On Sunday, September 30, 2018, California Governor Jerry Brown signed a bill into law that requires public companies “whose principal executive officers” are based in California to have at least one woman on its board by the end of 2019. This number would rise by 2021, depending on the size of the board. Critics have been outspoken against the measure, urging against mandatory requirements or quotas. Even Governor Brown acknowledged “serious legal concerns” about the law and legal challenges are expected. The law is part of an ongoing and increasingly vocal debate concerning diversity on corporate boards.
The California Law
The law requires any public company with shares listed on a major U.S. stock exchange that has its principal executive offices in California to have at least one woman on its board by December 31, 2019. By year-end 2021, such companies with five directors are required to have two women on the board, and companies with six or more directors are required to have three women on the board. The bill would authorize the California Secretary of State to fine companies $100,000 for failing to comply and up to $300,000 for subsequent violations.
Democratic state senator Hannah-Beth Jackson of Santa Barbara, who co-sponsored the bill, commented, “Gender diversity brings a variety of perspectives to the table that can help foster new and innovative ideas. It’s not only the right thing to do, it’s good for a company’s bottom line.” (Five years ago, Jackson authored a non-binding resolution calling on public companies to increase gender diversity. Since then, about 20% of the companies headquartered in California added women to their boards, according to the research firm board Governance Research. Massachusetts and Illinois have passed similar non-binding resolutions.)
Reports show that of the 445 publicly traded companies located in California, a quarter lack a single woman in their boardroom, while another 37.5% have only one woman director. Smaller companies have fewer female directors. Out of 50 companies with the lowest revenues, 48% have no female directors, according to Board Governance Research LLC.
A 2016 U.S. Government Accountability Office report found that, in 2014, women comprised about 16% of board seats in the S&P 1500, up from 8% in 1997. At that pace, the GAO estimated that it could take more than four decades for women’s representation on boards to be on par with that of men’s.
The bill’s co-sponsors, Governor Brown and other supporters hope the law will accelerate the pace of change. In reaction to the enactment, Senator Jackson tweeted: “Yet another glass ceiling is shattered, and women will finally have a seat at the table in corporate board rooms. Corporations will be more profitable. This is a giant step forward for women, our businesses and our economy.”
Critics of the Law
Critics have been vocal, including the California Chamber of Commerce. Opponents argue that the law violates federal and state constitutions by requiring companies to discriminate against people based on their gender. Further, critics argue that the law takes voting rights away from shareholders. Another criticism of the law is that it conflicts with the principle that internal affairs of corporations should be governed by the state where the corporations are incorporated as the law applies to corporations headquartered in California but incorporated elsewhere. Further, critics argue that by prioritizing women, the law could have the unintended consequence of being detrimental to ethnic minorities looking to increase representations on boards. Critics also oppose a one-size-fits-all, government-mandated approach.
In a statement following the enactment of the new law, Governor Brown acknowledged that “serious legal concerns have been raised” that “may prove fatal to [the law’s] ultimate implementation.” Nevertheless, Governor Brown argued that enacting the law was sending the right message to corporate America.
Part of a Larger Debate
The newly enacted law and opposition highlight an ongoing debate regarding whether diversity on boards leads to improved corporate governance and performance. Proponents of the bill cited studies and reports which find that companies with gender-diverse management teams are more profitable and better functioning. In his 2018 Annual Letter to CEOs, BlackRock Chairman and CEO Larry Fink wrote: “boards with a diverse mix of genders, ethnicities, career experience, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.”
Others, however, argue that peer-reviewed studies suggest that companies do not perform any better or worse when they have women on the board. As one researcher concluded, “board gender diversity either has a very weak relationship with board performance or no relationship at all.”
Board diversity is on the rise, albeit slowly. Shareholders have limited rights, but one core right is the ability to elect board members for most public companies. In general, while management proposes the slate of directors, shareholders vote on the slate. Institutional shareholders have withheld votes when the proposed candidates do not reflect the expertise, qualities and perspectives investors are looking for in board members. This has led to more diverse boards, admittedly at a slower pace than some would like. We expect that vocal, committed shareholders will continue to make their collective voices heard by pushing for boards that best address the needs of their companies. For now, however, attention will turn from the statehouse to the courthouse to monitor if legal challenges will prevent the actual implementation of the law.