California Statute Requiring Female Board Directors

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Civil Rights Practice Group, was recorded on Friday, April 26, 2019, during a live teleforum conference call held exclusively for Federalist Society members.     

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is the 2018 California statute requiring certain numbers of female board directors. My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.

 

As always, please note that all expressions of opinion are those of the expert on today's call.

 

Today we are fortunate to have with us Anastasia Boden, who is a Senior Attorney for the Pacific Legal Foundation. After our speaker gives her remarks, we will then go to audience Q&A. Thank you for sharing with us today. Anastasia, the floor is yours.

 

Anastasia Boden:  Thanks, Micah, and thank you to The Federalist Society for having me today. I'm here to talk about more good intentions out of the State of California that have gone awry, and that is that in an effort to boost female representation, the state recently passed SB 826 which imposes a female quota for the boards of public companies. For now, the quota is that the boards must have at least one female member by the end of 2019, but the quota will eventually increase such that by 2021, boards with at least five directors must have a minimum of two female board members, and boards with six or more directors must have a minimum of three female board members. And female in the statute is defined as any individual who self-identifies as female. The fines here are pretty hefty. It's $100,000 for the first violation, and it's $300,000 for the second violation. And each director spot not filled appropriately by a woman is considered a separate violation.

 

And notably here, with the statute, it applies not just to companies incorporated in California, which is sort of odd and presents a potential legal problem that we'll talk about later, but it also applies to public companies with their principal office, i.e., companies that are headquartered in California. Right now, there are reports that Apple, Google, and Facebook do not comply and will have to change their board composition. And it's an estimated 62 companies will have to change their boards, leading to an estimated 684 additional females throughout the State of California on public company boards.

 

Now, what's interesting is that the legislative analyst and the governor here have sort of conceded that there are some problems with the statute. The legislative analyst to the legislature said that this law, quote, "could be difficult to defend," end quote, but the author of the bill does not appear to, quote, "be a constitutional traditionalist." And so, apparently, in the face of various objections and potential problems noted by the legislative analyst, the sponsor decided to press on.

 

Governor Brown said something similar in his signing statement. He said there are many, quote, "potential flaws that may prove fatal to the bill, but many companies are not getting the message." So there's a real palpable concern about the legality here, but it almost seems to be virtue signaling on the part of California that they want to send a message that this is what they would like to see, even if they know that this is problematic in terms of its constitutionality.

 

So let's talk about both the policy implications and the constitutionality of this law. Is this law good policy? Well, inherent in it is the problem that's recognized by the Supreme Court, and that is that any quotas send the message that the group being benefitted cannot achieve parity without government help. So quotas may reinforce the very stereotypes that they are meant to ameliorate. Here, I'm thinking of my young daughter. She's just two months old. And I think what this law signals to her is that she is inherently being discriminated against anytime she walks into a job interview, that she cannot get that job without government help.

 

It's a theme that has been picked up in the recent book The Coddling of the American Mind where there is sort of a culture right now where we emphasize victimhood, where we look away from other explanations for non-parity, and we send a message to our youth that they should have a mentality of victimization. And it's just not empowering. It's really not a good way, I don't think, to treat our youth. And it's certainly not what I want my daughter to think when she grows up. I want her to walk into a boardroom and think that she faces an equal opportunity as everybody else.

 

Secondly, a policy problem is that it diminishes the achievements of women who earned their spot on the board because it causes women to look like quota hires. And in this way, it can also breed resentment between members of the board who think that the spot was given away only to satisfy a law and could have gone to somebody else who was equally or more deserving. And on this topic, there's also evidence that people hired through these types of policies suffer from reduced self-esteem themselves, that when people are told that they earned their spot based on their merit, naturally, they have a much higher sense of esteem than they do when they are told that they were given a leg up through some sort of quota program.

 

More than that, not just the mentality that we're breeding with this sort of statute, does it achieve its intended policy goals anyway? The policy goals in the statute are stated as increasing female representation, which I think many supporters would say is good in and of itself, but there's also a lot of talk in the statute about greater female representation leading to better company performance. Is that true? Well, if we look at studies from countries like Norway, France, Italy, Germany, and Spain, where quotas for female representation can reach as high as 40 percent, we show that there are mixed results.

