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What effect is California’s new law mandating more women in corporate boardrooms likely to have?

California's Mandatory Gender Diversity
Patricia Brown Holmes

Patricia Brown Holmes

April 18, 2019 10:39 AM

California, the country's most populous state and largest economy, recently passed a groundbreaking, controversial law intended to bridge corporate boardrooms’ gender gap. The Golden State’s then-governor, Jerry Brown, signed Senate Bill 826 into law last September 30, requiring every publicly held corporation with headquarters in California to have at least one woman on its board of directors by the end of 2019. Depending on the size of the board, those companies must have at least two or even three female directors by the end of 2021.

This new gender quota has no shortage of skeptics and critics, and it will inevitably be compared with similar measures enacted around the world. Questions abound over whether the law will survive the inevitable challenges and national scrutiny. Nevertheless, given that numerous studies show increased diversity is good for business, this is just the beginning of the conversation about long-overdue changes in American corporate leadership.

The Catalyst for Senate Bill 826

SB 826 was coauthored by California State Senator Hannah-Beth Jackson (D.–Santa Barbara) and State Senate President Pro Tem Toni Atkins (D.–San Diego), who introduced it on January 3, 2018. Five years prior, Senator Jackson had introduced the nonbinding Senate Concurrent Resolution 62, aimed at urging public companies in California to voluntarily increase the number of women on their boards. California was the first state to adopt such a resolution, which called on corporations to add between one and three women (depending on the board’s size) by the end of 2016. Studies then had revealed few women directors or high-paid executives despite stronger performance by companies with substantial female representation at the top. Still, as of the December 31, 2016, deadline, less than 20 percent of California-headquartered companies listed in the Russell 3000 Index had the minimum number of women directors.

Senator Jackson felt that voluntary encouragement had, as she put it, fallen “on deaf ears.” The legislative mandate soon followed. When Governor Brown signed the bill into law, he observed that it was “high time corporate boards include the people who constitute more than half the ‘persons’ in America.”

Corporate Compliance Requirements and Enforcement

The new law stipulates that any publicly held domestic or foreign corporation with principal executive offices in California—as listed on its annual 10-K form—must have at least one female board director by the end of 2019. By the end of 2021, companies with six or more directors must have at least three women; those with five directors must have at least two.

The law allows a corporation to increase the number of directors on its board to comply, meaning that male directors who are already on the board need not be removed. (Also, it defines “female” as a person who identifies as a woman, regardless of sex at birth.)

Crucially, the law covers publicly held domestic or foreign corporations headquartered in California, regardless of whether they’re incorporated there. The Secretary of State’s office is required to publish regular reports online showing which companies are subject to the law and whether they have complied with it.

Corporations that fail to comply will be subject to financial penalties. The first violation will incur a $100,000 fine; second and subsequent violations will cost $300,000. Having a woman in a board seat for at least part of the year would qualify as compliance.

Companies may also be fined $100,000 for failing to provide information about their board members in a timely manner. California requires publicly traded companies both incorporated and registered to transact business there to file an annual corporate disclosure statement with the Secretary of State’s office; that form has now been updated to reflect the new law.

Potential Legal Pitfalls

Opposition to the bill began to mount when it was first debated. Last May 29, a coalition of business organizations led by the California Chamber of Commerce published a statement opposing it. Although the coalition agreed that diversifying corporate boards was a laudable goal, it expressed concern about the bill’s potentially significant legal problems.

The first pitfall it cited was that a legal requirement for female directors could result in reverse gender discrimination, if a qualified male director candidate were denied a position based solely on the fact that he’s a man. Further, if shareholders failed to approve additional board seats, a company would be forced to remove a male director solely because of his gender. The statute might therefore face a legal challenge involving heightened scrutiny under the equal protection clauses of the Fourteenth Amendment to the U.S. Constitution; under Article I, Section 7 of the California Constitution; and under the Unruh Civil Rights law. This would require California to show a compelling government interest in the gender makeup of private entities’ corporate boards—a potentially difficult bar to clear.

The fact that the law seeks to manage the boards of companies headquartered but not incorporated in the state, meanwhile, may violate the internal affairs doctrine, codified in California Corporations Code Section 2116, under which the law of the state of incorporation, not California law, applies to actions involving the internal affairs of a foreign corporation.

