown increasing interest in more inclusive corporate governance. That’s a component of investor interest in so-called ESG issues, standing for “environmental, social and governance” goals.

Investors have concluded that shares of companies adhering to diversity and other ESG goals will do better as a result.

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Amid the pandemic-induced stock market volatility in 2020 and 2021, “you saw 30% outflows out of your standard equity [mutual] funds,” but “5% inflows into ESG-driven funds,” New York Stock Exchange President Lynn Martin said during a recent Bloomberg conference. “It really put a finer point on the returns that can be driven by portfolios that include ESG risk metrics.”

It may be tempting to think that this makes laws like California’s unnecessary, but that would be a mistake. “Today, shareholders and consumers play a more significant, more visible role in corporate board decisions,” says Heather Spilsbury, chief operating officer of the advocacy group 50/50 Women on Boards. “Coupled with the recent awakening of the business and human imperative for diversity and inclusion at the highest levels of leadership and beyond, perhaps we would not need to pass a law. However, SB 826 has been part of this awakening, and it’s a powerful reminder to business and society that we aren’t yet near gender-balance let alone diversity on boards.”


Market research lends credence to the idea that greater diversity in corporate leadership contributes to superior business performance.

“Over four- and five-year holding periods, the less diverse boards underperformed the Russell 3000 by about a quarter of one percent,” according to a study by Institutional Shareholder Services, an advisory firm for institutional investors. (The Russell 3000 is a broad stock market index.)

Investors with large holdings in nondiverse companies, ISS found, would have “lost out on 1.27% average additional returns annually over a four-year period,” compared with a portfolio of companies with a strong commitment to board diversity.

ISS says its ESG US Diversity Index, composed of companies with “broad ethnic and gender representation among directors” and top officers, had the best record in 2021 of all its ESG indexes, beating its benchmark index by 8.4%.

It may be hard to pinpoint the specific reasons diversity in corporate boards correlates with higher profits and share gains. BlackRock finds the answer partly in board dynamics — diversity counteracts hidebound or narrow-minded decision making, the firm said, so it “not only contributes to more robust discussions, it also is likely to lead to more innovative and resilient decisions.”

It’s certainly true that meeting diversity standards doesn’t guarantee that a board will be effective. The 10-member board of Meta Platforms (formerly Facebook), includes four women and three members the company says meet the state’s diversity rule.


But does anyone really believe the board has the ability to impose its will on Mark Zuckerberg, its chair, who controlled nearly 58% of its stockholder votes as of last March? There certainly are no indications that anyone else has policymaking authority at Meta, to the company’s disadvantage.

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What’s truly important is that a majority of the board be independent; that’s a standard that doesn’t necessarily correspond to its gender or ethnic composition. But it’s all that can keep the leaders of some companies from lining their own pockets.

A notable example was the Tesla board’s rubber-stamping of the company’s 2016 merger with SolarCity, another venture of its chief executive, Elon Musk. That deal transferred the latter company’s considerable financial distress to Tesla shareholders, but it was waved through by a seven-member board that included Musk and four of his cronies.

The course of the lawsuits challenging the California laws suggests that corporate America is essentially in agreement with the goal of board diversity. Neither court challenge is supported by major corporations claiming that their rights were breached.

Among the plaintiffs in the board diversity case, “there is no corporation seeking to avoid compliance,” Green observed. “There is no prospective board member seeking an order awarding them a vacant seat.”

Instead, Judicial Watch brought its lawsuits challenging both laws in the name of three taxpayers expressing discontent that the laws required state officials to spend money enforcing the laws by actions such as preparing an annual report and designing reporting forms.


The plaintiff in the federal lawsuit challenging the gender standard, Creighton Meland Jr., is an Illinois-based shareholder of OSI Systems, a medium-sized Los Angeles electronics company that added a woman to its seven-member board in 2019. Meland asserts that the California law forces him to discriminate in favor of women in his shareholder votes for board members.

Green’s ruling invalidating the California law is noteworthy in part because he fully accepted the law’s rationale.

“A homogenous board is vulnerable to stagnant thinking and common assumptions; it is also less flexible in responding to challenges,” he wrote. “This results in poorer business practices, less innovation, and ultimately less profit. A heterogeneous board avoids these pitfalls and generally leads to a healthier business that makes more money.”

The lack of diversity on corporate boards, he added, is “the natural result” of the tendency in any group — such as the white males who constitute the dominant species in corporate governance — to exclude “people who look and act differently.”

Unfortunately for the principle of diversity, he wrote, the state Constitution doesn’t allow the Legislature to mandate the appointment of heterogeneous boards as a remedy.

Finding a remedy is imperative, however.

The appointment of women to corporate boards is still treated as a landmark, in the same sense that the elevation of Judge Ketanji Brown Jackson to the U.S. Supreme Court as its first Black female justice is notable because of her race and gender.


Only when these actions are no longer the object of special attention will true diversity be achieved. And we’re not yet close to that point.