On September 30, 2018, California Governor Jerry Brown signed into law Senate Bill No. 826 [full text here] designed to increase gender diversity on the governing board of California publicly traded companies. Section 1 finds and declares that:
More women directors serving on boards of directors of California 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. Yet studies predict that it will take 40 to 50 years to achieve gender parity, if something is not done proactively. (Emphasis supplied, no citation for the “studies.”)
The preamble contained in the first sentence is actually well-documented. Section 1(g)(2)(A) cites a 2016 McKinsey and Company study titled Women Matter that “showed nationwide that companies where women are most strongly represented at board or top-management levels are also the companies that perform the best in profitability, productivity, and workforce engagement.” This is not limited to the U.S. A Peterson Institute for International Economics, Study on Gender Diversity, demonstrated that there is a direct correlation between increased number of women in roles of leadership in for-profit businesses and the bottom line. And, the Peterson Institute Study found that this direct correlation is staggeringly large. In other words, businesses with greater gender parity in leadership make more money. Another recent study, published in the November-December, 2017 issue of the Harvard Business Review shattered another stereotype by finding that women respond better under competitive pressure than do men.
So how does Cal. Sen. Bill 86 hope to jumpstart the gender parity issue? A publicly held corporation, including corporations incorporated in and outside of California, whose principal executive offices (according to the corporation’s annual report on Form 10-K filed with the Securities and Exchange Commission) are located in California must have on its board:
(a) no later than the close of the 2019 calendar year, at least one female director; and
(b) no later than the close of the 2021 calendar year, at least
(1) Three female directors if the board has six or more directors,
(2) Two female directors if the board has five directors, and
(3) One female director if the board has four or fewer directors. (Section 2)
The law permits the company to expand its board to add the female participant(s). Under the law, “Female” is defined as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.” And, “Publicly held” is defined as “a corporation with outstanding shares listed on a major U.S. stock exchange.” The California Secretary of State is empowered to impose fines upon non-compliant companies in the amount of $100,000 for an initial violation and $300,000 for each additional violation.
So if the proverbial “carrot” does not work – reviewing the extensive and consistent empirical data – California will bring you the financial “stick.” One might ask the John Oliver-esque question: why is this (lack of diversity) still a thing? Good leaders should see the research and promote gender diversity among co-leaders of their own volition. But, male leadership obviously misses the point with the half-century prediction referred to at the beginning of the bill. So the goal should obviously benefit Californians as a whole as Section 1 “finds and declares.”
One problem, however, is whether the state government can force corporate leadership in the “right” direction. Although it appears as of this publication no lawsuit has been filed to block the new law, the bill has come under attack by large corporate interests on several grounds. Those include Federal and State arguments under the equal protection clauses of the U.S. and California Constitutions, and the internal affairs doctrine. The latter is particularly problematic as the doctrine has long provided that voting rights of shareholders, distributions of dividends and corporate property, and the fiduciary obligations of management are all determined in accordance with the law of the state in which the company is incorporated. As many of California’s largest publicly traded corporations are organized under the laws of Delaware (and other states outside California), the physical location of the company is largely of no moment relating to the conduct of the internal affairs of the company. There may be other problems as well, including conflicts between state laws regarding how the company must go about expanding its board (vote of the shareholders v. vote of the board).
As in other contexts where California has sought to supersede the law of the state of incorporation, this new California statute will be ripe for debate and litigation. As a result, counsel for entities with California stockholders, directors, or other definitive connections to California (so called “quasi-California” corporations) may want to be mindful to tailor certificates of incorporation and bylaws to reflect the new California law so that all parties have consistent expectations with regard to the composition of the corporation’s board.
Regardless of your feelings on government overreach or applause for the Great State of California, counsel advising multi-state and international public companies must be mindful of these changes and recognize, based upon the empirical data, there could be more to come.