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Wednesday, October 10, 2018

California's New Law Requiring Corporate Boards to Include Women: Is it Constitutional?

On Sunday, September 30, California Governor Jerry Brown signed into law a new bill requiring publicly held corporations based in the State of California to include women on their boards of directors.  Specifically, any corporation with its principal executive offices in CA must have at least one woman on its board of directors by the end of 2019.  By the end of 2021, the minimum goes up to two female directors if the corporation has five directors, or to a minimum of three female directors of the corporation has six or more directors.  You can read the bill, Senate Bill. No 826, here

Many people--including Governor Brown himself!--have questioned the law's legality.  It is a facial sex-based classification, which means that it will trigger intermediate scrutiny in an analysis under the United States Constitution.  (To be precise, the law defines "female" as "an individual who self-identifies her gender as a woman," so it is a facial gender-identity-based classification, but that is unlikely to change the standard of review.)  And under the California Constitution, the law is likely to trigger strict scrutiny, based on past precedent, which would be even harder to pass.  In his signing statement, Governor Brown stated that "There have been numerous objections to this bill and serious legal concerns have been raised.  I don't minimize the potential flaws that indeed may prove fatal to its ultimate implementation." 

Indeed, it's very hard to see how this law could be upheld.  It essentially imposes a quota for women, and the Supreme Court has consistently looked with particular disfavor on any state action that involves quotas or set-asides on the basis of protected characteristics.   (Oddly, the state senator who introduced the bill apparently predicted that it would be held constitutional "because it doesn’t impose a quota or a percentage for board seats held by women"--but unless I'm missing something, it seems like the bill essentially does just that.)  Additionally, it seems that there are other facially-neutral measures to increase diversity that could be tried instead, such as requirements that director terms be shortened and that new directors be regularly cycled in. 

After acknowledging that the law might well be struck down in court, Governor Brown stated that "Nevertheless, recent events in Washington, D.C.--and beyond--make it crystal clear that many are not getting the message."  But does it even help the cause to adopt a measure that is so likely to get thrown out in court?  What message does that send?   I'm sympathetic to the ultimate policy goal of having more diverse corporate boards, but this doesn't seem like a productive route to me. 

 

 

 

Posted by Emily Gold Waldman on October 10, 2018 at 06:36 PM | Permalink

Comments

"Given those problems, I’m curious whether people think there was still some sort of productive symbolic value in passing the law, or whether it was counterproductive."

Emily, to my mind passing the law may be both productive and counterproductive to the objective of gender diversity.

In the productive category, even if struck down, the law may further catalyze efforts that had stalled until recently.

How it is struck down—and I think the chances it will survive in full are slim—matters greatly. As discussed, foreign corporations will likely be deemed exempt under the internal affairs doctrine. However, for CA-chartered corporations, there's a real risk the law will be invalidated on First Amendment grounds. To me the status quo regarding the extent of corporate free association rights (i.e., some legal uncertainty) was and continues to be tolerable. In the current climate, the most realistic alternative may be an acceleration and broadening of the trend towards holding that businesses are exempt from generally applicable regulations. If this happened, I would put passage of the law in the "counterproductive" category. So would its proponents, I would think.

The timing of a mandate like this is also odd in terms of the market, if not in terms of politics. For years, progress was unacceptably slow. However, post 2016, the logjam on board diversification does now actually appear to be breaking, at least at the biggest companies (nearly 40% of new Fortune 500 directors last year were women).

Posted by: Greg Shill | Oct 16, 2018 11:31:43 AM

"Given those problems, I’m curious whether people think there was still some sort of productive symbolic value in passing the law, or whether it was counterproductive."

Counterproductive. From a symbolic point of view this bill reveals more about liberals in Sacramento than they suspect. When you get right down to it one cannot say that female representation on corporate boards was a burning issue in the halls of progressive politics that hordes were taking to the street to demand. It's not going to be at the top of the party platform at the next presidential election. LA right now is going through a Typhus epidemic due to the squalid conditions the tens of thousands of homeless in that city suffer in. That truth gives this bill a Nero feel to it.

Seen from the perspective of inter-party rivalry this bill might be, as Brown suggests, a poke in the eye to Republicans. But is this really the type of distinction that progressive Democrats want to draw? From an intra-party perspective it seems to feed right into Bernie's classist criticisms. I comprehend the need, in the middle of a perceived crisis, to take a stance but really? This is all they could come up with? A crisis can be wasted just as much by doing something inane as it can be by doing nothing at all. Other than meeting some generic need to "look responsive" I can't see the positive symbolic value for the party either locally or nationally.

Posted by: James | Oct 12, 2018 4:46:45 PM

Yes—I was also thinking that the California Chamber of Commerce might well be the plaintiff here. I will be very surprised if this law goes unchallenged in court (and equally so if it gets upheld, given the legal problems identified here). Given those problems, I’m curious whether people think there was still some sort of productive symbolic value in passing the law, or whether it was counterproductive.

