What California’s ruling against board quotas means for diversity efforts

Diversity quotas often get struck down in US courts.
Diversity quotas often get struck down in US courts.
Image: Reuters/Toby Melville
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While quotas remain controversial in the United States, they do seem to be effective at furthering diversity. The portion of California-based companies with all-male boards, for instance, fell from more than 30% to less than 2% after the state passed a law in 2018 mandating women on boards.

But quotas can be tricky from a legal perspective. They “usually get shut down at the level of courts,” says Stephanie Creary, an assistant professor at the Wharton School of Business whose research focuses on diversity and inclusion.

And indeed that’s what happened earlier this month to another California law, passed in 2020, which requires publicly traded companies based in the state to have at least one board member who is Black, Latino, Asian, LGBTQ, or from another “underrepresented community.” It was struck down earlier this month.

The legal argument against quotas

Legal precedent holds that quotas violate the Civil Rights Act of 1964, which prohibits discrimination against people based on race, gender, religion, age, and other protected identities, because they could lead companies or schools to discriminate against people outside the targeted groups. That was the argument successfully made by Judicial Watch, the conservative group that convinced a judge in Los Angeles County to overturn the 2020 law. (It has a similar challenge pending against the state’s 2018 gender diversity mandate.).

California isn’t the country’s only battleground. Last year, a group headed by Edward Blum, a conservative activist who’s made a career out of challenging affirmative action and voting rights laws, filed a legal challenge against Nasdaq’s new diversity rule. That rule, slated to go into effect this year, requires Nasdaq-listed companies to have at least one board director who is female and at least one from an underrepresented racial group or LGBTQ group, or else explain why they do not.

Nasdaq’s legal team has said the latter clause means that it’s not enforcing mandatory quotas, an argument that could help it ward off allegations in court that the rule is unconstitutional.

Such legal complexities are the reason so many companies and schools talk about diversity metrics not in terms of quotas, but as targets or goals. “You have to make sure that in working toward the target or goal, you’re not ignoring people who are from backgrounds other than the one that you’re trying to increase,” Creary says.

Diversity measures beyond quotas

Quotas aren’t the only way that legislators are trying to nudge companies toward greater diversity. States including New York and Maryland have passed laws requiring companies to disclose information about gender diversity on their boards, under the theory that greater transparency will pressure companies to improve their demographics.

Diversity advocates say it’s not just representation that needs tracking. “Collecting employment and wage data from firms, something California has already initiated, might be an even stronger mechanism,” says Donald Tomaskovic-Devey, a professor of sociology at ​​the University of Massachusetts Amherst and executive director of the university’s Center for Employment Equity. He says that kind of data would be especially helpful “if it was accompanied by transparent reporting on firm employment composition and pay gaps, something Illinois has recently mandated.”

Diversity advocates say the issue isn’t just about getting more diverse board members at the table, but changing board culture so that directors play an active role in decision-making. Historically, Creary says, “the majority of boards were passive boards of retired CEOs who just signed off on whatever the CEO wanted to do.” A diverse board can only make a difference if they’re expected to engage with company strategy.

To that end, companies also need to pay attention to what happens after people from underrepresented backgrounds get appointed—because putting one woman or one Black person on an otherwise white, male board is unlikely to adequately tilt the balance of power. Research shows that boards need at least three women directors before the women are accepted into the group rather than treated as tokens or as a separate contingent.

Should diversity be regulated?

Some bristle at the prospect of governments regulating diversity efforts, whether through quotas or other measures. But the government already regulates many other aspects of business, notes Tomaskovic-Devey, who also serves as a research analyst at the Equal Employment Opportunity Commission.

“All firms set targets and hold themselves accountable for any business goal they value,” Tomaskovic-Devey says. “Goals, targets, quotas, it does not matter what you call them, they do work and firms know this. If firms do not set goals, governments can and often do. State and federal governments do this already for auto emissions, water pollution, securities trading, wage and hour laws, worker and consumer safety.”

California’s lawmakers clearly determined that companies, left to their own devices, weren’t adequately addressing the dearth of women, LGBTQ people, and people of color on their boards.

“I want people to remember why this law was passed in the first place,” says Evelyn Carter, a social psychologist and president of the diversity and inclusion consultancy Paradigm. “[A]ll this law was trying to do was to create a structure that would incentivize people to do the right thing.”

Gender diversity often gets higher priority than racial diversity

It’s worth noting that certain kinds of diversity efforts may be more likely to provoke pushback than others. Creary says that in her research on board diversity, both white and Black board directors have said their boards are more comfortable talking about gender diversity as opposed to racial diversity, and that gender diversity initiatives often make more progress than other kinds.

The numbers match this. A study by Deloitte and the Alliance of Board Diversity found that from 2018 to June 2020, the number of women on boards of Fortune 500 companies rose by 4 percentage points, to 26.5%. Meanwhile, the number of board candidates representing racial minorities rose by just 1 percentage point, and the number of Black male board members actually decreased. It was only during the summer of 2020, during the Black Lives Matter protests sparked by the police murder of George Floyd, that many companies began focusing on improving racial diversity in earnest.

Given this background, Creary says it’s telling that the first California quota to get overturned was the one aimed at increasing the ranks of LGBTQ and racial minorities on boards. She notes that California governor Gavin Newsom introduced the law in the wake of the Black Lives Matter protests and the US Supreme Court’s June 2020 ruling that LGBTQ workers are protected under civil rights legislation. “I can’t help but draw a link between those movements and those phenomena and this backlash,” Creary says.

What happens now to state diversity efforts?

A potential concern about the California judge’s ruling is that it could have a chilling effect on future government efforts to pass more diversity legislation. But the diversity experts interviewed for this article don’t sound overly worried about that possibility. “Backlash and opposition are always part of the march toward equity,” says Tomaskovic-Devey.

Creary says one possible reaction is that federal and state governments will focus more on legislation involving disclosure requirements. “‘Show me your data’ is so important, because you cannot argue with the facts,” she says. While rules requiring that companies share information about pay gaps or the rates at which they promote people of color are also bound to face opposition from some groups, they’re on safer legal ground.

Companies also are under mounting pressure from investors, employees, and customers to improve on diversity. Once they start investing in the issue, Carter says, they typically recognize the benefits of doing so.

“Maybe this law [in California] isn’t going to be the way that systemic inequity gets righted,” Carter adds, “but people need to have an answer for how they are going to do it in the absence of this law.”