California, home of Hollywood, surf beaches, endless sunshine and corporate gender equality? That may soon be the case after Senate Bill 826, which requires publicly held companies based in the state to have at least woman on their boards of directors by the end of 2019, has become law.

By Daniel Herborn

Posted on October 4, 2018

The law will also require publicly traded companies to have at least two women on a board of five members and at least three women on a board of six or more people by the end of July 2021.

At the end of May 2018, women held just 18% of all positions on the boards of the 3,000 largest publicly traded corporations in the US, though these numbers were rising with 31% of new board members being women.

Californian Governor linked the boardroom diversity law to #MeToo movement

Hundreds of public companies in California, home to many of the world’s largest high-tech companies, will potentially need to add women to their boards to be compliant.

Companies that fail to comply with the legislation will be subject to fines of up to US$100,000 in the first year of non-compliance and US$300,000 in additional years. Companies that fail to report can also be fined US$100,000.

It may be in the interests of companies to improve gender equality for purely financial reasons; research from Credit Suisse has suggested companies with greater gender diversity on their boards see better stock market returns and higher valuations than their male-dominated peers. The study also found that companies with all-male boards had an average return on equity of 10.1%, less than the average equity return of 12.2% in companies with at least one woman director.

Governor Brown attached a signing message to the bill, linking its objective of furthering gender equality to the #MeToo movement and the furore over sexual assault allegations against Supreme Court nominee Brett Kavanaugh.

Annalisa Barrett, a Professor of Finance at the University of San Diego’s School of Business, said that the law will mean 684 more women will get a seat on the boards of the US’s top 3,000 companies along with many more in smaller operations.

California follows European nations in passing a law to promote gender diversity in boardrooms

Companies that are already complying with the new law include Alphabet, Facebook, Apple and Intel, who each have two women board members. Netflix is also compliant with four of its 12 board members being women.

The legislation is a first for a US state, but similar quotas have already been made law in Germany, Finland, France and Sweden. Norway has been a leader in legislating for boardroom diversity; listed companies there must have at least 40% of their directors be women.

Whether the law will actually lead to an influx of women in positions of power remains an open question as it has been bitterly opposed by business groups and is considered vulnerable to a potential legal challenge. The state’s own legal advice on the bill warned it would “likely be challenged on equal protection grounds”. The advice went on to say the quota system set up by the bill would also be difficult to legally defend.

Another potential issue is that the law only catches those companies that are incorporated in California. Many companies have extensive operations in the state but are incorporated in states such as Delaware for tax minimisation purposes.

In his signing message, the Californian governor acknowledged its difficult path to becoming legislation. “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation,” he wrote.

“Nevertheless, recent events in Washington, DC — and beyond — make it crystal clear that many are not getting the message.”

Header image: Maarten Van den Heuvel (mvdheuvel)