California judge strikes down law requiring women on corporate boards

Yahoo Finance’s Alexis Keenan joins the Live show to discuss a California judge striking down a gender diversity law requiring women to serve on corporate boards.

Video Transcript

AKIKO FUJITA: A first in the nation mandate has now been struck down. The state judge has decided California's law requiring women on corporate boards is unconstitutional. Joining us to discuss is Yahoo Finance's Alexis Keenan. And Alexis, this is, what, the second setback that we've seen in terms of these mandates for board diversity.

ALEXIS KEENAN: Right, so this was a law that was written in 2018. It was taking effect in 2019. And what it required was-- this is a California state law, so this is a California state judge saying this law requiring companies, public companies in California, to put women on their boards, the judge says, no, that's unconstitutional, as per California's Constitution.

Now this case was brought by three California taxpayers, and what they argued is that the government can't use tax revenues in order to discriminate. And what the judge held was that, yes, the government cannot discriminate based on gender. They don't have the right to do that. So they're saying, no, this violates the Constitution. Also, the judge said that there's no compelling government interest in order to carry out this law. So the law basically goes away.

So here's what it required more specifically. By the end of 2021, boards that had four or fewer directors that were female-- four or fewer directors, rather, one had to be a woman. A board with five directors had to have at least two women. And then boards with six or more had to have three women. So did that make a difference in the long run, California passing this law that hasn't been in effect very long? Well, it's kind of hard to tell, but California does lag behind the wider look at the US boards generally in terms of gender diversity.

So "The Wall Street Journal" reports that at the end of 2021, 86% of California public company boards had at least two female directors. And that stands in contrast to, you look at the S&P 500 companies, 96% had at least two female directors. And that's up from 58% in 2011. So really hard to tell because this law was not in effect for very long, but definitely California going out on a limb there, trying to push this forward and trying to get more women to serve as directors.

BRIAN CHEUNG: And Alexis, this wasn't the only case that kind of tried to litigate this issue. There was another one that kind of came to the same conclusion, right?

ALEXIS KEENAN: Right, so just a few weeks ago, another law that was passed in California that had been in effect was struck down by a separate judge. And we should also note that the second judge here was a female judge. So you had one male judge and one female judge come to the same conclusion, saying that's unconstitutional.

This other law required California public company boards to put on their boards people of color, as well as people from the LGBT community. So the judge there also saying that cannot stand. So those are state constitutional issues. These, of course, would be challenged on national constitutional issues as well. I think it would have trouble withstanding those.

AKIKO FUJITA: I mean, that kind of begs the question, how do you go about increasing board diversity, right? I mean, at least in the court's opinion, this is unconstitutional for the state to mandate it in that way.

ALEXIS KEENAN: Right.

AKIKO FUJITA: And yet, those numbers show, even though it's a short period of time, things have improved as a result.

ALEXIS KEENAN: They have improved, but a lot of people argue that the pressure's really coming from institutional investors, that they are asking for disclosures about diversity, whether it's gender or otherwise, so that maybe that that's the most effective way here. And it certainly is moving the ball forward.

You also have the NASDAQ, for its part, saying, they've passed a rule now saying that they need to see some gender diversity and ethnicity diversity disclosures in their financial reporting for the companies that are on the exchange. But there is a loophole there that lets companies out if they say why they have not included a more diverse board. But they're asking for these disclosures. So perhaps it's going to come from a different level and not from a legal perspective this time around.

BRIAN CHEUNG: Right, very interesting to watch on that front. Yahoo Finance's Alexis Keenan, thanks so much for the breakdown there.