Dive Brief:
- A conservative watchdog group has sued California's secretary of state, alleging the state's diversity mandate for corporate boards is unconstitutional, according to an Oct. 2 announcement.
- The suit challenged legislation signed by Gov. Gavin Newsom on Sept. 30 requiring that publicly held corporations in the state have at least one board member from an underrepresented community — "who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender" — on its board by the end of 2021.
- The conservative watchdog alleged the law is unconstitutional and that the expenditure of taxpayer funds or taxpayer-financed resources for compliance with the measure’s requirements is illegal.
Dive Insight:
Many companies revisited diversity and inclusion practices amid calls for racial justice following the killing of George Floyd. Stakeholders, including investors, employees, customers and future talent, are watching to determine if a company’s corporate mission and values indicate that people of color and from diverse backgrounds are valued, Lyndon Taylor, managing partner, diversity and inclusion at Heidrick & Struggles, previously told HR Dive.
Most studies have shown that the business case for diversity in the boardroom includes an increase in profitability and enhancement of a company's culture. However, according to a study published in Organization Science, companies that increased the number of women on their boards experienced a decrease in market value. "Our findings reveal that the level of female representation on a firm's board may send a negative signal to the market regarding a firm's commitment to shareholder value maximization if it is perceived as being motivated by a desire for diversity," researchers said.
California's efforts to increase diversity at the board level has sparked interest in other U.S. state houses, but none have gone as far as the Golden State. New Jersey state senators introduced a bill that would require public companies to have a minimum of one female director by the end of 2019, but the bill did not progress to a vote. A similar bill was introduced in the Washington state senate.
Illinois Gov. J.B. Pritzker, however, signed a law in August requiring corporations based in that state to begin annually reporting female and minority board membership. And the U.S. House of Representatives last year passed the "Improving Corporate Governance Through Diversity Act of 2019," that, if adopted in the Senate, would require public companies to annually disclose the voluntarily self-identified gender, race, ethnicity and veteran status of their board of directors, nominees and senior executive officers. Meanwhile, the House Financial Services Committee released a report, Diversity and Inclusion: Holding America's Large Banks Accountable, that found that seats on the boards of director of financial institutions continue to be filled predominantly by white men.
To improve board diversity, Taylor recommended that companies include diverse executives in appointments and board succession plans; be open to individuals who have demonstrated leadership capabilities outside of traditional corporate positions; and create a robust pipeline by building relationships with diverse, high-potential rising executives.
