United We Stand, Divided We Fall: a Survey of Current Public and Private Initiatives Addressing Board Diversity & a Proposed Sec Diversity Disclosure to Help Increase Board Diversity

• Publication year: 2023

United We Stand, Divided We Fall: A Survey of Current Public and Private Initiatives Addressing Board Diversity & a Proposed SEC Diversity Disclosure to Help Increase Board Diversity

Gabrielle Hunter

UNITED WE STAND, DIVIDED WE FALL: A SURVEY OF CURRENT PUBLIC AND PRIVATE INITIATIVES ADDRESSING BOARD DIVERSITY & A PROPOSED SEC DIVERSITY DISCLOSURE TO HELP INCREASE BOARD DIVERSITY

Table of Contents

Introduction..........................................................................................281

I. An Overview of Current Reforms to Encourage Corporate Board Diversity......................................................282

A. Public Sector Responses ......................................................... 283

1. State Statutory Initiatives .................................................. 283
2. State Investment Fund Initiatives....................................... 287
3. SEC Board Diversity Disclosure Rules.............................. 290

B. Private Sector Responses ........................................................ 291

1. ESG Investing & Proxy Disclosures .................................. 291
2. The Goldman Sachs IPO Pledge ....................................... 293
3. Shareholder Action: Racial Equity Audits & Board Diversity Shareholder Proposals....................................... 294

C. Nasdaq Listing Requirements.................................................. 296
D. International Landscape ......................................................... 297
E. Alliance for Fair Board Recruitment v. SEC............................ 300

II. When the Dust Settles: Anticipating the Impact of Constitutional Challenges to Board Diversity Initiatives....................................................................................303
III. Walking the Line: Board Diversity Initiatives that Are Both Effective & Likely to Withstand Constitutional Challenge.......................................................305

A. What the SEC Board Diversity Proposal Should Include ......... 306
B. Legal Authority & Justifications for an SEC Board Diversity Disclosure ............................................................... 308

Conclusion.............................................................................................310

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Introduction

As of 2022, no Fortune 500 board of directors is proportional to the United States in its racial, ethnic, and gender composition.¹ From statutes that study, encourage, or mandate board diversity to ESG investments to proxy voting guidelines amendments, public and private actors alike recognize this disparity and are taking action to achieve greater board diversity.

Board diversity activism in America began in the early 2000s and called for greater female representation on boards.² Throughout the 2000s and 2010s, most of the debate, activism, and academic research regarding board diversity focused on increased female—specifically white, female—directorship. Still, the activism inspired some change.³ In 1995, women occupied 9.6% of Fortune 500 board seats.⁴ Twenty-five years later, that number rose to 20.9%.⁵ Still, more progress is necessary to achieve gender parity because women account for over half of the United States population.⁶

Unfortunately, the movement for increased female directors often excludes racial and ethnic identities board diversity. However, global attention to racial and ethnic disparities on corporate boards took center stage in the summer of 2020.⁷ Pre- and post-2020 data demonstrates the power of national demands for increased representation.⁸ For example, the percentage of Russel 3000 companies with no racial or ethnically diverse directors on their board in 2020 but only 10% lacked diverse directors in 2022.⁹ 2022 was also the first year in which all S&P 500 companies had at least one person of color director.¹⁰ Now,

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36% of the S&P 500 companies have at least three racially or ethnically diverse directors.¹¹ George Floyd's, Ahmaud Arbery's, and Breonna Taylor's brutal murders achieved this shift in boards' racial and ethnic composition—later termed the "George Floyd Effect.¹² Despite recent progress in board diversity, America has more progress to do to achieve representative boards.¹³

A 2020 study found an overwhelming majority of participating companies either made either no progress or regressed in achieving board diversity in recent years.¹⁴ Even when companies realize gains in diversity, white women benefit the most.¹⁵ At the current rate, minority women could achieve a proportional amount of board seats in Fortune 500 companies no earlier than 2046.¹⁶ Thus, both public and private actors must pressure corporations more to achieve today for what should have been won yesterday—boards of directors that look like the people they serve.