If an internal affairs doctrine challenge were successful, the law’s impact would be limited to companies both headquartered and incorporated in California—a small fraction of the businesses the law is intended to affect. A challenge based on equal-protection violations might eviscerate the law altogether, possibly creating an unintended precedent in affirmative-action and reverse gender discrimination jurisprudence.

Learning From Other Gender Quotas

Also relevant to the debate over the law is how gender quotas for corporate boards have fared in other countries. Norway, Austria, Belgium, Denmark, France, Ireland, Iceland, Italy, Germany, Finland, Switzerland, the Netherlands, Spain, and India have all enacted such laws. The European Union has also proposed formal legislation.

Norway was a pioneer, passing a law in 2003 mandating 40 percent female representation on the boards of publicly traded limited liability companies. As in California, Norway’s policy was voluntary at first, but most firms did not comply, and the law became compulsory in January 2006. Rather than the relatively minor monetary fines provided for in the California law, firms that did not meet Norway’s gender mandate by January 2008 faced the heavy sanction of being delisted from the Oslo Stock Exchange.

In 2000, only 5 percent of board members in Norway were women, with a 30 percent pay gap between them and their male counterparts. By 2008, more than 40 percent were women.

Norwegian businesses expressed concerns that there were not enough qualified women to fill the seats, that unqualified women would be appointed, and that women would be patronized rather than legitimately brought closer to leadership equality. A recent study showed that those concerns failed to materialize: The average qualifications of women showed significant improvement after the reform, and the income gap narrowed. There was, however, little evidence of spillover effects, such as more women in the ranks of top-earning executives. As these board members move into more powerful positions or are able to gain additional influence in corporate governance, this may change, ideally for the better.

Spain, which enacted a “soft” quota in 2007, presents an interesting contrast to Norway. The Spanish law includes no sanctions for noncompliant firms; penalties were omitted from the legislation to accommodate various political and business groups. Spain’s government instead offered compliant firms an incentive in the form of a preference for awarding government contracts.

In 2005, women held just 6.8 percent of director positions in Spain’s largest companies. By 2014, that had risen to only 11.6 percent, far below the desired target of 40 percent. Notably, compliant firms showed no significant increase in their income from public contracts.

With its mixture of carrots and sticks, California’s law falls somewhere between those of Norway and Spain. Its dictates are enforced by penalties and an element of public pressure, though its enforcement provisions are not nearly as stark as Norway’s. It has much sharper teeth than Spain’s law, though, and so far lacks any built-in compliance incentives.

Interestingly, some critics of California’s law have called for diversifying boards through education and incentives, rather than government mandates and penalties. It appears that other policies, such as Spain’s, that have tried that approach have not been effective, though perhaps more substantial rewards and sanctions might have made a difference. Cultural differences likely play a role, too. As California’s law is tested and other states enact similar laws, whether gender equality on corporate boards can come through quotas—and what effect that will have on businesses and the people who work for and lead them—will be noticed worldwide.

What Comes Next?

If we leave board diversity to the marketplace, change will be slow to arrive. The U.S. Government Accountability Office found in 2016 that if women continued to join corporate boards at then-current rates, it would take more than 40 years to reach gender parity. Whether quotas are the best mechanism for effecting this change remains to be seen, but their impact will certainly be much greater than having no laws in place.

No woman wants to be a token board addition, but the women vying for these positions surely know the difference between being interviewed to fill a slot and being asked to join an organization as an important contributor to success. Businesses also know that they won’t grow merely by checking a box, and are likely to compete for the smartest, most qualified women for their boards. Major corporations headquartered in California, such as Apple, Facebook, Tesla, Intel, Yelp, and Alphabet (Google’s parent company), are likely to comply with the law. As discussions about gender equality begin, meanwhile, other important discussions—about diversity and minority representation, among others—can continue. California’s Senate Bill 826 is unlikely to be the last word.

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Patricia Brown Holmes is the first African-American woman to lead and have her name on the door of a major law firm that is not women- or minority-owned. She has practiced law on both sides of the bench in courtrooms at every level and tried cases in state, city, and federal court as well as state appellate, federal appellate, and Illinois Supreme Court. She represents public and private corporate clients in complex commercial, regulatory, and class action litigation

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