In the latest legal blow to efforts to mandate diversity in corporate boardrooms, a federal judge has struck down a California law that required banks and other companies to appoint a minimum number of board members from underrepresented communities.
The three-year-old law, which applied to corporations headquartered in California, imposed an unconstitutional racial quota, a judge in the Eastern District of California ruled this week.
The law forced “a certain fixed number of board positions to be reserved for certain minority groups” in violation of the Equal Protection Clause of the U.S. Constitution, wrote Senior U.S. District Judge John Mendez.
The decision rolls back a law intended to address corporate discrimination against underrepresented communities including Black, Hispanic, Asian, Pacific Islander and indigenous groups, as well as individuals who identify as LGBTQ+.
Enacted in May 2020, the law required California-based corporations to appoint between one and three minority board members, depending on the size of the company’s board of directors. Fines for noncompliance ranged from $100,000 to $300,000.
The law was challenged in court by the Alliance for Fair Board Recruitment, a nonprofit group that’s dedicated to corporate board recruitment practices “without regard to race, ethnicity, sex and sexual identity,” according to its website.
Attempts to “semantically cast” the law as “flexible” did not overcome the court’s finding that the law established a racial quota, Mendez wrote in the ruling.
The California Secretary of State’s office and lawyers representing the Alliance for Fair Board Recruitment did not respond Friday to requests for comment.
The 2020 law has been the subject of multiple court challenges. Last year, a state court judge ruled that the law violated the Equal Protection Clause of California’s Constitution. Mendez initially granted a stay in the federal suit pending an appeal of the state court decision, but later lifted the stay.
California courts have also blocked a 2018 state law that would have required companies based in the state to add more women to their boards.
State laws on board diversity have also been enacted in Illinois, Maryland and New York. And a federal appeals court is currently reviewing the Securities and Exchange Commission’s approval of corporate board diversity rules devised by the Nasdaq stock exchange.
Lance Christensen, vice president for education policy and government affairs at the California Policy Center, a free-markets group, said courts are recognizing that California’s legislature is “overstepping its boundaries on issues that are specific to corporate governance.”
“Any time the state steps in to control, constrain or redirect a business’s purpose, mindset and mission, [it] can have a negative impact on the economy in California,” Christensen said in an interview.