 

In Norway, for example, a study found that higher female participation on the board did not trickle down to more women in senior management positions. It had little effect beyond those few women hired to satisfy the board quota. It did not reduce any sort of pay gap, and in terms of corporate performance, the studies tend to show that there's no impact. But there's actually some studies that tend to show that corporate performance is worse when they're subject to these quotas in industries where there's a smaller pool of qualified women. And so we have companies forced to take on less qualified board members, and it can negatively affect company performance. You'd think that if there was good evidence that better representation created better company performance that corporations would freely adopt these policies, but of course, we're not seeing that that's so.

 

I think something else that's notable is that in Norway, at least, the share of public corporations shrank because, ostensibly, a lot of corporations were trying to avoid the quota of 40 percent female board membership. So all in all, in terms of policy, we see that the law may benefit a handful of women, I mean, an estimated, I think I said 684 women in California who will be added to boards, but really it's at the expense of the cause of equality for women because it is going to breed notions about female inferiority and it won't have any real gains in terms of corporate performance.

 

In addition to the policy considerations, as I alluded to earlier, there's some serious questions about the legality of this law, and I can identify at least three potential infirmities. And that is, one, the Equal Protection Clause under the United States Constitution; two, the California State Constitution; and three, the Dormant Commerce Clause. So if we start with the Equal Protection Clause, under Supreme Court precedent, sex-based classifications are subject to intermediate scrutiny, which means that the law must be substantially related to an important government interest. And Justice Ginsburg in United States v. Virginia further articulated that "there must be an exceedingly persuasive justification for any sex-based classification, and the state may not rely on overbroad generalizations about the different talents, capacities, or preferences of males or females." Importantly, the standard applies to even purportedly benign classifications because of the dangers inherent in sex-based classifications and particularly with quotas. All of these laws are subject to scrutiny under the Equal Protection Clause.

 

So what are the goals of this statute? Are they legitimate, let alone important? And does the law actually further them, or is this law likely to get struck down? Well, I think we heard from Governor Brown's signing statement that one of the goals is just to send a message to the rest of the country and to corporations within the state that the state does not condone underrepresentation of women. I think there's no question that that would not alone be a legitimate or important interest sufficient to uphold the statute.

 

Secondly, one of the stated goals is enhancing diversity, but enhancing diversity has not been accepted as a goal in its own sake; that is, you can't make distinctions or impose quotas simply to cause different groups, different -- a board or a school or what have you, different populations, to reflect the same composition as society. Usually, we're doing this because of some benefit that purportedly flows from diversity, as in the case of education. The only reason that these racial classifications have been upheld is usually because the state is relying on an argument that diversity itself leads to educational benefits. It's not that it just wants a pure, outright certain racial composition. So here, the benefit that allegedly flows from diversity on the boards is increasing corporate performance.

 

Again, there's very mixed evidence on this, and I don't think we have the evidence under intermediate scrutiny to show that the statute should be sustained, especially where the statute mandates increased representation across all public companies, regardless of what sector or industry they are in. And so there's certainly not evidence to say that all the industries -- if you grow the diversity among all industries, it's going to lead to better corporate performance where the talent and interest for the genders is different in these different industries.

 

The third purported interest of the state is remedying past discrimination, and quotas are clumsy tools at remedying past discrimination. And for that reason, they may be, per se, illegitimate. They are in the strict scrutiny context, at least. Of course, this is intermediate scrutiny, so we don't really know. But I think there's reason to think that a quota like this is just inherently going to be called illegitimate because it's such a broad stroke. But beyond that, there's no evidence of past discrimination against women in all industries at every company that would justify this sort of quota in perpetuity. The existence of a disparity between men and women on a board alone is not sufficient to prove discrimination under Supreme Court precedent. We can't say that just because there happens to be a disparity that we can infer discrimination. There has to be something better than that.

 

And what I think is really interesting to combat the idea that these numbers would inherently show discrimination, I read from Ilya Somin that there's some fun with numbers about the chance that there would be no women representation, just as a matter of statistics. So if you have a one-person quota, just as a matter of chance, there would be 15 percent of boards that would have less than one female on their board. And that wouldn't be discrimination, that's just natural. So we can't infer that from these numbers.

 

And you look at the kind of businesses that you're going to penalize merely possibly because of chance. Even if we assume that there's past discrimination, is this law substantially related to remedying it? The quota is seemingly random. There's no reason why it should just be one or that it should be two if you have a five-member board, or three if you have six or more. And again, there's no end date on this quota. It's just into perpetuity. So I think that a court's going to look very unfavorably upon a law that's a broad brush that applies to all industries, regardless of any evidence of discrimination, all companies, regardless of evidence of discrimination, and that's seemingly random in terms of its numbers and goes on forever.

