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Is board diversity in jeopardy after California court ruling?

Despite a California court order that struck down the diversity requirement in the state, public opinion continues to push for it to be reversed.

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After the Los Angeles Superior Court struck down on April 2 a California law passed in 2020 as part of a push for corporate diversity, amid the juncture of the killing of George Floyd by police officers, many public and private companies consider it appropriate to continue with the line of inclusion and diversity within their boards, especially due to the pressure of public opinion.

Judge Terry Green, charged with determining the sentence, argued that “it was unconstitutional to use taxpayer funds or taxpayer-financed resources to enforce the rule.” For now, the California government has not officially ruled on a possible appeal.

“The ruling isn’t likely to have a significant impact on corporate board diversity trends. Institutional investors, employees, and customers have been pushing for corporate board diversity in the past few years,” said Paul Washington, executive director of the Conference Board ESG Center.

According to an October Conference Board analysis cited in the Bloomberg Law publication, “59% of the S&P 500 disclosed the racial composition of their boards in 2021, up from 24% in 2020. The number of women on corporate boards skyrocketed, while the number of racial minorities on boards continued to lag.”

Other requirements to be part of a board

Most boards today have small pools of candidates, while seeking current or former CEOs and CFOs as members.

“Most companies don’t allow lower-level executives to serve on other corporate boards, further narrowing the pool,” they noted. 

While some boards have moved toward seeking more industry-specific qualifications, which has allowed more women to join these groups, ethnic and racial diversity continues to be the outstanding debt of corporations that continue to be largely controlled by a white majority.

“The U.S. Securities and Exchange Commission in August approved a Nasdaq Inc. proposal requiring companies traded on the exchange to disclose the gender and ethnic makeup of their boards, and to meet a diversity quota or explain why they couldn’t. The federal agency is already facing legal challenges to its move,” it is highlighted. 

Stephanie Creary, a professor at the University of Pennsylvania, also highlighted that even without legal accountability, pressure for diversity on boards is likely to persist. 

“Not a single one had suggested that any kind of legal action was driving board diversity,” she noted.

Creary also said:

Perhaps for the most reluctant boards the removal of that provision will invite them to do less, but there were already boards who were doing more.

States like New York and Illinois require companies to disclose diversity statistics on their boards, as well as the private firm Goldman Sachs & Co, which has increased these requirements for companies it endorses.

“It’s important for companies to at least disclose the gender and racial makeup of their boards so that investors and customers can make informed decisions,” said Esther Aguilera, CEO of the Latino Corporate Directors Association, stressing that this is a “sensible and common sense approach.”

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