Race and gender quotas are bad for business. In laws passed in 2018 and 2020, California’s legislature required corporations to diversify their boards of directors, if their headquarters were located in California. Corporate boards had to have women on them (even if a company was in an overwhelmingly male industry) and had to include a minimum number of people from historically marginalized racial, ethnic or sexual orientation groups.
Both of these laws were later successfully challenged in California state trial courts (the racial diversity law was also successfully challenged in a federal district court).
But during the time they were in effect, they seem to have reduced the value of the firms they regulated, and caused financial harm.
A December 2024 study by Jonathan Klick, titled “Market Response to Court Rejection of California’s Board Diversity Laws,”, examined the financial effect of court rulings striking down the board diversity laws. Here is the abstract of the study, published in the Journal of Empirical Legal Studies:
California mandated that firms headquartered in the state include women (SB 826) and underrepresented minorities (AB 979) on their corporate boards. These laws, passed in 2018 and 2020 respectively, were held to violate the state’s constitution by judges on the Los Angeles County Superior Court in 2022. This paper examines the market reaction to these surprising court decisions, finding that California firms appreciated significantly on the days of the rulings, and there is evidence that firms that were not in compliance with the laws exhibited larger abnormal returns than firms that were in compliance.
The study concluded that board diversity mandates did “not improve firm value” and might even lower companies’ valuations; indeed, “the market reaction” to court rulings striking down the board diversity mandates suggests that those mandates were economically harmful, explains the study:
Those who advocate for more diversity on corporate boards generally claim that more diverse boards improve firm performance, and they claim that identifying, attracting, and retaining female and minority board members will not generate large costs. Supporters of diversity mandates, such as those adopted in California, at least implicitly suggest that firms are unwilling to exploit this diversity premium without legal intervention. The market reaction to the invalidation of California’s board diversity mandates suggests otherwise.
When California judges found AB 979 and SB 826 to be in conflict with the equal protection clause of the state’s constitution, firms headquartered in California appreciated in value, with non-compliant firms gaining more than compliant firms. Because the court decisions arguably had no repercussions for other changes in corporate law and regulation in the state, which cannot be said with as much confidence for the original adoption of these mandates, these results improve confidence in the conclusion that board diversity mandates do not improve firm value and, perhaps, they even lead investors to lower their valuations.
In 2018, I argued in the Wall Street Journal that these board diversity mandates were a violation of the California state constitution, but the California legislature ignored my legal advice. Regarding California’s gender-based quotas for corporate boards, I wrote
The legislation violates both the U.S. Constitution and the California Constitution, especially the latter. Courts have interpreted the California Constitution as banning gender-based set-asides, even in the rare contexts in which they are permitted under the federal Constitution. Set-asides for women have been struck down in state appeals-court decisions such as Connerly v. State Personnel Board (2001) and Hiatt v. City of Berkeley (1982). Gender-based affirmative-action is subject to “strict scrutiny” under the state constitution.
Under the U.S. Constitution, the ban on gender-based preferences is less absolute. But a federal appeals court struck down a set-aside for women in 1987. That ruling was affirmed, on the merits, by the Supreme Court in Michigan Road Builders v. Milliken (1987). Similarly, an appeals court struck down the FCC’s preference for women in broadcasting in Lamprecht v. FCC (1992), rejecting the FCC’s “diversity” argument.
So far, judges have concluded that the board diversity laws violated the state constitution. For example, Los Angeles Superior Court Judge Terry Green struck down California’s racial-diversity requirement for corporate boards in Crest v. Padilla, Case No.20STCV37513 (Apr. 1, 2022). Los Angeles Superior Court Judge Maureen Duffy-Lewis struck down California’s gender-diversity requirement in Crest v. Padilla, Case No. 19STCV27561 (May 13, 2022).
A federal judge ruled that the 2020 law requiring racial, ethnic, and sexual orientation diversity violated the federal constitution, in Alliance for Fair Board Recruitment v. Weber (2023). But that judge had earlier refused to enjoin the 2018 law mandating gender quotas, in a lawsuit alleging they violated the federal constitution (the federal constitution is somewhat more permissive of gender quotas than racial quotas, although as I noted in the Wall Street Journal, even gender quotas are typically unconstitutional).
