Recently, California Governor Jerry Brown signed into law a bill (S.B. 826) that requires any corporation with principal executive offices located in California to have a minimum of one female director on its board. If the corporation has five directors, it must have a minimum of two female directors, and if it has six or more directors, it must have a minimum of three female directors. The bill defines “female” to mean “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.”
Does this bill violate federal law? Federal constitutional law prohibits classifications based on sex unless the challenged classification serves important governmental objectives and the means employed are substantially related to those objectives. Interestingly, the California bill makes a classification based on gender identity, rather than on sex. The major constitutional cases on sex preferences do not directly address gender identity based preferences. Still, a substantial majority of persons with female gender identity are also persons of the female sex. Because the two groups overlap so substantially, courts are likely also apply intermediate scrutiny to gender identity-based preferences.
Does the challenged classification serve an important governmental objective? Section 1 of the bill says that this legislation will “boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees.” The phrase “improve opportunities for women in the workplace” indicates that the legislation is intended, at least in part, to remedy past discrimination against women. Federal equal protection cases have sometimes upheld remedial gender preferences and sometimes not. At least one lower court has invalidated gender quotas for a government board. See Back v. Carter, 933 F. Supp. 738 (N.D. Ind. 1996)
But are the means used substantially related to this objective? Back v. Carter turned a critical eye on gender classifications of indefinite duration like these: “The fact that the legislation imposes gender classifications indefinitely argues against a finding of substantial relation… A gender classification imposed indefinitely can outlive the interest that justifies its use.” Back v. Carter, 933 F.Supp. 738 (N.D. Indiana 1996.) The breadth of this requirement – it applies across all sectors of the economy – further suggests S.B.’s 826’s constitutionality is questionable.
Also, because corporate boards are small entities, in many cases lack of gender balance may be explained by random chance rather than by discrimination. Imagine a population where ability and interest in serving on boards is equally distributed between men and women and all firms are completely nondiscriminatory. Even so, 18.75% of 5 person boards will have one or zero women on them just by random chance (there would be a comparable number of boards with one or zero men). With regard to slightly larger boards, even with a completely equal distribution of ability and interest combined with a complete lack of discrimination, many firms will run afoul of the law just by random chance. For example, 18.75% of ten-person boards will have two or fewer women, and therefore violate the law. A law that forces companies to engage in sex discrimination just to avoid the risk of liability caused by random chance variation is very likely unconstitutional.
Also, while S.B. 826 recites some empirical findings suggesting that the presence of women on boards boosts corporate earnings, other subject matter experts are not so sure. Duke Law School professor Kim Krawiec writes after having reviewed the relevant empirical literature, “There is no consensus on the critical question of whether board diversity improves firm performance. Whereas some studies find evidence consistent with the theory that board diversity positively affects firm performance, others find no support or even contradictory evidence. A recent study concluded, for example, that the increased monitoring associated with more women on boards can have a negative effect on well-governed businesses, and some other studies find similar negative effects or no effect at all.” UCLA professor Stephen Bainbridge, responding to Krawiec, adds that “the research in this area is even more fraught with problems than is the norm with empirical legal studies. What if diversity decisions are endogenous? How much do we discount the many studies done by folks with a political ax to grind? And so on. On balance, however, it looks like there simply is no compelling business case for mandated diversity.”
The experience of Norway, which adopted a similar law, also indicates lack of relation between the law’s objectives and the means sought to achieve them. In 2003, the Norwegian Parliament passed a law requiring that women make up 40 percent of publicly traded corporate boards. Following the law, stock prices and firm values dropped as boards added less experienced female directors. In apparent efforts to evade the new numbers of public firms decreased and private companies increased, according to a study by Kenneth Ahern and Amy Dittmar.
What about California state constitutional law? California law holds sex-based classifications to a still higher standard – strict scrutiny – which requires that the law further a compelling governmental interest and be narrowly tailored to achieve that goal. See, e.g., Connerly v. State Personnel Board, 92 Cal.App.4th 16 (2001). It is even less likely that S.B. 826 would survive under that level of scrutiny.
S.B. 826 may also be of dubious constitutional validity because of the so-called “internal affairs doctrine”—a conflicts of law rule holding that corporate governance matters are controlled by the law of the state of incorporation. Although I am far less familiar with this area of legal doctrine, Stephen Bainbridge makes the argument here and former SEC Commissioner and Stanford Law professor Joseph Grundfest discusses it here.
As Professor Krawiec said to The Washington Times, “Let the lawsuits begin.”