California Becomes First State to Mandate Women on Corporate Boards

By Eve Tahmincioglu
October 1, 2018

UPDATE

Will the law finally move the needle on gender diversity in the boardroom?

California Gov. Jerry Brown signed Senate Bill 826 into law Sunday, ushering in the first U.S. state to mandate publicly traded companies add women to their boards. The law requires companies to add at least one woman to their boardrooms by the end of 2019 and a minimum of two by 2021.

“Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America,” he wrote in a letter about his decision.

The reason for the legislation is something most directors have heard before. This from the bill:

More women directors serving on boards of directors of 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 or 50 years to achieve gender parity, if something is not done proactively.

So will this make a difference in the state and beyond?

“This move in California represents just one example of a broader and growing support of diversity on boards — a movement that WomenCorporateDirectors is leading both in the U.S. and around the world,” says Susan C. Keating, CEO of the organization at the forefront of gender diversity in the boardroom.

Indeed, many experts see the move as just part of an ongoing process and not a huge game changer, yet. But it points to how important this issue has become.

Paula Loop, PwC Governance Insights Center Leader, doesn’t find it terribly surprising that this type of legislation is coming out of California, and she’s not convinced other states will follow the lead.

It does, however, “help the dialogue,” she says, a dialogue propped up by institutional investors, including State Street and BlackRock, among others.

(Remember the Fearless Girl?)

Many directors and company executives realize diversity bolsters governance. According to a recent PwC survey of corporate directors, most agree it improves board performance. But the study also found:

• Nearly one in five (18%) says diversity has had no benefit on their board.

• And less than two-thirds (59%) believe it enhances company performance — despite a number of studies that show a correlation between women on boards and strong company performance.

So how do you push companies to change without mandates? “You need investors and shareholders to demand it of the board. That’s really the best push,” Loop says.

Joseph Grundfest, co-director of the Rock Center on Corporate Governance at Stanford University and a member of Directors & Boards editorial advisory board, believes California can better use its power to pressure investors to make diversity changes in the boardroom.

In a paper he recently published titled "Mandating Gender Diversity in the Corporate Boardroom: The Inevitable Failure of California’s SB 826", he said he sees the legislation as “well intentioned” but maintains it “will not achieve its intended effect.” It will, he adds, only lead to a trivial gain of board seats for women “but increase the risk of judicial rulings inimical to broader affirmative action initiatives.”

The better option, he writes, is for California to “use its significant capital market influence to induce major institutional investors to mount more aggressive activist campaigns that can rapidly and materially increase boardroom diversity. These campaigns have a demonstrated history of success.”

For some it's unclear whether the bill goes far enough to lead to real change among boards.

“I believe that the spirit of the bill is moving in the right direction to ensure that there is greater gender equity in corporate leadership, but its implementation might backfire to achieve this goal,” explains Wendy Smith, professor of management at the Lerner College of Business, University of Delaware.

Research, she continues, “shows that one minority member in a group becomes a 'token', whose voice is diminished by the group, or who is relied upon by the group to be the representation of that minority opinion only. As a result, the token member often feels marginalized and unable to bring their 'whole self' with all their talents to the board, and ultimately disengage.”

The bill’s second mandate to add additional women may mitigate tokenism, she adds. "What is most important in this law is that the board would need two to three women by 2021 so that these women are not tokens."

Others are buoyed by California’s diversity push.

“I think once again California is leading the way with respect to progressive legislation designed to protect shareholders as well as women and minorities. It is likely this sort of legislation will expand out to different states and eventually even at the federal level as well,” says Andrew Stoltmann, a Chicago-based securities attorney who handles class action lawsuits and securities fraud claims against companies.

Some, however, believe a cultural shift is needed before the needle moves on gender diversity.

Board member quotas can move the needle, Smith says, "Not enough to see real change. These quotas have to be supported by changes in the cultures to support minorities, corporate codes for governance, etc. This California law is a good start, but will only be effective if it’s also surrounded by other laws, i.e. for term limits; other commitments, i.e. to have more women and minorities on boards, and other changes, i.e. cultural shifts in how we understand women's leadership.”