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E-MailMartin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; and Leo E. Strine, Jr. is Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on their Wachtell memorandum.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.
Last Friday, the 2020 California board diversity statute requiring publicly held domestic or foreign corporations whose principal executive office is located in California to have a minimum of “one director from an underrepresented community” on its board by December 31, 2021 was struck down by a Los Angeles County Superior Court judge as violating the Equal Protection Clause of the California Constitution. Under the statute: “‘Director from an underrepresented community’ means an individual 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.”
From the inception of California’s predecessor 2018 statute that required gender diversity on corporate boards, many who cared about improving board diversity feared that the statute had state and federal constitutional vulnerabilities, including because California was purporting to regulate corporations that were domiciled outside California and thus intruding on their internal corporate affairs. But the positive effects of California’s statute have been substantial as board diversity from underrepresented communities has increased markedly since its enactment. It is our hope that corporate America will continue to focus on the need to increase racial, gender and other types of diversity and to capitalize on the full range of talent in our great nation, not just at the boardroom level, but from the ground floor up all the way through to the C-Suite.
To that end, we were proud to spearhead an effort, with the broad support of general counsel of leading companies, former corporate law judges and securities regulators, leading academics, and colleagues at distinguished law firms who are leaders in the corporate and securities laws bar, in favor of NASDAQ’s right as a private actor to encourage diversity in the boardrooms of their voluntarily listed companies. Although a trial judge’s ruling is not necessarily the last word on the California statute—given not only the potential for appeal but also the potential for the legislature to adopt a version less susceptible to challenge—it does underscore the vital role that Corporate America must play if our nation is to fulfill its promise of equality.
As shown by NASDAQ and other corporate leaders who are taking positive action, the private sector can play a powerful, and arguably indispensable, role in making sure that the full promise of our nation’s ideals, and thus the full promise of our economic potential, can be realized, by including all Americans’ diverse talents.
The full list of Amici is available here (pp. 44-63).
One Comment
I DISAGREE with “Corporate Leadership’s Indispensable Role in Promoting Equality” —
I am pleased that now the 2020 California board diversity statute was struck down by a Los Angeles County Superior Court judge as violating the Equal Protection Clause of the California Constitution.
My reasons:
Mandating diversity by design is outside the scope of corporations, infringes upon freedoms, imposes obligations, compels self-identification, and violates Constitutionally protected rights. Moreover, mandating diversity does nothing to reduce unfair discrimination.
Proponents of gender and racial diversity often cite selective, self-serving, inconclusive studies that point to a correlation between diversity and improvements to governance and performance metrics. These studies, now abundant in the literature, do not however demonstrate cause and effect and their claims and merits have not been subject to scrutiny.
Procedures to mandate diversity on corporate boards by self-regulatory organizations are arbitrary and fraught with problems. Definitions of diversity on gender and racial and sexual orientation rely on self-identification. Also, who is to decide whether these criteria themselves are an adequate basis? Why exclude the vegetarian, the atheist, the teenager, the octogenarian, the tall or short or overweight or underweight, vets, persons with disabilities, the Republican or the Democrat, the citizen, and the foreigner from inclusion in chosen diversity criteria?
Everyone is different and therefore is diverse. We are differently shaped by origin, life circumstances, experiences, personal choices, and beliefs inter-alia. By aggregating individuals into neat buckets of color, gender, race etc. we diminish the individual and add nothing. We gloss over the differences between perspectives, knowledge, expertise, and world views of people assigned to such coarse categories. Human beings slotted to within categories are not substitutable and interchangeable. Two members of minority groups, while sharing a similar outward race characteristic may be poles apart in every other dimension and may even have huge overlap with a majority community member.
Subsuming merit to ideology is the road to penury. Also, in a global world where companies compete transnational, such constraints diminish American competitiveness since most other countries do not have such constraints. And given the charged social dialog of the past few years, the asymmetric power proxy advisory firms now have, dissenting voices (such as this one) are likely to face opprobrium. This persuades firms to give in and take the path of least resistance by adopting popular ideological screens.
-Sameer