California gender diversity law could lead to more women quotas nationally

California gender diversity law could lead to more women quotas nationally

In 2013, Hannah-Beth Jackson sponsored a resolution urging corporations in California to add more women to their boards. Yet, despite studies showing that companies with female directors were more profitable and productive, “we weren’t making much progress by asking politely,” the Democratic state senator from Santa Barbara says.

So Jackson helped write first-of-its-kind legislation that would require publicly held corporations headquartered in the state diversify their all-male boards.

The controversial bill was opposed by more than two dozen business groups, including the California Chamber of Commerce, which argued the quotas were “likely unconstitutional.” Even then-Gov. Jerry Brown was hesitant to sign the bill, citing the many objections and legal concerns.

But he signed it anyway in September 2018 as the #MeToo movement raged, and sent a copy to the U.S. Senate Judiciary Committee which, at the time, had narrowly voted to recommend Judge Brett Kavanaugh’s nomination to the Supreme Court despite sexual assault accusations against him. “Recent events in Washington, D.C. – and beyond – make it crystal clear,” Brown wrote, “that many are not getting the message.” 

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Starting this week, California law requires the all-male boards of publicly traded companies headquartered in the state to add at least one woman. By 2021, boards with five members must have two women, while those with six members must have three. Public companies that don’t comply could face fines of $100,000 for a first violation and $300,000 for a subsequent violation.

More than 90{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the hundreds of publicly traded companies based in California comply with the law, researchers say. As of Dec. 26, 25 companies had not yet, according Clemson University assistant professors Daniel Greene and Vincent Intintoli and University of Arizona professor Kathleen Kahle, who have been studying the issue.

Jackson says there are plenty of qualified women “who are ready, willing and able to serve on corporate boards,” and she’s confident companies will see they’re better off opening up their boardrooms “to the other 52{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the population, which is also, by the way, 70{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of consumers.”

“The corporate boardroom has been a white-male bastion for far too long, limiting the opportunities for women and others to participate,” she says. “I think once companies recognize the value and importance of bringing diversity to the boardroom, we will see this happening more and more.”

Maybe so, but conservative groups object to Jackson’s methods and they are turning to California courts to strike down the law.

Legal challenges from conservative groups

In August, watchdog group Judicial Watch sued on behalf of three California taxpayers, who say that spending taxpayer money to enforce the law violates the state constitution. “California’s gender quota law is brazenly unconstitutional,” Judicial Watch’s president Tom Fitton said at the time.

A second lawsuit was filed by libertarian nonprofit law firm Pacific Legal Foundation, which contends the California law violates the equal protection clause of the U.S. Constitution.

“We think that it’s patronizing to women, that women are doing just fine without government help and the law has the unfortunate consequence of undermining any gains that women are making or would have made in the absence of a quota,” Anastasia Boden, senior attorney with the Pacific Legal Foundation, told USA TODAY.

Boden filed the case in November on behalf of Creighton Meland Jr., a retired corporate attorney and shareholder of equipment manufacturer OSI Systems Inc., who complained the “woman quota” would force him to discriminate on the basis of gender when voting for new board members. On Dec. 12, OSI Systems announced it had added Kelli Bernard, a former deputy mayor for economic development for the city of Los Angeles and executive vice president and national cities leader for infrastructure firm AECOM, to its board.

“If you take a look at the numbers, it’s true that women are not equally represented, but we’re actually near parity in hiring patterns so women are making it there on their own,” Boden says. “This law undercuts those gains and tells a really disempowering narrative about the status of women in the workplace.”

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California Secretary of State Alex Padilla’s office, which is charged with enforcing the law, said it would assess the data on how many companies were complying with the law in March. 

Boards are hiring more women and underrepresented minorities amid pressure from activist shareholders and business leaders intent on shaking up the demographics of those who scale to the most powerful perches in corporate America. 

Corporate boards hiring more women

Courtney Yu is director of research with corporate governance data firm Equilar, which tracks the performance of the 3,000 largest U.S.-traded stocks. Of the 582 directors who joined a board of the Russell 3000 in the third quarter, 45{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} were women, Yu says.

“It is very clear that companies haven’t been willing to do this on their own,” says Stephanie Sonnabend, co-founder and chair of 2020 Women on Boards. In 2010 when her nonprofit organization with the mission of diversifying the corporate boardroom started out, the number of women directors had not budged in a decade.

“It’s only been since the issue has gotten more visibility and individual investors and stakeholders have been putting pressure on companies that they have changed,” Sonnabend says. “The California law just took it to the next level.”

“The corporate boardroom has been a white-male bastion for far too long, limiting the opportunities for women and others to participate. I think once companies recognize the value and importance of bringing diversity to the boardroom, we will see this happening more and more,” says California state Sen. Hannah-Beth Jackson.

Women held a record 20.4{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of corporate board seats nationally in 2019, up from 17.7{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} in 2018, according to 2020 Women on Boards’ Gender Diversity Index. California, which had trailed nationally, made even greater strides, with 21.1{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of seats occupied by women, up from 17.4{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}.

Parity remains elusive. More than 300 companies in the Russell 3000 Index still have no women on their boards, and that could prompt other states to follow California’s lead.

Massachusetts and New Jersey are already considering legislation similar to California. In August, Illinois Governor J.B. Pritzker signed a watered-down version of the California law which requires businesses based in the state to report the number of women and minorities on their boards and their plans to increase diversity. The bill originally would have required every company headquartered in the state to have at least one African American and one woman on its board of directors.

Companies rush to comply with California law

The rush to fall in line with the new law in California intensified in December, with 13 companies adding a female director, up from five in November and six in October, Clemson University’s Intintoli says.

Semiconductor company AXT Inc., biopharmaceutical company Kodiak Sciences Inc. and biotechnology company Sorrento Therapeutics all added a woman to their all-male boards in the last few weeks. 

One technology company, A10 Networks Inc., said in a statement to USA TODAY that it would miss the Jan. 1 deadline, but looked forward “to achieving increased gender diversity on our board.”

Adam Tomasi, president and chief operating officer of Allakos, said in an email that his company, which makes therapeutic antibodies, also would not meet the requirements of the law by Jan. 1 but “we are very committed to diversity, and could not agree more with the spirit of the requirement,” he wrote. “We look forward to having women members on our board, as well as other forms of diversity.” 

Enphase Energy, through a statement from its vice president and general counsel Lisan Hung, said the solar technology company is aware of the new law and “will continue to consider the value of diverse representation on our board.”

A handful of companies escaped the reach of the law when they moved their headquarters outside of California. 

Most holdouts are small companies

Going into 2020, most of the California companies with all-male boards had smaller market caps, revenues and boards of directors, which complicates the task of recruiting a director, Intintoli says.

The cost of replacing or adding a board member is not trivial for small companies either, especially when factoring in the cost of travel and lodging and insurance, he says.

Then there’s the negative market reaction to the addition of a female director.

Shares initially slip, largely driven by concerns that companies won’t be able to meet the law’s demands to recruit more women by 2021, Intintoli’s research with Greene and Kahle found.

“It doesn’t mean the market thinks the presence of female directors is bad,” he says. “It’s how difficult it is for these companies to meet the requirements of this mandate.”

This article originally appeared on USA TODAY: How California gender diversity law could lead to more women quotas

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