The state of California has often been at the forefront of technological innovation and social trends, and now you can add corporate diversity to that list. With Governor Jerry Brown’s signature, Senate Bill #829 has become law, and it mandates that all publicly held corporations with executive offices in the state must have women on corporate boards
In other words, California has just made corporate diversity at the highest levels a legal requirement. There is also a nationwide movement to have 20 percent of board positions on all companies fulfilled by women.
It is a bold move by the Golden State. And while the new law has yet to face constitutional challenges in the courtroom—and those challenges will surely come—it’s worth noting the impact this gesture could have on making the business world more diverse.
Understanding the Mandate for Women on Corporate Boards
Among California-based corporations, a quarter have no women on corporate boards. Of those that do, female board members comprise only 15 percent of all board executives. The two state senators who introduced SB #829, Senators Hannah-Beth Jackson and Toni Atkins, wanted to remedy that. Senator Jackson noted that it’s time to shatter California’s glass ceiling.
By the end of 2019, any publicly traded corporation headquartered in California will be required to have at least one female board member. Corporations with six or more board members must have at least three female board members by the end of 2021. Those who are non-compliant will be fined $100,000 for the first offense. Continued violations will incur fines of $300,000.
And the identity of violators will be made public. In an effort to be transparent, the California Secretary of State will publish annual reports identifying which companies failed to adhere to the law.
Controversy Over the New Legislation
Not everyone in California’s legislature was happy with the new law. Specifically, some Republican members believe the mandated quota for women on corporate boards was disrespectful to women.
Senator Joel Anderson stated the new law underestimated the power and accomplishments of existing female board members.
Others suggest the new law violates the independent voting rights of corporate boards. Some suggest requiring a specific number of female board members leads to discrimination of other groups.
Those in support of the new legislation cite the importance female board members have on the state’s economy. Having greater gender diversity on corporate boards correlates with higher levels of productivity and performance. In addition, enhanced diversity and inclusion of women support innovation and progress by challenging the status quo.
While female board members exist, they continue to be severely underrepresented despite their qualifications and achievements. Proponents believe the new legislation is required to not only promote better economic health but to overcome institutionalized gender barriers.
“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.” – California Governor Jerry Brown
Challenges Ahead for Both Corporations and the New Law
Without question, California-based companies face serious challenges in complying with the new law concerning female board members. Based on the 2021 requirements of the law, nearly four in every five corporations would currently be non-compliant. Given the time required to identify, vet, and elect a new board member, the deadlines impose serious constraints.
Likewise, companies filing their IPO are subject to these requirements for women on corporate boards immediately. California companies need to act fast if they are to avoid hefty fines and unwanted publicity.
The new legislation may also face its own set of legal challenges. One major issue relates to its Constitutionality. Opponents believe requiring female board members violates the Equal Protection Clause.
In addition, the legislation applies to all corporations headquartered in California. But this may violate the Internal Affairs Doctrine. As per the doctrine, the state of incorporation directs corporate board requirements. Thus, companies headquartered in California but incorporated elsewhere may not be required to abide by the legislation.
Future Ramifications for California Women and Female Board Directors
While California is the first U.S. state to require corporations to have female board members, this is not an unheard of notion.
Some countries in Europe have similar laws, like Norway, which requires 40 percent of corporate boards to have female board members.
Likewise, Massachusetts, Illinois, and Colorado have already passed non-binding resolutions to promote gender equity among corporate boards. These states may be among the first to follow in California’s footsteps.
It’s likely the new California law will face judicial challenges. If the law withstands these challenges, other states will certainly follow suit. And if not, the top bold businesses who are promoting women to the top may realize that gender diversity on their boards is actually in their best interest regardless.