 

So a second problem with this statute is also that the California Constitution requires even stricter scrutiny than the U.S. Constitution when it comes to gender classifications. Under Connolly v. State Personnel Board, a case litigated by Pacific Legal Foundation—I have to name drop—gender-based classifications require strict scrutiny. So for all of the problems we see under the U.S. Constitution, we have even more problems under the California Constitution.

 

And then lastly, something that's been flagged by various legal scholars is that there is a Dormant Commerce Clause and, in some ways, a due process concern with the way that this law applies extraterritorially. So as I mentioned, it applies not just to public corporations incorporated within the State but also to any corporation headquartered in California. And this breaks with custom of most state laws that have to do with the internal affairs of corporations, which are usually limited to corporations that are incorporated in the state. And the reason for that, of course, is that we want to give companies certainty about what laws they are subject to. We want a uniform rule across the United States that you know what the rule is for what law is governing you and to make sure that there is no conflict among those states. And this is typically called the Internal Affairs Doctrine. So a law that now applies extraterritorially beyond just companies incorporated violates the Internal Affairs Doctrine.

 

And the Delaware Supreme Court, at least, has said that that sort of application has constitutional implications, that there's actually a due process problem with applying a law extraterritorial like that and subjecting the company to vagueness and uncertainty about what laws it should follow. For example, if you have a law that's incorporated in Delaware but has its headquarters in California, Delaware law does not have the same mandate, and so it subjects the company to competing requirements and throws the company into uncertainty.

 

There's also a potential -- for similar reasons, there's a potential Dormant Commerce Clause violation going on. It's similar for all the reasons expressed, that this law is having an effect on interstate commerce but there's no real benefit. It's just unduly burdening interstate commerce. So that's a third concern. And those arguments have been articulated by Professor Grundfest and Bainbridge in two articles; one's on SSRN, the other was published by Washington Legal Foundation. And I think those also present very real threats to the vitality of this regulation.

 

So in sum, this law is misguided and, I think, a potential to attack in the courts. As an aside, it ignores the real gains women are making without government help. In the first quarter of 2018, less than 20 percent of S&P companies had all male boards. There's also evidence that one-third of all new directorships went to women in 2018. The share of female board memberships increased 54 percent globally between 2010 and 2015, so there is progress here. Maybe slow progress, but progress is progress, and it's progress without the stigma that accompanies quotas.

 

And again, another way to spur on this progress might be through non-government means. f course, if California -- or California could do it, perhaps, constitutionally through other means. For example, people who want to see more women on boards could engage in shareholder activism. And that's particularly true of California, which is a huge institutional shareholder in many companies through CalPERS and other California fundholders. And they can vote on board members. They can say, "We're going to vote down board members when there's no female participation." That is a technique that has been extremely useful in New York, Massachusetts, and Rhode Island, and it presents an alternative to quotas, which are, I think, inherently more divisive.

 

Of course, the state could also engage in government speech and education. And given that there's a lot more disclosure about the composition of boards, this presents a way for people to publish that and shame people, shame boards that they think are acting in shameful behavior. But certainly, that's an alternative to these quotas, which are very likely unconstitutional.

 

So with that, I'm going to close up and open it up to questions.

 

Micah Wallen:  Thank you, Anastasia. Without further ado, we'll now go to our first question.

 

Caller 1:  Thank you, Anastasia, for that. That was very informative. Can you talk a little bit about whether you see this law being challenged, or what a challenge would look like to the law?

 

Anastasia Boden:  I hope to see it challenged. And I think it's the very litigation that Pacific Legal Foundation has a strong reputation for bringing, particularly in California where we've been leaders on the issue of race or sex-based classifications. So I'd like to see it challenged, and certainly Pacific Legal Foundation represents people free of charge to take such challenges. And I think it would take the form of a lawsuit bringing the claims that I outlined on behalf of an organization who objects to this law.

