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Judge Says California law requiring diverse company boards is unconstitutional


Illustration by Amy Zhao


By Emma Lin, Kelly Liu, and Ananya Biswas

 

Recently, a Los Angeles judge ruled that a California law requiring diverse company boards was unconstitutional because it required corporate boards to have an “underrepresented member” in the company, and, as Judge Terry Green argued, “If demographically homogeneous boards are a problem, then heterogenous boards are the immediate and obvious solution. But that doesn’t mean the Legislature can skip directly to mandating heterogenous boards”. This recent ruling poses a serious question: What is truly enforcing equality, democracy, and freedom, especially in a time where we are trying to correct past discriminations?


The law (Assembly Bill No. 979) hoped to address discrimination and lack of opportunities for underrepresented groups. One such example is that people from underrepresented communities (Black/African American, Latino/Hispanic, Asian, Pacific Islander, Native American, Alaskan Native, Hawaiian Native, or gay, lesbian, bisexual or transgender) rarely end up as CEOs or on the executive boards of companies. The law “...seeks to remedy one specific discriminatory outcome” which is that people from these communities rarely end up on executive boards “seeks to remedy one specific discriminatory outcome”, which is that people from these communities rarely end up on executive boards.


The law directly affects the people who could get onto the board because of it, the people who couldn’t, the families of both, and potentially some of the general public if any of those who got a chance made a significant change to the company which otherwise would not have been made. Indirectly, it affects children of color who don’t have representation, and, as teenager Dazhane Brown states, “If you see people who look like you and act like you and speak like you and come from the same place you come from… it’s an inspiration”.


The problem is worth addressing for numerous reasons. Diverse boards would help the communities and families of those picked, and it might be that the subconscious biases had previously led to people with less qualification/talent being picked instead, in which case the company would also benefit. In minority groups, others in different positions in the company could feel more empowered and kids and other adults might be encouraged to pursue such jobs/positions of leadership from seeing that others like them were able to do it. Within the company itself, it might improve the quality of leadership because of the new talent.


However, it could theoretically make the leadership worse if there was already no candidates or if the people were elected solely on the basis of the law with no other consideration. It would also hopefully improve company ethics as it would lead the leadership of the company to see the ability of people in minority groups and focus more on ability in general, rather than race, sexual orientation, or other determinations that actually have nothing related to ability. Despite this, it might unintentionally lead to resentment to those who were appointed due to being a requirement to include people of minority groups, and it might become harder for those people.


The law makes it illegal to not have some members of a minority group on a publicly owned (has stockholders in a major US stock exchange) and California-based company. Depending on the size of the board, there must be at least 1 member of the board from a minority group at the end of 2021 and 1-3 members on the board from these minority groups, depending on the size of the board, by 2022.


The law seeks to specifically address the problem by ensuring more people from minority groups get opportunities to enter positions of power (i.e. the board) in the workplace. However, it doesn’t address the problem in its entirety, as it doesn’t address discrimination at lower levels or non-workplace situations, and there’s no guarantee employers won’t discriminate on who to choose for the role, even within the minority groups. Additionally, the law is about this specific situation, and doesn’t state that the best people from the available pool would be picked, or that they would be paid the same amount, and it doesn’t guarantee there won’t still be discrimination.


Governor Newsom approved the bill for this law alongside other bills on racial/criminal justice, reform, rental housing, and cannabis. The reason why the bill was seen as needed was because “the bill cited LCDA’s recent study of all 662 California-based public companies which found that 35%, or 233 of these corporations, had all white boards of directors; and, 87%, or 571 California public companies had no Latino representation on their boards”.


Judge Terry Green’s reasoning for ruling the law as unconstitutional was that "equal treatment and opportunity, of and for all individuals regardless of how they look or identify, is one of this state's basic commitments. Sometimes and in some places, the citizens of this state will not live up to that ideal. But the thing that caused the problem is not always the right tool to fix the problem. Only in very particular cases should discrimination be remedied by more discrimination, and that should only happen after obvious alternative measures have been tried". The discrimination in this case is that, as the plaintiffs for the court case reasoned, “the [law] requires subject corporations to have a specific number of directors based upon race, ethnicity, sexual preferences, and transgender status”. Essentially, the law is discriminating in that it requires corporations to appoint directors with discriminating factors as a deciding factor.


A similar law to the one mentioned above has also been passed. The law requires women to be on company boards, akin to how the one above requires minority representation on company boards. As a result of the law, companies were found to do better, as “Numerous independent studies have concluded that publicly held companies perform better when women serve on their board of directors…”, and companies with women on their boards also “tend to be less risk averse and carry less debt, on average”.


Companies that had female directors on their boards were found to outperform shares of comparable businesses without any female directors by 26 percent, and companies with three or more female directors reported revenues that were 45 percent higher per share than companies without female directors. Additionally, more women got on corporate boards, as opposed to what would have otherwise happened where “gender parity” would be reached only in 40 to 50 years.


The number of women on boards almost quadrupled, and California companies on the Russell 3000 Index almost all have women on their boards, when earlier, eighty-six of those companies didn’t. However, this law was challenged by conservatives to be unconstitutional in that it “perpetuates sex-based discrimination” due to the requirement of a decision to be based on gender.


The current responses to this development are split. On one hand, many encourage the development and regulation of newer diversity, however others argue that constitutionally mandating this diversity may infringe on other basic constitutional rights. The core issue still needs to be addressed as we need to strive for equality in a society that massively favors one type of person over another.The future of this development is up for question. There will most likely be further attempts to raise another type of bill like this, and more court cases that battle for mandating diversity in other companies. While the court case may be a big blow to liberalism, it is in no way stopping any time soon with the increasingly democratic culture amongst people today.

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