California Becomes the First State in the U.S. to Mandate Gender Diversity on the Board of Directors of Public Companies
In September of 2018, California was the first state in the U.S. to sign into law mandatory gender diversity on boards of public companies listed on a major U.S. stock exchange. (Richard Vernon Smith, Forbes). The California law went into effect at the close of 2019 calendar year. It requires any corporation with shares listed on a major U.S. stock exchange that is incorporated in or with a principal executive office in the state of California to have a minimum of one female on its board of directors. (SB No. 826, California Legislative Information). By the end of 2021, the law will increase the required minimum number of directors to two female directors if the corporation has five or three if the corporation has six or more directors.
The law authorizes the Secretary of State to impose (1) a fine of $100,000 for failure to timely file board member information with the secretary of state; (2) a fine of $100,000 for the first violation of not meeting the minimum requirements for gender diversity; and (3) a fine of $300,00 for a second and any subsequent violation of gender diversity. This landmark legislation in the U.S. was the result of decades of lobbying from activists seeking greater gender equality in executive and director positions in corporations in the U.S. (Jeff Green et al., Bloomberg).
At this time, California is the only state that has instituted this type of corporate governance legislation, but other states such as New Jersey and Massachusetts are considering similar measures. (Cydney Posner, Cooley PubCo). If a comparable law were adopted in all 50 states, U.S. companies in the Russell 3000 would need to open up 3,732 boards seats for women. (Jeff Green et al., Bloomberg). A Bloomberg report shows that as of April 4, 2019, 21,424 board seats are currently held by men while women only hold 5,088 board seats on the Russell 3000. If such policies were implemented, the projected increase in women occupying corporate board seats in the U.S. would rise by almost 75%. (Jeff Green et al., Bloomberg).
Although California is the first state in the U.S. to institute this type of corporate governance policy, gender diversity quotas have been adopted in several countries prior to California. (Alison Smale & Claire Cain Miller, The New York Times). Norway was the first European country to legislate gender boardroom quotas. (Alison Smale & Claire Cain Miller, The New York Times). Most recently, Germany committed to improving gender diversity on corporate boards by passing legislation in 2015 that requires 30% of supervisory seats to be held by females. (Alison Smale & Claire Cain Miller, The New York Times). The German system of co-determination is composed of two boards, a management board, and a supervisory board. (Susan Holmberg, The New York Times). The supervisory board is responsible for supervising the general affairs and policies of the management board and the company. (Christoph Seibt et al., Thomson Reuters). Justice Minister of Germany Heiko Maas called the law “the greatest contribution to gender equality since women got the vote” in Germany in 1918. (Vanessa Fuhrmans, The Wall Street Journal)
Senate Bill No. 826, the number of which draws attention to August 26, 1920, the day women were given the right to vote, was championed by the National Association of Women Business Owners (NAWBO). (Jeff Green et al., Bloomberg). NAWBO stated that California, as the world’s fifth largest economy, should “set an example globally for enlightened business practice.” (Hannah Norman, San Francisco Business Times).
Betsy Berkhermer-Credaire, who serves on the board of NAWBO–California, has spent the last two decades attempting to turn gender diversity in corporations into a reality. (Gayle Jo Carter, Aspire). In 2013, Senate Concurrent Resolution 62, authored by State Senator Hannah Beth-Jackson, urged public companies in California to increase the number of women on their boards to one, two, or three, depending on the size of the board. (Hannah Beth-Jackson, SD19). Senator Beth-Jackson believes research has shown that gender diversity on corporate boards is associated with increased profitability, performance, governance, innovation, and opportunity. (Hannah Beth-Jackson, SD19). Despite this, one-fourth of California’s publicly-held corporations have all male boards of directors. (Hannah Beth-Jackson, SD19).
The California legislature noted significant statistics and studies leading up to the implementation of this policy. (SB No. 826, California Legislative Information). A 2012 study by the University of California found that companies with more women on their boards are more likely to “create a sustainable future” through instituting corporate governance structures with a high level of transparency. (SB No. 826, California Legislative Information). Credit-Suisse conducted a six-year global research study from 2006-2012 which concluded that women on boards improves business performance in many key areas. (SB No. 826, California Legislative Information). Some of the findings of the Credit Suisse report include a greater correlation between stock performance and the presence of women on corporate boards, that companies with women on the board significantly outperformed others when the 2008 recession occurred, and that companies with women on their boards carry less debt on average. (SB No. 826, California Legislative Information).
Statistics such as these indicate that companies with greater gender diversity tend to be more responsible with their business decisions than companies with less or no gender diversity. Responsibility and transparency are crucial in corporations, as illustrated by the 2008 financial crisis. (Theodore N. Mirvis, Harvard Law School Forum on Corporate Governance and Financial Regulation). Mary Schapiro, the now retired Securities and Exchange Commission Chair, described the Financial Crisis of 2008 as “[leading] many investors to raise serious concerns about the accountability and responsiveness of some companies and boards of directors to the interests of shareholders, and has resulted in a loss of investor confidence.” (Theodore N. Mirvis, Harvard Law School Forum on Corporate Governance and Financial Regulation).
In the past decade there has been remarkable change in gender diversity trends in director and executive roles in corporations. (Michelle Fabrizi, Forbes). The California mandate is a step in the right direction, but there is still a long way to go. (Michelle Fabrizi, Forbes).