The new legislation seeks to make corporate boards more inclusive.
5 min read
California Gov. Jerry Brown over the weekend signed a bill into law requiring publicly traded companies headquartered in the state to include women on corporate boards of directors.
According to findings from the 20% by 2020 Women on Boards campaign, women held 19.8 percent of board seats of companies on the Fortune 1000 list. A study of the first five months of 2018 by ISS Analytics found that women made up 31 percent of new board directors at the 3,000 largest publicly traded companies in the United States. An annual global survey from Deloitte found that women hold 15 percent of board seats worldwide.
So while the numbers are certainly improving, the progress can best be described as incremental.
In California in particular, there are 377 businesses on the Russell 3000 stock index that have all male boards. And while companies such as Facebook and Tesla each have one female board member in Sheryl Sandberg and Linda Johnson Rice, respectively, they too are going to have grow their numbers to fall in line with the new law.
Related: Achieving Diversity Demands Less Talk and More Action. And Good Intentions Alone Won't Do It.
How does it work?
Now that it’s official, the companies that fall under the law’s purview will be required to have at least one woman on their boards by the end of 2019. By July 2021, at a minimum, there have to be two women on boards that have five members and at least three women on boards that have six or more people. If companies don’t follow the letter of the law, these businesses are looking at fines of $ 100,000 for breaking the rules the first time, then $ 300,000 if they fail to comply again.
But there are questions around whether the bill might run into a few issues that could render it more symbolic than ultimately practical. In his letter accompanying the signed legislation, Brown wrote, “There have been numerous objections to this bill and serious legal concerns have been raised. I don’t minimize the potential flaws that indeed may prove fatal to its implementation. Nevertheless, recent events in Washington, D.C. — and beyond — make it crystal clear that many are not getting the message.”
More than 30 business groups, including the California Restaurant Association and the California Chamber of Commerce, expressed opposition to the bill because, as they wrote in a letter to state lawmakers, “Gender is an important aspect of diversity, as are the other protected classifications recognized under our laws. We are concerned that the mandate under SB 826 that focuses only on gender potentially elevates it as a priority over other aspects of diversity.”
Related: Diverse Teams Drive Innovation in Ways Homogeneous Teams Just Can't
What about businesses incorporated elsewhere?
Even if a company is headquartered in California, it could very well be incorporated in a different state and could argue that it doesn’t have to comply with the bill because, technically speaking, according to federal law, it only has to follow the rules of the state where it's incorporated. For example, as cited by the Los Angeles Times, more than 80 percent of public companies in California on the Ross 3000 list are incorporated in Delaware.
In a statement this summer, the bill’s author, state Sen. Hannah-Beth Jackson, said of the impetus behind it: “One-fourth of California’s publicly traded companies still do not have a single woman on their board, despite numerous independent studies that show companies with women on their board are more profitable and productive. … With women comprising over half the population and making over 70 percent of purchasing decisions, their insight is critical to discussions and decisions that affect corporate culture, actions, and profitability.”
Whether other state or federal representatives will decide to follow suit remains to be seen. If they did, there are other examples they could look to. Norway passed legislation requiring 40 percent of board seats be made up women in 2006. As of 2017, women held 42 percent of those seats. Countries including Belgium, France, Germany, Italy, India and the Netherlands all have similar laws on the books.
But even if there isn’t a legal or regulatory solution, it seems that it has sparked a conversation around diversity on boards. “We have, in fact, seen quite an increase in our search volume in the last month that the discussion has been going on about the legislation,” said Shannon Gordon, CEO of theBoardlist, a platform that connects companies with prospective female board members, who while qualified, may not be on their radar. “Those searches that are coming to us are not all in California. There is a bit of a halo effect that’s happening.”
Gordon explained that theBoardlist community is made up of women who have served on boards already, and those who haven't yet had the opportunity. But those women who do have board membership, already have served on an average of three.
For any entrepreneur who is growing their business and bringing on board members, Gordon said they should be thinking about who it is that can bring their skill set, background and perspective to help the company solve its most pressing challenges. “The good news is that there is a very large pipeline of talented women that are excited and ready to fill those roles, no matter what competency that board is looking for,” Gordon said. “This legislation will force companies to open the lens and look beyond those first order networks. I anticipate that women who have not yet served on board but are qualified to do so are going to get the chance.”
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