California law requiring diversity on corporate boards challenged in court

A shareholder advocacy organization filed a lawsuit this week challenging a state law that mandates public corporations headquartered in California to appoint people of color or LGBTQ leaders to their boards of directors.

The National Center for Public Policy Research filed the complaint on Tuesday, claiming "the diversity quotas injure Plaintiff's right to vote for the candidate of its choice, free of a government-imposed race, sex, and sexual orientation quotas," according to the lawsuit filed in the District Court for the Eastern District of California.

It is the latest legal challenge threatening the fate of the law, Assembly Bill 979, signed by Gov. Gavin Newsom last year.

The organization is being represented by The Pacific Legal Foundation, which filed a lawsuit in 2019 on behalf of a shareholder challenging a similar law, Senate Bill 826, that requires California companies to appoint more women to their boards of directors.

Daniel Ortner, an attorney with the Pacific Legal Foundation, said he aims for the courts to declare both diversity laws unconstitutional.

"The state of California is intruding into corporate affairs to impose quotas based on race and sex and they don't have a good justification for doing so," he said. "Companies are already diversifying, without the need of the state of California forcing the matter. And doing so through a quota, in particular, is discriminatory and unlawful."

In the lawsuit, the conservative group National Center for Public Policy Research says it invests in 14 California corporations that would be impacted by the law, including Apple, Facebook, Netflix, Tesla, Twitter and Wells Fargo.

"These laws, which dole out benefits and impose burdens on the basis of race, sex, and sexual orientation, are unconstitutional," according to the complaint.

The law was also challenged by Judicial Watch, a conservative legal group, last year.

AB 979, authored by Assemblymember Chris Holden, D-Pasadena, aims to increase the number of under-represented groups on California boards.

Despite Latinos accounting for 39% of the state population, they only make up 2.3% of board room seats, a 2021 analysis by the Latino Corporate Directors Association showed. White directors continue to make up the majority of board seats, holding 81% of the positions, according to the report.

"It is not a surprise that those who oppose racial equity are using the legal system in their desperate attempt to hold on to the status quo," Holden said in a statement about the lawsuit.

The law requires corporations to have at least one under-represented director by the end of 2021. Corporations with more than four directors, but fewer than nine, would require a minimum of two diverse directors. Corporations with nine or more directors must have at least three directors from an under-represented community by 2022.