On September 30, 2018, former California Governor Jerry Brown signed Senate Bill (“SB”) 826 into law. SB 826 is legislation that seeks to implement and enforce gender diversity on California’s publicly-held corporations’ boards. Under this new law, each publicly-held company will be required to have a minimum of one woman on its board of directors by December 31, 2019. The minimum increases to two women by December 31, 2021, if the corporation has at least five directors, and to three women if the corporation has six or more directors. The law provides that companies will either need to increase the number of directors on its board or fill an open seat with a female. If the company does not comply, it may face fines form the Secretary of State starting at $100,000.00.
Many women’s rights advocacy groups have lauded this legislation as progressive and long needed to combat the “boys club” that they say often still occurs in board rooms today. According to the National Association of Women Business Owners:
Numerous independent research studies have shown that having gender diversity on corporate boards is beneficial to the corporation, including increasing profitability, better performance, governance, innovation, and opportunity, and creates meaningful cultural change in the workplace. Yet, one-fourth of California’s publicly-held corporations have no women directors on their boards. California’s public corporations have fewer women directors than the rest of the country, with only 15.5% of board seats held by women, lower than the Russell 3000 nationally at 16.2%, and significantly lower than the Fortune 1000 at 19.8%.
Yet, even when signing the bill into law, Governor Brown acknowledged that further legal hurdles lie ahead, “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation.” But, ultimately he concluded, “it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America.”
Unsurprisingly, on August 9, 2019, SB 826 was legally challenged in Los Angeles Superior Court in a case entitled Crest v. Padilla. Interestingly, in Crest, a corporation did not file the lawsuit. Rather, the lawsuit was brought by three plaintiffs from a Conservative advocacy group. The three plaintiffs sued on the theory that they had standing to sue as a taxpayer and can sue the California Secretary of State to enjoin it from “expending taxpayer funds and taxpayer-financed resources enforcing or carrying out the provisions of Senate Bill 826.” The plaintiffs allege that SB 826 will require “ongoing General Fund costs of approximately $500,000 each year for the Secretary of State to develop regulations, investigate claims, and enforce violations of the statute’s provisions and unknown additional costs to produce a required annual report.”
The crux of the issue, however, appears to be that the plaintiffs contend that the law’s requirement for female representation on corporate boards “employs express gender classifications” and, as a result, is “presumptively invalid” and subject to “strict scrutiny” under the California Constitution and in California courts.
“Strict scrutiny” is the highest standard of review a court will use to evaluate the constitutionality of governmental discrimination and a form of judicial review that courts use to determine the constitutionality of certain laws. To pass strict scrutiny, the legislature must have passed a law that furthers a “compelling governmental interest” and has narrowly tailored the law to achieve that interest.
The plaintiffs cite to Connerly v. State Personnel Bd. to support their position that a strict scrutiny analysis should apply. In Connerly, a private citizen brought an action that challenged five California statutory affirmative action race-based programs as violative of equal protection principles. One of the statutory schemes involved the distribution of California lottery funds to “socially and economically disadvantaged small business concerns.” The issue, however, was that the statute defined “socially and economically disadvantaged persons” by gender and race.
The Court opined that under a strict scrutiny standard of review “[w]hat is constitutionally significant is that the government has drawn a line on the basis of race or has engaged in purposeful use of racial criteria. A constitutional injury occurs whenever the government treats a person differently because of his or her race.” The court held that a taxpayer, as a private citizen, had the standing to file suit and held some of the statutory schemes – including the lottery scheme – invalid upon strict scrutiny review.
This type of “automatic preference” has also been found unconstitutional by the California Supreme Court in Regents of the University of California v. Bakke. In Bakke, the court held that a university admissions program that relies on race or nationality as the exclusive basis for admissions violates the Equal Protection Clause and generally condemned the use of racial quotas.
The plaintiffs in Crest allege that California has enacted a law that draws a similar arbitrary line for corporations, but instead of race focuses on gender. Racial quotas and gender quotas, however, are given different treatment. Laws that involve gender classifications typically receive “intermediate scrutiny” which is a less arduous standard to meet. To pass “intermediate scrutiny” the legislature must have passed a law substantially tailored to an important and exceedingly persuasive governmental interest.
Despite the likely application of this lesser “intermediate scrutiny” standard, SB 826 may still fail given the court’s general dislike of arbitrary quotas. It’s possible that the court may rely on similar case studies in other countries, like Norway, which was the first country to institute gender quotas for the board of directors. Critics in Norway have argued that what actually occurs with gender quotas is that a few, trusted women with “golden skirts” serve on numerous boards – precluding other skilled women from opportunity. Others maintain that such gender quotas lead to unqualified board members who sit as a mere token to avoid a fine. Proponents of the law claim these fears are largely exaggerated and have not materialized. Crest is still in the early stages, and the State of California has yet to respond to the complaint.
There is no private right of action for alleged violations of SB 826, so the new law will not lead to an avalanche of new lawsuits. Although SB 826 was intended to promote equality across California boardrooms, if upheld, SB 826 will alter boardrooms across the State of California and, depending on the vigor with which California enforces this law, could lead to an exodus of some corporations from California.