Can California’s New Board Diversity Act Really Change Corporate Culture?

The summer has been filled with scorching images of racial injustice and the fury that injustice engenders. Now comes autumn, and with it a longing for the refreshing breeze of mighty reform.

The right demand for diversity, equity and inclusion is heard on all sides. This week, California claimed to be responding on the business front.

Gov. Gavin Newsom recently enacted dramatic new legislation that requires public corporations headquartered in California to put at least a minority on their boards by 2021. By 2022, most public boards will need to have at least one third of minority directors. . Under this law, a minority means either a member of a historically under-represented racial group, or a gay, lesbian or transgender person.

In some ways, this is a remarkable breakthrough for diversity advocates in America’s most powerful institutions. Still, in a deeper sense, it’s business as usual. Or worse, it is the co-opting of the drive for racial justice by the dominant systems of power and privilege.

What is diversity for?

Corporate law in the United States requires directors of corporations to use their powers to seek profit for shareholders. Profits cannot be sacrificed for the sake of workers, consumers, communities or the patriotic conscience.

“Cakes and beers,” as an old affair puts it, are allowed, but only to the extent that they are needed to make money for shareholders. This is the rule today, whether it is about corporate diversity, advertising on the theme of the coronavirus or any policy that claims to be socially responsible. In fact, American companies routinely lay off thousands of workers, destroy local communities, and ignore the national interest when profit demands it.

California’s new corporate minority quota follows the Golden State’s adoption of a gender quota for corporate boards in 2018. When this reform was passed, many researchers doubted the constitutional viability of the command. The Constitution requires “equal protection” under the law, and legal scholars generally believe that strict hiring quotas violate this standard. However, it is only recently that a few cases have started to filter that call into question the gender quota in companies. Most companies have complied with the new restrictions, eagerly identifying women who will contribute to the faithful pursuit of the company’s profits.

Proponents of diversity quotas in companies believe that more female directors will improve the company’s responsiveness to the needs of families and children of employees. They hope minority directors will curb corporate abuses that hurt poor and disadvantaged communities. They might be right. But if they are right, it will only happen through informal and unspoken compromises at the margins, in the shadow of the law that says shareholders come first – rather than being explicitly addressed in the room. of the board, in corporate conscience and in most important decisions, where only the shareholders are served.

Without reforming our basic corporate governance law, the California Diversity Statutes represent (hang in there) the commodification of diversity, equity and inclusion by capitalism, and a capture of the impulses of gender and racial justice in the service of the shareholder class, rather than real reform.

Progressives who want businesses to be more socially responsible and more responsive to the interests of women, minorities and future generations should demand that the federal government provide for states when it comes to granting the right to do business under the law. the form of business. And a federal charter law should require that corporate directors, regardless of gender or racial makeup, govern publicly traded companies in a socially responsible manner, and not just in the interests of shareholders.

David Yosifon teaches professional liability and business organizations at Santa Clara Law School.

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