This article was first published on Activist Insight Online on October 14, 2019. For more information about the product, click here.
Gender quota mandates are nothing new in the world of business but it was not until 2018 that the first U.S. state signed a bill to require women on corporate boards. The Californian measure has been met with a range of reactions and lawsuits, begging the question of whether it has been a warning to other states to refrain from doing the same or if others will follow in the golden state’s footsteps.
The measure, which applies to companies that list their principal executive offices in California, requires at least one female director on the board of each California-based public corporation by the end of this year and at least two by 2021 for five-member boards and three for six-member boards.
Corporations can be fined $100,000 for a first violation and $300,000 for subsequent violations. The law also requires companies to report their board composition to the California Secretary of State and imposes a $100,000 fine if a company fails to do so.
According to Activist Insight Governance data, 4.9% of California-headquartered companies in the Russell 3000 do not comply with the mandate to have at least one female director on their boards, although there is still time until the end of 2019. In the rest of the country, 10.9% of Russell 3000 companies, excluding California-headquartered companies, fail to have at least one female member on their boards.
In California, most progress in gender quota on boards seems to have taken place during the past year. More than half of all director appointments in 2019, as of September 26, were female, versus a third in 2018.
Across the country, however, companies have a way to go before a substantial number are compliant with the 2021 mandate. As of September 26, 26.3% of California-headquartered companies were compliant with their respective 2021 mandate, only a slight improvement on the 27.6% of Russell 3000 companies, excluding California-headquartered companies.
Complex constitutional laws
While other countries, including Israel, Norway, France, Italy, and Belgium, previously passed laws requiring gender diversity in the boardroom, Lior Nuchi, corporate, M&A and securities partner in Norton Rose Fulbright’s San Francisco office, told Activist Insight Online that “when California passes a law like this, it does tend to get a lot of publicity in the U.S. and abroad.”
The lawyer explained that “given California’s history of progressive legislation in the U.S. … it tends to cause a movement to grow in the U.S.” On top of this, Nuchi reckoned that due to the large number of U.S. companies headquartered in California, a lot of them will soon have at least one female director, “which will change public perceptions on this issue.”
Nuchi’s positive outlook on the bill is not widely shared, however, and the state has encountered various lawsuits in the past year, including one driven by the Judicial Watch. The California Chamber of Commerce also argued that the composition of corporate boards should be decided internally, as opposed to mandated by the government. “It creates a challenge for a board on achieving broader diversity goals,” said Jennifer Barrera, senior vice president for policy at the chamber.
Although detractors would rather the state bin the bill on the premise that it is unconstitutional, Nuchi believes it “will be upheld by the federal courts which in the U.S. determine if a state law statute is constitutional or not.” While gender quotas is a complex issue under constitutional law, programs assisting women to get access “to the corridors of power” have been allowed by the U.S. Supreme Court, the lawyer explained. Gender diversity “is viewed as a goal that must be achieved by the legislators and the courts in the U.S., and I believe is widely supported by the electorate,” Nuchi said.
Former California governor Jerry Brown knew the risks of the bill himself when signing it. “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation,” Brown wrote last year in a signing statement. “Nevertheless, recent events in Washington, D.C. and beyond make it crystal clear that many are not getting the message.” At the time, Brown also approved legislation requiring sexual harassment training at smaller employers and banning secret settlements related to sexual assault and harassment.
Senator Hannah-Beth Jackson, the author of the gender quota mandate, said she believes having more women in power could help reduce sexual assault and harassment in the workplace. “This is one of the last bastions of total male domination,” she said. “We know that the public and business are not being well-served by this level of discrimination.”