Posted by: Emily Gold Waldman | Oct 12, 2018 7:29:05 AM

The California Chamber opposed the law when it was proposed and, if they can assert standing, they may be the ones to sue. I agree with Jeff; any Equal Protection issue seems secondary, or even tertiary.

First and unavoidable is the internal affairs issue. That is likely dispositive as to foreign corporations. Then, as to CA-chartered corporations, a free association claim seems likely to be made. There was discussion of this on twitter, where I (along with Danielle D'Onfro and other law profs) wondered if a motivated court might leap at the chance to use such a claim as a vehicle to invalidate business regulation via the First Amendment. Cf. Citizens United, Hobby Lobby, and Masterpiece Cakeshop. I suppose claims that might arise under the Fourteenth Amendment could skip one or both of these in the queue, depending on the judge or court.

Outcome aside, the analysis of the First Amendment issue in particular will be crucial for the future of business regulation.

Posted by: Greg Shill | Oct 11, 2018 11:07:42 PM

Emily, I don’t know enough about constitutional gender issues to have a view on that. But it doesn’t matter what the governance issue is. Assume the imposition of a governance requirement that is not otherwise constitutionally infirm. For example, California says all locally headquartered public companies must have a representative of a labor union on the board or that classified boards are barred. Those are solely the provenance of the state of the charter, Were this litigated and I were the judge, I’d never get to the gender issue.

On the other hand, “PaulB” has a point. If I were the GC of a public company chartered in Delaware but headquartered in California, I would be loathe to spend money vindicating a constitutional issue in the face of the not-unreasonable idea that public companies should have more women on their boards. There IS a practical point here, which is that if the gender advocates can push this through, why not labor unions or shareholder activists or anybody else who wants to make a political point via corporate governance? I don’t know who else might have standing to litigate it. The Chamber of Commerce? Delaware? Even better, Delaware v. California with original jurisdiction in the Supreme Court?

Posted by: Jeff Lipshaw | Oct 11, 2018 6:30:43 PM

The comments here treat this as if this will be a legal matter. As a practical matter, virtually all public corporations will comply rather than litigate.

Posted by: PaulB | Oct 11, 2018 12:50:29 PM

Jeff, I agree that there isn't a Title VII issue (because this is not about employees), but do you agree that there is an Equal Protection problem in addition to the corporate problem?

Posted by: Emily Waldman | Oct 11, 2018 12:48:33 PM

The core problem has to do with corporate law, not gender discrimination.

If California were legislate that all corporations chartered in California, regardless of their principal place of business, had to have gender-dictated membership, only then would the issue relate to gender. The practical problem in that case is that most corporations, even based in California, are chartered in Delaware. And it would be relatively easy to migrate a corporation's state of incorporation out of California.

No, the corporate problem is what is known as the internal affairs doctrine. The federal system works because there is only one state law recognized as controlling the corporate governance issues of a corporation. And it is the state of the charter. What California has done most clearly is overstep the Commerce Clause by working Delaware's side of the street.

See Joe Grundfest's short and sweet paper on this.

Posted by: Jeff Lipshaw | Oct 11, 2018 11:30:42 AM

Never mind the Constitution, doesn't this law conflict with Title VII? Under this law, when a board member on an all male board retires, the company is required to only consider women for the position. Title VII has an exception for a bona fide occupational qualification, but there is no way that being a woman is BFOQ for being on any publicly traded company's board.

Posted by: Biff | Oct 11, 2018 10:44:38 AM

What's to stop all-male boards from simply having the requisite number of members self-identify as women?

Posted by: Confused | Oct 11, 2018 8:55:12 AM


Interesting , and thanks for drawing our attention to it . This law is facially flawed , but mainly due to other reason :

And it is , due to the purpose of it ( paradoxically ) . The clearly asserted purpose as presented in that law , is ( among others ) to increase profitability and efficiency of firms publicly held . However , and although it is correct , that women are doing better than men typically ( in management terms ) yet :

Directors of firms ( and even publicly held ) have clear and conclusive prerogative , to manage their firms , as they find fit . If there are regulation and inspection, it has to do typically , not with pure management , but rather , keeping the public , and employees , and share holders , safe from fraud and recklessness of the board of directors and so forth.... . Yet , when dealing with pure thinking and strategy concerning efficiency and profitability , it is up to the directors and share holders , not up to states and governments .

Yet , here we have very dangerous precedent , where such intervention is very brutal , and even imposing fines for violations .

Simply wrong , and may serve badly the cause of integrating women is such boards ( due to more reasons by the way ) .

Thanks

Posted by: El roam | Oct 10, 2018 8:00:05 PM

"It essentially imposes a quota for women, and the Supreme Court has consistently looked with particular disfavor on any state action that involves quotas or set-asides on the basis of protected characteristics."

But does it in fact set aside anything based upon a "protected characteristic"? AFAIK SCOTUS has never held that a person who "self-identifies" as a woman is the legal definition a woman, and I suspect with the current make-up of the Court it is unlikely to do so.

It seems that this would be an easy way for the court to rule by saying that the group being protected isn't even a legally protected class to begin with.

Posted by: James | Oct 10, 2018 7:58:53 PM

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