A California court invalidated a state law requiring that boards of directors of public companies based in California include members from under-represented groups, including persons of several races and ethnic groups and those who identify as gay, lesbian, bisexual, or transgender. The April 1, 2022 decision in Crest v. Padilla, No. 20ST-CV-37513, by Judge Terry Green of the Los Angeles Superior Court, was issued in one of several cases attacking California laws designed to increase diversity on corporate boards of directors, a significant goal of the ESG movement.
The lawsuit attacking the diversity statute (Assembly Bill 979), which took effect in 2020, was filed by Judicial Watch. Judicial Watch argued that the statute mandated quotas and was therefore unconstitutional under the California Constitution’s Equal Protection Clause. Judge Green did not issue a written opinion to explain his grant of summary judgment in favor of Judicial Watch, but he presumably agreed with that argument. In one hearing, Judge Green described the statute as “a bit arbitrary” as to the groups it sought to benefit.
Judicial Watch also has sued to invalidate another California statute (Senate Bill 826), which requires inclusion of women on corporate boards. That case is captioned Crest v. Padilla, No. 19ST-CV-27561, also in Los Angeles Superior Court. The court recently completed a full trial on the statute’s constitutionality.
Although the ruling invalidating the California law could be viewed as a setback in the effort toward board diversity, its practical impact might be mitigated by other developments. Institutional investors and shareholder groups have been expressing concern in recent years about the lack of diversity on corporate boards. The Securities and Exchange Commission has approved a Nasdaq rule requiring Nasdaq-listed companies to disclose the ethnic and gender composition of their boards and to include at least two “diverse” directors – or to explain why they do not have that level of diversity. And some states, including New York, have required companies to disclose board-diversity statistics. Pressures toward greater diversity on corporate boards thus exist even apart from state-law requirements such as California’s.