Can new California law on board diversity really change corporate culture?

The summer was filled with scorching images of racial injustice, and the fury that injustice breeds. Now comes the fall, and with it a yearning for the cooling breeze of potent reform.

From all quarters is heard the righteous demand for diversity, equity and inclusion. This week, California purported to respond on the corporate front.

Gov. Gavin Newsom recently signed into law a dramatic new statute that requires public corporations headquartered in California to put at least one minority on their board of directors by 2021. By 2022, most public boards are required to have at least one-third minority directors. Under this law, minority means either a member of a historically underrepresented racial group, or a gay, lesbian or transgender person.

In some ways, this is a remarkable advance for proponents of diversity in America’s most powerful institutions. Yet in a deeper sense, it is business as usual. Or worse, it is the co-option of the impulse to racial justice by prevailing systems of power and privilege.

What is diversity for?

Corporate law in the United States requires corporate directors to use their powers to pursue profits for shareholders. Profits may not be sacrificed in the interests of workers, consumers, communities or patriotic conscience.

“Cakes and ales,” as an old case puts it, are permitted, but only such as are necessary to make money for shareholders. This is the rule today, whether the issue is corporate diversity, coronavirus-themed advertising or any policy that purports to be socially responsible. In fact, American corporations routinely lay off thousands of workers, destroy local communities and ignore the national interest when profit so commands.

California’s new corporate minority quota comes fast on the heels of the Golden State adopting a gender quota for corporate boards in 2018. When that reform was passed, many scholars doubted the constitutional viability of the command. The Constitution requires “equal protection” under the law, and jurists usually hold that strict hiring quotas violate this standard. Yet only recently have a few cases begun to percolate that challenge the corporate gender quota. Most firms have complied with the new strictures, eagerly identifying women who will further the faithful pursuit of corporate profits.

Proponents of corporate diversity quotas believe that more women directors will improve corporate sensitivity to the needs of employees’ families and children. They hope minority directors will curb corporate abuses that harm poor and disadvantaged communities. They may be right. But if they are right, this will happen only through informal, unspoken compromises at the margin, in the shadow of the law that says shareholders are first — rather than being dealt with explicitly in the boardroom, in the corporate conscience, and in the most important decisions, where shareholders alone are served.

Without reform of our foundational corporate governance law, California’s diversity statutes represent (brace yourself) capitalism’s commodification of diversity, equity and inclusion, and a capture of gender and racial justice impulses in the service of the shareholding class, rather than genuine reform.

Progressives who want corporations to be more socially responsible and more alert to the interests of women, minorities and future generations should demand that the federal government preempt the states when it comes to granting the right to do business in the corporate form. And a federal chartering law should require that corporate directors, whatever their gender or racial composition, govern publicly traded corporations in a socially responsible manner, not just in the interest of shareholders.

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

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