On September 30, 2018, the former governor of California, Jerry Brown, signed a bill into law that would require publicly held corporations in California to include women on their boards. The law“requires publicly traded corporations headquartered in California to include at least one woman on their boards of directors by the end of 2019 as part of an effort to close the gender gap in business.” Furthermore, by the end of July 2021, the law requires that “a minimum of two women must sit on boards with five members, and there must be at least three women on boards with six or more members. Companies that fail to comply face fines of $100,000 for a first violation and $300,000 for a second or subsequent violation.” By signing the bill into law, California became the first state to require that companies include women on their corporate board.
Gender diversity and representation on corporate boards is undeniably a problem, in the United States and globally. In 2003, Norway became the first country to institute gender quotas for board directors. Since then, several countries have also instituted gender board quotas. These gender quotas have especially become prominent in Western European countries. Many critics of gender board quotas argue that the lack of women on Boards show that there are not enough qualified women to fill such positions, and mandating these quotas through laws would lead to numerous token women being placed on corporate boards. However, in countries that have instituted gender quota laws, these fears have largely not been realized. There are numerous arguments for and against gender quotas. However, within the context of America’s legal landscape, one fundamental objection to gender board quotas mandated by law (state action) is that it is unconstitutional.
In order to understand why gender board quotas may be deemed unconstitutional, it is important to understand the Supreme Court’s affirmative action jurisprudence. In Regents of the University of California v. Bakke, the court held that a university admissions program that relies upon race or nationality as the exclusive basis for admissions decisions violates the Equal Protection Clause of the Fourteenth Amendment. In this case, the Court condemned the use of racial quotas. In Grutter v. Bollinger, the Court held that consideration of race as a factor in admissions by a state law school does not violate the Fourteenth Amendment because supporting student body diversity is a compelling state interest. However, in the companion case, Gratz v. Bollinger, the Court held that a university’s admissions policy that automatically gives preference to minority students on the basis of race, without additional individualized consideration, violates the Equal Protection Clause of the Fourteenth Amendment. Finally in Parents Involved in Community Schools v. Seattle School Dist. No. 1, the Court held that public schools may not assign students to schools solely on the basis of race for the purpose of achieving racial integration.
Thus, based on the jurisprudence of the Supreme Court, affirmative action is constitutional and promoting diversity is rightly considered to be a compelling state interest. When states execute these policies by considering race and other factors, the Court usually finds said policies to be constitutional. However, when race is the only factor considered by the State or when the State employ the use of racial quotas, the Court deems such actions unconstitutional. Of course, within the context of American constitutional jurisprudence, race and gender are treated differently. Given America’s history, racial classifications receive strict scrutiny under the constitution. Thus, when racial classification is employed, the means have to be narrowly tailored to the compelling governmental interest. However, gender classifications receive intermediate scrutiny, and so the means employed only have to be substantially tailored to an important and exceedingly persuasive governmental interest. So, affirmative action that employs gender classifications will not receive as intense a constitutional scrutiny as racial classifications and are more likely to be accepted. However, the California law is still one that will likely be deemed unconstitutional since the Supreme Court has made it clear that quotas are inherently constitutionally suspect.
That the Courts are likely to strike down California’s law does not mean that gender diversity is not worth pursuing. As the Supreme Court has held, promoting diversity is a compelling state interest. Whether or not instituting mandatory gender board quotas is the best way to promote diversity on corporate boards is an issue that is certainly up for debate. However, what is not up for debate is the fact that there are other ways to promote gender diversity on corporate boards.
One alternative argument is that shareholder activism by major institutional investors offers a superior approach to California’s law, in terms of promoting gender diversity. Due to the internal affairs doctrine, corporate governance matters are controlled by the law of the state of incorporation. Thus, even if we assume for the sake of argument that state law mandating gender board quotas is not unconstitutional, the scope of impact of these laws is limited. However, shareholder activism aimed at increasing gender diversity can have a national impact on the composition of corporate boards, more so than individual and varying state legislations.
Some of the other ways to promote gender diversity on corporate boards include:
- Mandatory disclosure laws enacted by Congress or the SEC, requiring corporations to disclose the gender composition of their boards.
- Providing tax incentives for companies that reach a certain threshold of gender diversity.
- Voluntary pledges by corporations.
Whether or not these alternative routes are better for promoting gender diversity is certainly an issue that is open to debate. Gender quotas certainly provide a more immediate impact. But, perhaps it is okay that our constitutional doctrine requires that immediacy give way to other values. What is clear is that if the California legislation faces legal challenge in the Courts, it is likely to be struck down as unconstitutional. Thus, since gender board quotas are likely unconstitutional, it is imperative that we as a society come up with other (better?) solutions.