 

And I think, ideally, in public interest litigation, we would want to see a corporation where complying with this law would be somehow inconsistent with the organization's mission or otherwise would, maybe because of the industry, it's very hard to find women with the same interest in that industry or what have you. But something like that would, I think, be very illustrative to the public about why this law is wrong. Of course, people might just object ideologically for various reasons, for good reasons, but I think where you can tell the story of a corporation showing the harm done to its mission that that presents a better vehicle for litigation. But that being said, I think Pacific Legal Foundation would be very interested in representing a company, and any company with such interest should fell free to contact us.

 

Micah Wallen:  All right. We'll now go to our next question.

 

Caller 2:  My question has been asked. I was going to ask if any litigation is pending, or has been brought, or is about to be brought. And I suppose, at this point, the answer is no.

 

Anastasia Boden:  As far as I know, no. But we're certainly up to it, as I said. And what's interesting is California is in some ways, unfortunately, a leader in terms of policy. And we're seeing this policy spreading. So there's also proposals to expand to other states. I know Illinois was considering a very similar quota. So there's also opportunities in other states, and we'd be very happy to sue there as well.

 

Caller 2:  So do you see that there could be a potential PR problem for a company in challenging this law, even if ideologically it would be contrary to principles of the company's leaders? If you're in the marketplace and you're now tarred and feathered as being sexist and resistant to promoting women, how would a potential client overcome that PR challenge?

 

Anastasia Boden:  Yeah. Well, certainly, I think if there is a reason for -- a reason in the company's mission for opposing that that helps mitigate some of that. But I think also, opposing -- whenever you oppose government regulation, it's inevitable that you get called these names. I'm very used to that in my line of work, and it's a challenge, but there's always a way to craft the argument to reach out to the other side, I think. And I think with this law, we can talk about some of the things that we said that this is damaging to women in many ways, that it takes away from their accomplishments, that it undermines the progress being made naturally without government help, and that there are other ways to achieve these same goals, if you think they're laudable, through other means that are not offensive and do not carry the same danger.

 

So I think it's just a communications issue and framing it in a way that the other side can understand. And they're not always going to agree, but that's part of our job here is not just to win in the courts, but also to win in the mind of the public. And we're very ready to try to frame the argument in such a way.

 

Micah Wallen:  All right. We'll now go to our next question.

 

John Shu:  Hello. This is John Shu in Orange County. Thank you very much for your presentation. Who has the responsibility for enforcing the law? For example, is it the California Department of Corporations, or is it the AG's Office? And second, if the law isn't challenged or successfully challenged, what is to prevent the state from saying there needs to be a certain number of Asians or African Americans or Latinos on every board? Because in California, the least diverse companies, either employees-wise or board-wise, are the liberal ones in Silicon Valley.

 

Anastasia Boden:  Yeah, thanks for your question. It's a very interesting question. To your first point, I think the Secretary of State's Office is responsible for enforcing the law, as I understand it, as they're usually responsible for the laws regulating corporations.

 

But in response to your second question, yeah, I think that's a threat with this law. This is just the beginning. If the state can mandate what your corporate board should look like in terms of gender balance, who's to say that there's no reason for it also to mandate other demographic features? Why couldn't it mandate the racial composition, or the sexual preference composition, or any number of things? Age. Maybe there's age discrimination there. Maybe there's a disparity in age representation, and then the state's going to say, "Well, we think that's representative of some sort of age discrimination, and we want to remedy that."

 

So I think, of course, that is a problem. And part of the reason, I think, maybe some of those arguments, again, would help to show the other side why these arguments are problematic because there's just no end. And it just ends up being whatever the favored preference of the day is from the legislature.

 

Micah Wallen:  We'll now go to our next question.

 

Devin Watkins:  Hi. Devin Watkins. Sorry if this was answered earlier, but I was wondering if the government is, in some way, still going to win, even if they lose in this case. So if this is challenged, eventually, it's going to be found unconstitutional, I assume. But before that happens, it seems to me a variety of companies are likely to change their board under just the threat of this. Is that likely to occur?

 

Anastasia Boden:  Well, the date that companies have to comply with this is through the end of 2019. And that might be so, but maybe that's a reason for us to bring a preliminary injunction if somebody wants to sue right now. So I welcome that opportunity.

 

But I'll tell you one way -- that's an interesting thought. But I'll tell you one way in which the government might lose. And I was thinking about this in preparation for the talks, and that is that many people in government and in the judiciary -- I think Justice Ginsburg is probably one of the biggest proponents of subjecting gender-based classifications to strict scrutiny, and that this is a case where they wouldn't want that to happen because they want the law to be upheld. And so it presents a real quandary for them, and shows the inconsistency of their arguments, and shows one way in which they might be harming their own cause here.

