Another California Law Overturned: Diversity Back On The Agenda

CEOs and directors everywhere should expect investors and stakeholder groups to become more vocal on this issue over the next year.

The pushback against efforts to increase board diversity continued this week as a Los Angeles Superior Court judge overturned a California law requiring public companies headquartered in the state have a minimum number of women on their board. This ruling comes after an April 1 ruling from another Los Angeles Superior Court judge struck down California’s law mandating that companies headquartered in the state have a minimum number of women and underrepresented groups on their board. These two court rulings place the decision of whether to emphasize or downplay board diversity back in the hands of each California-based company and its board.

While these rulings focused on companies based in California, directors everywhere should expect investors and other stakeholder groups to become more vocal on this issue over the next year. This may require boards to clarify their company’s position on board diversity now that the California mandates no longer apply. Developing strategies on how to respond to shareholder questions and proposals seeking transparency regarding board diversity and employee actions regarding diversity in general may need to be added to the board’s agenda.

How important is board diversity to your company?

With the spotlight intensifying on board diversity, companies that have made commitments to improve their board makeup may be challenged to reaffirm those commitments. Boards that have done little may be asked for commitments to make changes. The board and management will need to be on the same page regarding the level of board diversity the company is willing to stake its reputation on.

Companies listed on the Nasdaq exchange are likely prepared for many issues surrounding board diversity. The Nasdaq Board Diversity Rule, approved last August, requires companies listed on the exchange to publicly disclose board diversity statistics, and have at least one woman and one member of an “underrepresented group” on their board—if they don’t have two diverse directors, they need to explain why. Nearly a year after the rule went into effect, most Nasdaq companies should have been able to address the board diversity issue sufficiently. Those that are still unsure how to respond to the rule can look at the proxy statements of other Nasdaq companies for ideas on how to handle this issue and reflect their company values. Companies not on the Nasdaq exchange can learn from their examples as well.

Maintaining progress on board diversity

Although, diversity advocates believe the overturning of the California laws will slow the pace of board diversity, they acknowledge there are reasons progress should continue:

• More women and persons from underrepresented groups were added to boards during the short time that the California Laws were in effect. It is hoped that the addition of these new diverse directors will help companies be more open to welcoming this untapped and capable source of human capital. Many talented minority and female executives have been given a great opportunity to help improve the fortunes of the corporations they’ve joined as directors. Their contributions to boards will add to the growing research that shows that more diverse boards produce better financial results than less diverse boards.

• Investors and other stakeholders are continuing to pressure companies to place diverse individuals on their boards and board diversity goals are expanding as a result. This is reflected in the growing number of shareholder proposals regarding board diversity that continue to be filed each year.

• Institutional shareholders such as Blackrock and Vanguard have already said that they will vote against directors who don’t support board diversity, and they can enforce that position at any time. Proxy advisory firms have also tended to recommend shareholders vote against the re-election of directors who do not favor diversifying boards—influence that can affect director appointments and board’s willingness to diversify their ranks.