California led the way last year with a pioneering law requiring publicly traded companies headquartered in the state to have at least one woman on their board of directors by the end of 2019.
But a year after then-Gov. Jerry Brown, a Democrat, signed the measure into law, data indicate that boosting the number of women on boards of directors may be easier said than done for companies in the state.
“There are a lot [of companies] that have said they are not able to meet that particular deadline but have every intention of complying,” said David Bahnsen, founder of the Bahnsen Group, a wealth advisory firm based in Newport Beach, California.
The law gives California-based companies that are publicly held until Dec. 31 to ensure they have at least one female director on their boards. By the end of 2021, companies with five-member boards must have at least two female directors, and companies with six-member boards must have at least three female directors.
Companies that fail to have one woman on their boards of directors by the years’ end will get hit with a $100,000 fine for their first violation and a $300,000 penalty for subsequent violations.
The measure seeks to address gender disparity within America’s boardrooms and encourage California companies to promote equitable gender representation on their boards of directors.
“Having diverse life experience and diverse backgrounds and perspectives improve the deliberation and discussions in the boardroom, which leads to better decision-making,” said Annalisa Barrett, an expert on corporate governance and senior adviser at KPMG’s Board Leadership Center.
But data compiled by the California secretary of state and reported in July indicate a fraction of companies covered by the measure complied halfway through 2019.
The secretary of state identified at least 500 publicly held corporations that appear to be subject to the California measure’s requirements. Early data from the state found 183 companies complied with the measure as of July 1, though that figure is likely to change.
A 2018 study from Board Governance Research found there are more than 632 companies that are subject to California’s law.
There is widespread agreement that the gender disparity on boards of directors should be addressed, but there is disagreement as to whether a government mandate like California’s is the best way to close the gap.
Bahnsen said having more female directors is a “wonderful idea” but warned a state-mandated deadline to name a woman to a board could harm qualified women.
“Mandating it would be the biggest single underminer of the concept they possibly could come up with,” he said. “There’s no question that it has served the purpose of calling into doubt the legitimacy of women who have received board positions, that it’s the result of state mandate than merit.”
A key hurdle for the California law is whether it passes legal muster, as the measure was met with early concerns it is legally dubious.
Analyses conducted by the state legislature before the proposal’s passage warned it “potentially” conflicted with the United States and California Constitutions. And Brown acknowledged in a signing statement the law’s shaky legal footing could lead to its demise.
“There have been numerous objections to this bill, and serious legal concerns have been raised,” Brown said last year. “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.”
The law is already facing a test of its legality.
Just before the one-year anniversary of the signing of California’s gender diversity bill, Judicial Watch, a conservative legal group, filed a lawsuit in state court on behalf of three California taxpayers arguing the law violates the California Constitution.
The group is asking the court to block the secretary of state from spending taxpayer dollars or using taxpayer-financed resources to enforce the measure and carry it out by promulgating regulations to fine companies not in compliance.
“What that’s doing is essentially creating a quota, saying you have to have x-number of self-identified females at the exclusion of everybody else, which would be self-identified males and individuals who don’t identify as female,” Michael Bekesha, a senior attorney at Judicial Watch, said. “This is really saying that the state of California prefers women over other genders.”
Bekesha noted that state lawmakers and Brown raised questions about the law’s constitutionality when debating its passage and said Judicial Watch’s clients “feel legislatures should not be passing laws they know to be unconstitutional.”
California is thus far the only state to mandate publicly traded corporations headquartered there have a set number of women on their boards of directors, but the first-in-the-nation law has inspired efforts elsewhere and, if upheld, could be one that other states emulate.
In New Jersey, lawmakers introduced a measure this year requiring publicly held companies headquartered in the state to have at least one woman on their boards by the end of 2019. Bills in Michigan and Massachusetts, meanwhile, would’ve required publicly held corporations based in those states to have at least one female director by the end of 2020 and 2021, respectively.
Some states have passed nonbinding resolutions emboldening companies to diversify their boards, while other state legislatures have passed laws requiring companies to disclose genders of board members in state filings.
“By increasing the information about governance practices, board practices, board composition, it allows for investors, employees, other stakeholders to be aware of the diversity in the boardroom so they can make an informed decision,” Barrett said.
Similar efforts in Europe to impose quotas for women on corporate boards have had mixed results.
In Norway, where a 2008 law requires public companies to reserve 40% of director seats for women, the number of public companies fell in the five years after the quota law took effect, according to a 2015 study from the Nordic Labour Journal. Additionally, the number of board seats declined from 2008 to 2013, leaving fewer seats for females to fill.
The 2015 study also found that eight years after the quota was mandated, Norway’s 60 largest companies had no female CEOs.
While California’s bill aims to boost the number of women in boardrooms, Yaron Nili, an assistant professor at the University of Wisconsin School of Law who has studied gender diversity on boards of directors, said those measures fail to account for the role and clout of the women within those ranks.
“The question is, why do we care about diversity? Do we care about it to say females are on boards, or do we think there are important benefits to women on boards?” Nili said. “If it’s the latter, it’s not enough to just put them on the board, but making sure they get equal opportunity to contribute as the white, male directors do.”
It’s not enough, he added, to only look at quantity.
“You need to look at substance,” Nili said. “While the legislation is putting the focus on the sheer number, it’s an easier way to approach it initially. We need to start shifting and expecting companies to disclose the substantive roles women take.”
While some states have launched their own efforts aimed at closing the gender gap on boards of directors, the private sector has been responding to calls for companies to achieve gender parity in boardrooms.
“The legislatures are basically responding to something that is already happening in society, by investors,” Nili said.
Asset management firm State Street Global Advisors, which commissioned the Fearless Girl statue in New York City, said last year that beginning in 2020 in the U.S., it would vote against the full slate of board members on a company’s nominating committee if the company doesn’t have at least one woman on its board.
BlackRock, the world’s biggest asset manager, said in February 2018 it expects the companies in which it invests to have at least two female directors on every board.
Additionally, 2020 Women on Boards, an advocacy group that aimed to boost the percentage of women on company boards to at least 20% by 2020, announced last month it met its namesake goal. Data analyzed by the organization found women held 20.4% of board seats on publicly traded companies in the Russell 3,000 Index.
“The market is slowly taking care of this problem on its own,” Bekesha said. “Companies are realizing it’s good business to have a more diverse board, to whatever extent that means.”
