Show or Tell: A Roadmap for Board Diversity Laws
It now appears — at least until the call dust settles — that California’s statutory efforts to mandate board seats for women and people from underrepresented communities are on hold.
The recent defeats that two trial courts inflicted on California suggest that the time may be right to rethink (and possibly reframe) statutory diversity efforts of boards of directors to focus on disclosure, not on warrants. The first ruling, on April 1, dealt with California law mandating corporate board seats for underrepresented communities, while the second ruling, on May 13, dealt with the state’s historic requirement that which company boards include women.
Both California courts rejected evidence supporting the state’s board diversity mandates. While the procedural paths of these decisions differed slightly, their legal premises rested on the same failure of the state to prove that these laws were narrowly tailored to address specific harms that the state had a compelling interest in addressing.
In summary, both courts found that California had failed to meet its burden of proof to justify state-imposed penalties for missing statutory gender and race milestones for corporate boards. public.
While the state has indicated it intends to appeal the May 13 ruling reversing the gender mandate, it faces a high bar on appeal. Now is the time to seek a statutory solution to inclusive representation on the board of directors that will stand up to legal challenges. A starting point for a solution can be found in long-standing precedents requiring transparency and disclosure rather than the imposition of penalties for failing to achieve representation goals set by law.
The EEO model
The notion of diversity disclosure is not new. In 1966, the Equal Employment Opportunity Commission adopted the mandatory diversity report for employers of 100 or more as a method of collecting data to understand the extent and impact of discrimination. in employment.
The EEO-1 reporting mandate has gone largely unchallenged (except for recent legal skirmishes over the reporting of salary data). The report asks employers to identify racial, ethnic and gender categories for each employee.
This requirement goes far beyond the small group of 3,000 Russell Companies (the top 3,000 publicly traded U.S. companies ranked by market capitalization) that represent most public companies in the United States — nearly 75,000 employers representing 56 million employees filed EEO-1 reports in 2018 alone, the last year for which this data is available.
The SEC-Nasdaq approach
More than a decade ago, the SEC passed a rule requiring issuers to disclose the impact of diversity on the board nomination process. This rule directs boards to address diversity as one of many important factors in board selection, such as board members with disparate viewpoints, professional experience, education, skills and backgrounds. other qualities and attributes, including sex, race and national origin.
These nominating committee disclosures for candidate identification and evaluation and board renewal policies have generally never been seriously challenged or significantly changed, at least until the rule of Nasdaq 2021 diversity goes into effect this year.
Based on Model EEO-1 and in accordance with SEC disclosure rules, effective August 8 (or the date the issuer’s 2022 proxy is filed, whichever is later), Nasdaq issuers must file an initial board matrix indicating the diversity composition of the issuer’s board of directors. via a Nasdaq model. The rule also requires (after a transition period) that issuers explain whether they have at least two different directors and, if not, why.
This “show or tell” rule is not a warrant. Issuers that fail to provide or achieve stated diversity goals may choose to explain the unmet goals in a proxy statement or through public disclosures. The Nasdaq rule is the subject of an ongoing lawsuit challenging the authority of the SEC to implement the rule.
Other Model State Laws
Several states, such as Washington, Illinois and New York, have enacted laws similar to the EEO-1 and Nasdaq show or tell rules, requiring mandatory reporting of board representation.
While Washington law on its face requires a specific percentage of female board members, no penalties are imposed for compliance failures. In fact, the Washington law works like the Nasdaq initiative in requiring transparent reporting through a board diversity discussion and analysis that provides board diversity composition, information on proposed nominees and other board refresh disclosures.
These disclosure templates are solidly designed to withstand legal challenges, because instead of warrants for statutorily protected classifications that trigger in-depth constitutional analyses, the reporting templates are administrative vehicles of transparency, similar to reports. financials inform shareholders about whether a company is achieving its financial and other goals.
Show or tell meets ESG objectives
Inclusive board representation is not just good governance, it reflects the principles of deliberate and transparent governance that stakeholders demand – key foundations of the ESG movement. Transparent diversity information, although not monetary, can be important to the company’s mission. Board refresh practices involve the movement toward a focus on social justice, community representation, and value (including the monetary value of increased shareholder returns and corporate profits) that diverse representation brings to boards.
A “show or tell” method ultimately meets important ESG requirements for meaningful governance processes. In sum, statutory governance initiatives could enable more inclusive board representation if they legally aim to transparently inform shareholders that boards reflect the communities the companies serve.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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jen rubin is a member of Mintz, practicing bicoastal labor law. She is chair of the company’s ESG practice group.