This Comment analyzes legal routes of activism that are likely to achieve greater board diversity and withstand constitutional challenges. Section I surveys the current public and private initiatives that address board diversity and their effectiveness. Section II details the current legal challenges to board diversity initiatives, Alliance for Fair Board Recruitment v. SEC and Crest v. Padilla I and II. Section III anticipates those constitutional challenges' impact on board diversity advocacy and ESG investing. Finally, Section IV proposes a board diversity disclosure framework as a potential way to address board diversity that will likely aid efforts to increase board diversity and withstand legal challenges.

I. An Overview of Current Reforms to Encourage Corporate Board Diversity

The private and public sectors increasingly recognize the value of board diversity and respond in different ways. This section surveys the public and private sectors', Nasdaq's, and other countries' approaches to board diversity and evaluates their effectiveness, limitations, and potential legal challenges.

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A. Public Sector Responses

1. State Statutory Initiatives

As there is no federal board diversity law, states led the charge in public policies that address board diversity.¹⁷ The result is a patchwork of policies as diverse as the United States. However, the American approach does not operate in a vacuum. European countries acted long before America, and the literature categorizes the four approaches to redress as (1) mandatory quotas, (2) comply or explain, (3) voluntary, or (4) non-binding resolutions.¹⁸

California is the only state to implement mandatory quotas.¹⁹ California Corporations Code § 301.3 and § 301.4 (also known as S.B. 826 and A.B. 979, respectively) require that every publicly held domestic and foreign corporation whose principal executive office is in California have at least one director who self-identifies as a woman and one director from an "underrepresented community."²⁰ A member of an underrepresented community is someone who "self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native" or someone "who self-identifies as gay, lesbian, bisexual, or transgender."²¹ The number of requisite directors correspond to the corporation's board size, but every public corporation with its principal place of business in California needs at least one female director and one director from an underrepresented community.²² On the other hand, corporations with nine or more board members need at least three female directors and three directors from an underrepresented community.²³ Before injunctions were issued preempting enforcement of these statutes, corporations faced up to a $300,000 fine for noncompliance.²⁴

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While both California statutes were eventually held unconstitutional,²⁵ California's legislative advocacy achieved more diverse boards. Women hold 34.1% of presently existing board seats in Californian companies, which is the highest rate of female representation in the country.²⁶ Of the female directors appointed within a year after the passage of § 301.3, 76% held advanced degrees, and 73% were "employed on top of their new board roles, most commonly in C-suite positions."²⁷ This data harshly rebuts the allegations that mandatory quotas force corporations to elevate unqualified candidates to board positions.²⁸ One year after § 301.4 enacted § 301 of the § 358 impacted California corporations complied with the law despite legal challenges.²⁹ While courts have since enjoined California's mandatory quota approach,³⁰ it demonstrates that a mandatory quota approach with a harsh fine can quickly and effectively achieve greater board diversity, even amidst legal challenges.³¹

Other states take their own unique approaches to bridge corporate board disparities. For example, Washington adopted a version of the comply-or-explain approach in the Women on Corporate Boards Act.³² The Women on Corporate Boards Act requires that 25% of individuals on public companies' board of directors self-identify as a woman or the company must deliver a "diversity discussion and analysis" to its shareholders at the annual shareholder meeting.³³ The presentation must include many of the same disclosures that Item 407 requires, such as a discussion of whether the board considers diversity when nominating candidates, the existence of any policy for identifying or nominating diverse board members, and any company-specific mechanisms for refreshing

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the board, like term or age limits for directors.³⁴ Washington is second in female representation on boards, falling only four percentage points behind California.³⁵ However, Washington has not yet amended or adopted any law that addresses diversity in race, ethnicity, or sexual orientation.³⁶

Maryland law, on the other hand, only addresses racial diversity.³⁷ It requires all commercial enterprises incorporated or registered to do business in Maryland and all Maryland non-profits either (1) demonstrate diverse membership within the board of...