On September 30, 2018, despite voicing some reservations, California Governor Jerry Brown signed into law SB-826, mandating that publicly traded corporations have women on their boards. The new law will require all California public company boards to have one female director by the end of 2019—a requirement that will impact the nearly 100 California-based public companies that currently have zero women included as directors. By 2021, boards with five members are required to have at least two women, and boards with six or more members are required to have at least three women. All publicly held corporations with a principal place of business in California are required to comply with the new legislation, and penalties for failure to comply are steep, ranging from $100,000 to $300,000 under the newly amended assembly version of the bill.
With the world’s fifth largest economy, backers of the bill argued that it is time for California to join several European countries in mandating gender diversity while taking a leadership role on the issue in the United States. However, the law was opposed by some business groups including the California Chamber of Commerce, arguing it violates the US Constitution and California Constitution and amounts to social engineering in the form of unwanted additional corporate governance regulations. Others claim this kind of legislation is flatly unnecessary and that the market is already working to correct the longstanding problem of lack of diversity on corporate boards. Opponents note that as of 2017, 38% of incoming Fortune 500 directors are women. Recently major index funds began mandating that companies in their index have a minimum of two female directors, or they will vote against the noncompliant board. Further evidence that the law was unnecessary was new guidelines from Vanguard, Fidelity, and BlackRock requiring that boards have at least two female directors as an example of movement in the right direction without added regulations.
The legislation, however, is likely to impact well-known companies like Sketchers and TiVo, which currently have all-male boards. Facebook, Apple, and Tesla would be required to add at least one female board member each by 2021, while Google and Uber have three women on their boards each and are already compliant.
The impact of the bill is yet to be seen, but many of its supporters believe it will improve productivity on corporate boards, citing a 2014 study from Credit Suisse finding that companies with at least one woman director had higher returns on equity than companies with all-male boards. The bill’s sponsor, state Senator Hannah-Beth Jackson, also thinks the bill would be good for business, as research has shown that the presence of women on corporate boards leads to an increase in profitability, performance, governance, innovation, and opportunity. Critics of the bill worry it will harm board attempts to achieve broader diversity goals, citing concerns that racial and ethnic diversity efforts will suffer. What is clear is that at minimum, this legislation will force corporations to include more women on their corporate boards in an effort to promote gender equality.
Lessons from abroad may provide some insight into the legislation’s potential influence. The law is the first of its kind in the United States, but this kind of legislation is not novel in Europe, where a number of nations have already mandated gender diversity on corporate boards. Norway required that 40% of its corporate board seats be held by women over ten years ago, and countries like France, Sweden, Iceland, and Finland soon followed with fines and quotas requiring their publicly traded companies to add women. Germany, the most recent European country to enact gender-based quotas, mandated in 2015 that 30% of its corporate board seats be held by women.
The results of these European regulations are mixed. A 2015 study based on interviews of 24 current and former corporate board members in France found that while the country’s quota policy led to changes in the process of some boards’ decision-making, it did not change the substance of decisions. In Norway, five years after the implementation of gender-based quotas, the country’s public companies had 41% female board representation, but women made up only 5.8% of general managers. Similarly, in France, Germany, and the Netherlands, all of which have implemented some type of quota system, the percentage of senior management jobs that are held by women has barely changed in recent years, and the gender pay gap has not decreased.1
We believe that SB-826 may be worth watching because of what it might suggest about future legislation or other mandates that would require Californian pension authorities to only invest in companies meeting certain gender-based requirements. Such funds have certainly been vocal advocates for advancing gender diversity on corporate boards. For example, in August 2017, the then $330.2 billion California Public Employees’ Retirement System sent letters to 504 companies in the Russell 3000 index that have no women on their boards of directors asking the companies to address the lack of diversity. In fact, a bill was introduced earlier this year that would have restricted public pension funds that make new, additional, or renewed investments with alternative investment funds to managers that have adopted and committed to comply with a race and gender pay equity policy.
“There have been numerous objections to this bill and serious legal concerns have been raised,” Governor Brown said in his signing statement. “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation.” Potential judicial objections notwithstanding, it is clear that business leaders all over California, and the world, will be watching for the impact of its implementation as well as watching for what similar legislation and mandates are on the horizon.