 

Micah Wallen:  We'll now go to our next question.

 

Hilary Miller:  Hi. It's Hilary Miller. Thanks for your great talk. My question is this: Assuming it will be very difficult to attract any of the large public companies as plaintiffs in such an action, who else do you think might have standing to complain of this, and how remote would their injury need to be before they would be outed?

 

Anastasia Boden:  You're right that it might be hard to attract certain big companies, and it's also true that public interest firms are, many times, barred from representing companies that can afford to represent themselves or who have a financial interest in bringing the lawsuit themselves. But I think potential candidates would be smaller companies — of course, they have to be publicly held; that's part of the statute — and potentially ideological companies, religious companies or other companies who have some sort of mission, even an organization, maybe, that is geared towards women in some way but happens to have a board that does not comply, so a large board where they don't meet the three female board member minimum. I think that would be a possibility, and a very good plaintiff. So those are some other candidates.

 

In terms of how remote their injury has to be, we need a company that is either incorporated in California or is headquartered in California, and that's not currently in compliance with the mandates and, I think, even that may not be in compliance just with the future increased mandates. That would be sufficient right now because the law applies to them, and they're going to need to start preparing for that change at the end of 2019. So those are the requirements we would be looking for in a plaintiff.

 

Hilary Miller:  Would a trade association represented such parties or corporations do you think have standing?

 

Anastasia Boden:  I think it's very possible, if a member of the trade association is affected. And I'm certainly open to talking about it offline if you want to give us a call at Pacific Legal following the call.

 

Micah Wallen:  Anastasia, I had a question as well. I was wondering -- some of the opponents to your view argue that the regulation isn't malignant, that it's just benevolent because it's not requiring that you replace people already on the board. You can also just add women. So they're arguing that it doesn't really hurt any of the standing board members. Do you think that that should matter in the analysis at all?

 

Anastasia Boden:  I don't because the harm is not just, say, having to fire someone in order to make the quota. The harm is having people being subjected to the racial classification itself. That is a harm that, as the Supreme Court has said, demeans us all. And it's not just having people being fired, it's the fact of the racial classification in the first place.

 

So for instance, if we said in the school context that we're going to impose racial quotas, but in order to meet them, you can just increase the population of the student body. So we're going to increase the population by 50 students in order to fill the quota, but those have to be held open only for white kids, or only for Asian kids, or only for black kids, like a certain race. There's still a harm being done there, even though nobody's necessarily not being accepted to the school because of the new quota because we're just expanding the population base and because nobody's tuition is being -- or nobody's acceptance is being revoked. There's still a harm there with the classification, and that's opening up spots to people, but only a group of people, and that's based on their immutable traits.

 

Micah Wallen:  All right. And we did have another question come through, so we will now jump to that next question.

 

Caller 6:  Hi. Besides the obvious differences between, say, associational rights and the equal protection rights you're talking about, what's your best response to what I would expect the state to bring up, which is that this is just a logical extension of the decisions opening up membership in groups like the Jaycees and the Rotary Club to women?

 

Anastasia Boden:  Yeah. Well, I think one problem with this law just technically speaking is it's not just opening up membership. It's a quota. There have been other affirmative action type laws for women that have been upheld, but it's been a more flexible standard where companies are charged with taking into account diversity factors and what have you. And granted, those challenges were under Title VII. But in any event, I think the real difficulty with this is that it's this black and white quota that's seemingly arbitrary, and it's hard to argue that there's any good reason for it other than to just impose a certain composition that the state wants to see. It's not about expanding opportunity. It's about reflecting a certain makeup in society that the state had deemed ideal. And so I think that's what's particularly offensive about it.

 

Micah Wallen:  All right. Not seeing any other questions lined up in the queue. I'll offer one final call for questions. And Anastasia, while we're waiting to see if one of those comes in, would you like to offer any closing remarks?

 

Anastasia Boden:  Not really, except to say that, again, this is not -- to oppose this law is not to oppose female representation or to oppose women. It's actually, I think, to empower women by saying that progress can be made without the government help, that liberty is conducive to equality, and that forced equality can be very detrimental.

 

Micah Wallen:  All right. And on behalf of The Federalist Society, I would like to thank our expert for the benefit of her valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

 

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