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

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Posted in: Business Law

Two weeks ago, in Part One of this series, we began to analyze some of the intriguing constitutional questions raised by California’s enactment of SB 826, a statute that requires publicly held corporations with principal executive offices in California to have a prescribed number of women on their boards of directors. In particular, we argued that so-called intermediate scrutiny would apply under the federal Equal Protection Clause, and we discussed how California’s mandate of a minimum number of women board members (essentially a quota for women directors) might fare under that scrutiny.

In the space below we take up a second question, namely whether California’s ostensible reasons for enacting and implementing SB 826 are permissible and “important” (which is the standard required under federal intermediate equal protection scrutiny).

An “Important” Government Interest in Addressing Past Discrimination?

As to the adequacy under equal protection of California’s interests, we start by noting the two main objectives advanced in the debates leading up to SB 826’s enactment: (1) remedying prior discrimination against women that has prevented larger numbers of women from serving on corporate boards; and (2) promoting gender diversity on boards which (supporters say) will lead to better corporate performance.

In 1989, in City of Richmond v. Croson, the Supreme Court (in an opinion written by Justice Sandra Day O’Connor) invalidated a Richmond requirement that prime contractors awarded city construction contracts subcontract at least 30% of the dollar amount of the contract to minority business enterprises—defined to include businesses anywhere in the country with at least 51% ownership by Black, Hispanic, Asian, Indian, Eskimo, or Aleut citizens. Richmond argued it was remedying the effects of discrimination in the construction industry, but the Court rejected such a government interest. The majority began by acknowledging that a city or state could have an interest in remedying its own past discrimination and it could also act in response to evidence that its own allocation of government grants to private entities has facilitated discrimination.

The justices were clear, though, in holding that, under strict scrutiny at least, cities and states did not have a compelling interest in remedying generalized societal discrimination, particularly discrimination occurring beyond the borders of the city or state itself. One problem, the Court said, was that of proof of remedial fit:

It is sheer speculation how many minority firms there would be in Richmond absent past societal discrimination, just as it was sheer speculation how many minority medical students would have been admitted to the medical school at Davis [in Regents of the University of California v. Bakke] absent past discrimination in educational opportunities. Defining these sorts of injuries as ‘identified discrimination’ would give local governments license to create a patchwork of racial preferences based on statistical generalizations about any particular field of endeavor.

The entire Richmond program thus looked arbitrary: the 30% figure was not tied to any provable injury, and there was no explanation for why the program deemed Blacks, Hispanics, and Aleuts to merit exactly the same remedy.

Although the Croson analysis is open to question (for example, even specific findings of past and pervasive discrimination by Richmond or UC Davis themselves will not necessarily tell us how many minority-owned firms there would be today in Richmond or how many minority medical students would have been admitted at Davis without such past discrimination), Croson remains the law of the land (likely ever more so with Justice Anthony Kennedy’s departure), And Croson’s analysis highlights the potential challenges California may have in justifying SB 826 on remedial grounds. Courts that apply Croson might conclude that while California is entitled to take steps to remedy the state’s own discriminatory practices, it lacks an interest in remedying generalized societal discrimination that has kept women off corporate boards—so as to justify now a quota system.

Of course, Croson involved race and thus strict scrutiny. As we have observed, gender classifications trigger only the less stringent intermediate scrutiny, and so perhaps a court would allow California greater flexibility than the Supreme Court showed Richmond. But it is also true that the California law sweeps more broadly than did the invalidated Richmond program. The California law applies—literally—across the boards. It treats all corporations, regardless of economic sector, demographic history, or region of incorporation the same, and subjects them all to the same remedy. Even recognizing that a different level of scrutiny applies to gender classifications than to racial sorting, if a remedial construction industry quota is unconstitutional in Virginia, it is difficult to see how a wholesale quota for all of corporate America is likely to survive.

California’s Asserted Interest in Promoting Diversity

What about the second asserted interest, in corporate diversity? Here, Grutter v. Bollinger, the 2003 case upholding the University of Michigan Law School’s carefully tailored race-conscious admissions program, is instructive. In Grutter, the Court accepted the law school’s argument that diversity was a compelling interest in the realm of law school admissions, given the documented educational benefits of diverse classrooms, and also some intuitive broader societal benefits that stem from having good law schools produce a diverse group of graduates. But there are several impediments to upholding the California law on a diversity rationale.

First, Grutter exhibited an unusual respect for the professional expertise of those who run higher education: the Court explicitly “deferred” to the “law school’s educational judgment that . . . diversity is essential to its educational mission.” This seemed to reflect the justices’ view that academic administrators may understand educational dynamics and outcomes better than judges. The majority opinion (interestingly enough, written by Justice O’Connor here too) also emphasized the role that law schools play in shaping political leaders and facilitating political—and not just economic—participation by underrepresented groups. The Court has consistently been more deferential to the concerns of minority groups when political and educational (and they are related) access, as distinguished from economic benefits, are concerned. So even assuming (a big assumption) that Grutter would remain good law with the recent membership changes at the Court, there is little reason to believe the Court’s somewhat generous attitude towards higher education affirmative action will carry over to legislatively prescribed use of race or gender in the purely economic realm, particularly if (as is certainly possible) corporations themselves bring challenges to the California requirement, taking issue with California’s apparent belief that what is good for business is good for SB 826.

Second, and related, while supporters of the California law assert that more women on boards will improve corporate performance, the evidence on that score is arguably more mixed, at least when the assertion is made (as California has effectively made it) for all corporations. Certainly within the business world there is not the consensus on this question that there seems to be among law school administrations, the overwhelming majority of which supported Michigan’s position in Grutter. The less clear-cut the empirical evidence, the less likely a court is to sustain the asserted state interest.

Third, and very importantly, in Grutter, the University of Michigan Law School sought to promote diversity in its student body in all its forms through a holistic admissions program, not one limited to just racial diversity. So, for example, the law school showed that it took diversity of all kinds—racial, gender, geographic, socioeconomic, experiential, occupational, etc.—into account. California’s SB 826 is very different in this regard: it attempts to promote only one kind of diversity (that relating to gender) on corporate boards.

Finally, in Grutter the state was promoting diversity within its own public universities, not private universities located within Michigan, let alone universities founded in other states. California, by contrast, seeks to regulate private corporations and impose diversity upon them. State officials might genuinely want corporate boards to be diverse in their composition—but that desire to regulate outside entities does not necessarily translate, under heightened equal protection scrutiny, into the same kind of state interest that government has in keeping its own house.

In Part Three, we will take up two final questions: (1) Putting equal protection constraints aside, is SB 826 likely to run afoul of the clause in the Constitution conferring power on the federal government to regulate commerce “among the several states” (known popularly as the “Commerce Clause”)?; and (2) What are we to make of California’s seeming objective, in enacting SB 826, to push the boundaries of the law as it currently exists, or, more aggressively still, to make a political statement even without any reasonable belief that the law could be upheld in court?