Is California’s Mandate That Public Companies Include Women on Their Boards Of Directors Constitutional?

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Posted in: Business Law

Earlier this week, California Governor Jerry Brown signed into law SB 826, a landmark measure that requires each publicly held corporation whose principal executive offices are located in California to have, by the end of 2019, at least one woman on its board of directors. By 2021, each such corporation is required to have at least two women board members if the corporation has five directors, and at least three women board members if the corporation has six or more directors.

In today’s column, Part One in a series, we begin to spot and analyze some of the cutting-edge constitutional questions SB 826 raises. More specifically, in the space below we address aspects of federal equal protection review, focusing on what it means under federal intermediate scrutiny to for a state to “substantially further” a government objective. In Part Two we ask which government objectives—both in enacting and implementing SB 826—are appropriate for a state to pursue consistent with equal protection law and constitutional principles more generally, and we also discuss a separate potential constitutional problem: the impact that SB 826 has on corporations chartered in other states. Throughout, we shall train our analysis on issues under the federal Constitution, even though we recognize (and in some instances note) that California constitutional limitations may pose additional problems for the measure.

The Standard of Review and the Quota Issue

The new statute embodies what constitutional doctrine calls a gender classification, a feature of a law that facially treats people differently based on their gender. As discussed in more detail below, SB 826 is somewhat unusual in that government is not itself directly apportioning benefits or burdens in a way that takes gender into account, but it is mandating that private entities do so. While most of the U.S. Supreme Court rulings dealing with so-called “affirmative action” programs involve the government directly doling out to individuals dollars, university admission slots, etc., in Fullilove v. Klutznik the Court addressed a congressional law that required local governments who accepted federal funding for public works to spend at least ten percent of the federal monies on goods and services provided by minority-owned companies, and the justices there characterized the federal government’s actions as a racial classification. If the inducement of local governments to take race into account constitutes a racial classification by Congress, then the requirement that private entities take gender into account would seem to be a gender classification by California.

According to what we consider settled Supreme Court precedent, gender classifications by all levels of government are required to satisfy so-called intermediate scrutiny to pass muster under the Equal Protection Clause of the Fourteenth Amendment. Although the Court describes intermediate scrutiny in different ways, perhaps the most common articulation is that the law must substantially further an important government interest. What interests count as important will be taken up in Part Two, but even assuming the interests of remedying discrimination against women and making sure corporate boards are more diverse and representative of the society in which they operate are sufficient, there is a real question of whether a rigid numerical floor (which some would call a quota) is a permissible way to accomplish—or “substantially further”—those objectives. Certainly the U.S. Supreme Court has in recent decades frowned on racial floors or quotas under so-called strict scrutiny, in cases such as Regents of the University of California v. Bakke and Richmond v. Croson. Indeed, in Gratz v. Bollinger (a 2003 case involving the University of Michigan’s undergraduate admissions process), the Court struck down the use of race even though government didn’t make use of any formal quota, because the university was nonetheless using race in a way that was too mechanical and rigidly quantifiable.

Whether in fact racial quotas ought to be more constitutionally objectionable than racial targets, goals or inscrutable “plusses” given to individual applicants in the context of a holistic inquiry into worthiness (techniques the modern Court has permitted) is a big question on which one of us has written more extensively in academic writings, including here. Perhaps the best argument for permitting racial plusses but not quotas is the notion that plus programs appear to use race in a softer—less in-your-face—kind of way. Maybe elevating each individual’s race and considering it sui generis makes it too salient, and thus too contentious. A concern with how the use of race makes the affected people feel is certainly understandable, so that constitutionality and gentility seem to be related. Race can figure in the mix, but we must blend it in politely, pursuant to some unwritten etiquette that encourages us not to become too visibly absorbed, or even interested, in the necessary evil that is racial redress.

And perhaps some of these arguments apply to gender as well. But the problem with this kind of reasoning is that the rules and systems of manners and politesse don’t derive from or demand analytic coherence and consistency the way rules and systems of constitutional doctrines generally do and should. As a result, there is a tremendously underexplained, sometimes seemingly arbitrary, quality to the Court’s work product in this realm.

