California’s state legislature recently passed SB-826, a bill mandating that companies headquartered in the state include female directors on their boards.
Signed on Sept. 30 by Governor Jerry Brown, it will require that, by the end of 2019, each publicly traded company based in California must include one woman on their board of directors; the quota increases by the end of 2021 based on company size.
The big question that faces the legislation: Can it survive already brewing legal challenges?
In 2013, a state senate resolution urged that by 2017, each public company in California increase the number of women on their board to one, two, or three, depending on the size of the board. California was the first state in the U.S. to adopt this type of resolution.
Nevertheless, as of the December 2016 cutoff date, fewer than 20 percent of the Russell 3000 companies headquartered in California had the minimum number of women directors called for in the resolution. That, in large part, inspired the more formal legislative demand—one that adds enforcement teeth.
No later than the close of the 2019 calendar year, the new legislation requires domestic and foreign publicly held corporations with principal executive offices in California (as reported in their 10-K form filed with the Securities and Exchange Commission) “to have a minimum of one female, as defined, on its board of directors, as specified.”
By the close of the 2021 calendar year, the law increases that required minimum number to two female directors if the corporation has five directors or to three female directors if the corporation has six or more directors.
The law instructs California’s Secretary of State to publish online reports documenting the number of corporations in compliance with these provisions and impose fines for violations.
Failure to timely file board member information with the Secretary of State will cost companies, for a first violation, $100,000; $300,000 for a second or subsequent violation. These fines are intended to offset the cost of administering the bill.
The legislative text details intended benefits.
“More women directors serving on boards of directors of publicly held corporations will boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees, including retired California state employees and teachers whose pensions are managed by CalPERS and CalSTRS,” it says, adding that “studies predict that it will take 40 or 50 years to achieve gender parity, if something is not done proactively.”
A 2017 report by Board Governance Research, conducted by University of San Diego professor Annalisa Barrett, is also cited. Among its findings:
As of June 2017, among the 446 publicly traded companies included in the Russell 3000 index and headquartered in California, representing nearly $5 trillion in market capitalization, women directors held 566 seats, or 15.5 percent of seats;
More than one-quarter (26 percent) of the Russell 3000 companies based in California have no female directors serving on their boards; and
Just 12 percent of these companies have three or more female directors on their boards;
Among the 50 California-based companies with the lowest revenues, just 8.4 percent of the director seats are held by women, and 48 percent of these companies have no women directors; and
Among the 50 largest California companies, with an average of nearly $30 billion in 2015 revenues, 23.5 percent of the director seats are held by women and all of the 50 have at least one female director.
A backgrounder that accompanied the legislation provided additional details to bolster the effort. It claims that “numerous independent studies have concluded that publicly held companies perform better when women serve on their boards of directors.”
For example, a 2017 study by MSCI found that U.S. companies that began the five-year period from 2011 to 2016 with three or more female directors reported earnings per share that were 45 percent higher than those companies with no female directors at the beginning of the period.
In 2014, Credit Suisse research similarly found that companies with at least one woman on the board had an average return on equity of 12.2 percent, compared to 10.1 percent for companies with no female directors. Additionally, it said, the price-to-book value of these firms was greater for those with women on their boards: 2.4 times the value in comparison to 1.8 times the value for zero-women boards.
There is no shortage of opposition to the law, much of it spearheaded by the California Chamber of Commerce.
In a letter to the state legislature, prior to the vote, it and a coalition of like-minded trade organizations made their case. The law, it chided, would displace an existing member of the board, or promote an individual to the board of directors, “solely on the basis of gender.”
“It would place gender as the main criteria of diversity over any other protected classification,” the letter adds. “It also likely violates the U.S. Constitution, California Constitution, and California’s Civil Rights Act, which places California companies in a legal predicament.”
“Gender is an important aspect of diversity, as are the other protected classifications recognized under our laws,” the Chamber wrote. “We are concerned that the mandate focuses only on gender and potentially elevates it as a priority over other aspects of diversity.”
In a statement upon signing the bill into law, Gov. Brown conceded that such constitutional challenges were not unexpected. He also, by copying the U.S. Senate Judiciary Committee in his letter, took a swipe at the controversial confirmation process for Supreme Court nominee Brett Kavanaugh.
“There have been numerous objections to this bill, and serious legal concerns have been raised,” Brown wrote. “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation. Nevertheless, recent events in Washington, D.C.—and beyond—make it crystal clear that many are not getting the message.”
While California takes the lead among U.S. states seeking greater gender-based board diversity, moves are also afoot internationally. Other countries have addressed the lack of gender diversity on corporate boards by instituting quotas mandating 30 to 40 percent of seats to be held by women directors.
Germany is the largest economy to mandate a quota requiring that 30 percent of public company board seats be held by women; in 2003, Norway was the first country to legislate a mandatory 40 percent quota for female representation on corporate boards. Since then, other European nations that have legislated similar quotas include France, Spain, Iceland, and the Netherlands.