In any event, the point we want to make here and now is that there is considerable uncertainty over how quotas will fare under equal protection intermediate scrutiny. The Court hasn’t reviewed a gender-only affirmative action case in which government made use of a quota, but there are two potentially relevant precedents. One is the Fullilove case mentioned above. That case involved race-only affirmative action, but the Court upheld Congress’s actions seemingly pursuant to an intermediate scrutiny approach. We say “seemingly” because Fullilove was a splintered ruling in which there was no majority opinion clearly laying out a standard of review. And since Fullilove, the Court has decided that all race-based affirmative action, including that undertaken by the federal government, is subject to strict (and not intermediate) scrutiny, under which quotas are not allowed. So Fullilove is almost certainly no longer good law with respect to the standard of review it applied, but query whether it is at least helpful law as to the permissibility of quotas under intermediate scrutiny.

The other case that is tangentially relevant is Johnson v. Transportation Agency, a 1987 case in which the Court upheld a county employer’s affirmative action plan that took gender into account to increase the number of women in leadership positions. We say “tangentially” for two reasons. First, the case was litigated under Title VII (the federal employment discrimination statute), not the Fourteenth Amendment. Although the Court has suggested that federal anti-discrimination statutes embody the same limitations on the use of race (and presumably gender) that the Equal Protection Clause does, there really isn’t much well-developed Supreme Court law on that point. Second, while Santa Clara County’s plan was “intended to achieve a statistically measurable yearly improvement in hiring and promoting minorities and women in job classifications where they are underrepresented,” the plan set “aside no specific number of positions for . . . women” and required only “that short-range goals be established and annually adjusted to serve as the most realistic guide for actual employment decisions.” So there really was no floor or quota or any other mechanical numerical formula in play.

The bottom line is that the question of how federal intermediate scrutiny in gender affirmative action quota cases will play out is somewhat open. A final observation to make here is that those justices (like Ruth Bader Ginsburg) who often analogize gender discrimination to racial discrimination, and who may prefer that racial and gender classifications be treated the same way doctrinally, might find themselves torn as to how strict intermediate scrutiny should be. Indeed, if quotas to increase the representation of women can be upheld, that might also improve the chances that quotas for men in certain settings (which would mean ceilings for women, since there are, as explained below, often a finite number of slots) could also be upheld.

Although, as noted above, our focus is on the federal Constitution, we do observe that gender classifications under California’s constitution are usually subjected by the California courts to strict scrutiny. Whether a case is filed to challenge SB 826 in federal or state court, a claim could be brought under both state and federal constitutions. What is less clear, however, is how strict the California constitution’s strict scrutiny is in affirmative action cases, or, more particularly, in gender affirmative action cases. Simply because a quota is a non-starter under the federal strict scrutiny applied in race cases does not mean that all quotas will be automatically struck down under California’s strict scrutiny. But, as we noted with federal intermediate scrutiny, proponents of a strict form of strict scrutiny in California to protect women from old-fashioned discrimination against them may not want to risk diluting strict scrutiny generally by affording too much deference to the California legislature in SB 826.

Complicating matters further is that California voters in 1996 adopted Proposition 209, which bans the state from giving preferences—much less adopting quotas—on the basis of race or gender in the areas of government employment, education, and contracting. SB 826 does not involve government provision of jobs, school admission slots, or money, and thus may not technically implicate Proposition 209. But it would be an odd thing if California can’t itself adopt a quota for representation of women in its own leadership boards, but can impose such a quota on private leadership boards.

A Creative But Unavailing Argument Made by SB 826 Proponents

Proponents of the California statute contend that they can avoid heightened scrutiny (or at least have it applied differently) because, by actually requiring an expansion in the number of board seats, the law benefits women in a way that does not impose any costs upon men. According to this argument, without the statute, the seats reserved for women would not otherwise be available to anybody because they would not exist. Thus, men are in the same position they were before the law was enacted.

We don’t think this argument can succeed. The Supreme Court has long held that heightened scrutiny applies to all laws that classify on the basis of race or gender or other protected characteristic, even when the government ostensibly seeks to protect or to confer a benefit upon a traditionally disadvantaged group, or aims for a broader social benefit such as promoting diversity. The Court’s view in this regard is that there is no such thing as benign discrimination, at least on the question of what standard of review should apply. Vigilance is needed in part because the short-term pursuit of arguably noble goals, like promoting opportunity, can end up generating inequalities. The Court’s adoption of intermediate scrutiny for gender classifications arose largely in cases involving laws that by one perspective favored women over men: laws that spared women from jury service and other obligations that men incurred, or that gave women access to spousal survivorship programs, child support, or other benefits not available to men on equal terms. The Court recognized that such laws perpetuated old-fashioned notions that women were less capable than men and needed special protections. Thus, even seemingly favorable classifications require the same level of scrutiny as laws designed to make life more difficult for members of disfavored groups.

SB 826 cannot escape these well settled rules. Superficially, by working an expansion in the size of boards, the California law avoids the zero-sum characteristic of the quota and affirmative action programs that the Court has subjected to heightened scrutiny. (That said, the law is hardly costless to the corporation that would prefer a smaller board and must now appoint, pay and support additional directors.) But for a Court that is inclined to look hard at the real-world operations of laws challenged on equal protection grounds, this distinction is unlikely to make a difference. Instead, we think the Court would view the California law as a disfavored gender-based quota.

Consider, for example, if the medical school at UC Davis had responded to the Bakke ruling mentioned earlier—which involved a set-aside of 16 of the existing 100 slots at the UC Davis Medical School for racial minorities—by increasing the size of its entering class from 100 to 116 students and then reserving those additional 16 seats for minority applicants. We are virtually certain that the Court would have viewed the new program to be an impermissible racial quota. Likewise, in Grutter v. Bollinger, Gratz, and Fisher v. University of Texas (the most recent Supreme Court affirmative action case) the flagship public universities of Michigan and Texas wisely did not defend their race-conscious admissions programs on the ground that they had added slots to achieve a critical mass of underrepresented racial minority students and that therefore strict scrutiny should not apply. Or, take an example in the news today. The federal government is currently investigating Harvard, Yale, and other elite universities for allegedly discriminating in undergraduate admissions against Asian-American applicants in violation of Title VI of the Civil Rights Act of 1964. (Title VI prohibits private universities and other entities that receive federal funding from discriminating on the basis of race, color, or national origin. As noted earlier, since Bakke, many have understood Title VI to apply the same standards that apply as a matter of equal protection law to government entities.) We think it most unlikely that the universities under investigation could successfully defend their admissions practices by arguing that over the years they merely increased their freshman class sizes to enroll a larger number of less-qualified whites, and that if that goal were not permitted they would have kept their class sizes smaller. We doubt many people would imagine that a whites-only policy is lawful when it refers to some “extra” seats—anymore than we would believe that a public accommodations law would permit a restauranteur who serves all-comers to open a second location that welcomes only whites.

To be sure, the Court has made clear (as will be discussed more in Part Two) that the purpose behind a racial or gender classification is relevant in assessing its lawfulness. Nonetheless, the level of scrutiny for a racial or gender classification does not vary just because a benign purpose is invoked. Here again, longstanding concerns with the effects of seemingly well-intentioned classifications loom large. Creating an extra classroom seat for a minority medical student risks sending a message that minority students cannot compete with white applicants (and perhaps that they make less qualified physicians). Reserving board positions for women could signal that female executives might underperform their male counterparts (and perhaps that their views or leadership skills should not be trusted or given as much weight as those of men). California need not regulate or prescribe the size of corporate boards, just as it need not operate public universities of a given enrollment (or even at all). Once, however, the state does create seats, whether in the boardroom or in the classroom, and then says who can and cannot occupy those seats, the usual equal protection standards will apply.

In Part Two, we will look more closely at California’s asserted objectives, and also at the possibly impermissible impact SB 826 could have outside the state.