State Legislative Updates

California Becomes First State To Require Gender Diversity on Boards of Directors

California Becomes First State To Require Gender Diversity on Boards of Directors

The lack of gender diversity on the corporate boards of directors in America is an inarguable fact. What has been argued is what, if anything, the federal or state governments should do about it.

One state, California, has decided something must be done. On September 30, 2018, California’s Governor Brown signed Senate Bill 826, a bill that requires publicly held corporations incorporated or headquartered in California to have a minimum number of women on their board of directors.

This legislation—the first of its kind in the United States—has already garnered a great deal of attention. Some of the reaction has been positive; some, much less so. This article will take a look at the bill, the reasons stated by the legislature for enacting it, and the challenges California faces in implementing its mandates.

What Does Senate Bill 826 Provide?

The quotas: S.B. 826 adds a new Section 301.3 to the Corporations Code, providing:

(1) No later than the close of 2019, a publicly held domestic or foreign corporation whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California, is required to have a minimum of one female director on its board.

(2) No later than the close of 2021, a publicly held domestic or foreign corporation whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California, is required to have a minimum of three female directors if its number of directors is six or more; a minimum of two female directors if its number of directors is five; or a minimum of one female director if its number of directors is four or fewer.

The penalties: The Secretary of State is authorized to adopt regulations to implement Section 301.3 and may impose fines for violations consisting of $100,000 for a first violation and $300,000 for a second or subsequent violation. Each director seat required to be held by a female, which is not held by a female during at least a portion of a calendar year, counts as a violation. Corporations can also be required to file board member information with the Secretary of State and can be fined $100,000 for non-compliance.

Definitions: “Female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth. “Publicly held corporation” means a corporation with outstanding shares listed on a major United States stock exchange.

Application to Foreign Corporations: The bill also adds a new Section 2115.5 to the Corporations Code that states that Section 303.1 applies to a foreign corporation that is a publicly held corporation to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated.

Why Did the Legislature Enact Senate Bill 826?

S.B. 826 also sets forth the legislature’s findings and declarations, which help to explain why the legislature felt that this bill was needed. They include the following:

  • More women directors serving on boards of directors of publicly held corporations will boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees.

  • Numerous independent studies have concluded that publicly held companies perform better when women serve on their boards of directors.

  • Other countries have addressed the lack of gender diversity on corporate boards by instituting quotas. Germany requires 30 percent of public company board seats to be held by women; Norway requires 40 percent. Other European nations that have legislated similar quotas include France, Spain, Iceland, and the Netherlands.

  • One-fourth of California’s public companies in the Russell 3000 Index have no women on their boards of directors. And for the rest of the companies, women hold only 15.5 percent of the board seats.

  • Nearly one-half of the 75 largest IPOs from 2014 to 2016 went public with no women on their boards. Many technology companies in California have gone public with no women on their boards.

  • Several studies have concluded that having three women on the board, rather than just one or none, increases the effectiveness of a board.

  • If measures are not taken to proactively increase the numbers of women serving on corporate boards, studies have shown that it will take as many as 40 or 50 years to achieve gender parity among directors.

Challenges Facing Senate Bill 826

S.B. 826 faces some legal challenges. Governor Brown acknowledged that fact in a letter he wrote to the state Senate, a copy of which he sent to the U.S. Senate Committee on the Judiciary. In his letter the Governor stated:

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

Some have argued the bill violates the Equal Protection Clause of the U.S. Constitution by creating a classification based on gender. A coalition of California business groups claims it violates California’s Constitution, which states, "A person may not be disqualified from entering or pursuing a business, profession, vocation or employment because of sex, race, creed, color or national or ethnic origin."

Others have objected to the application of the quotas to foreign corporations. They claim Section 2115.5 violates the internal affairs doctrine, which provides that the laws of the state of incorporation govern the relationship between the corporation and its directors, officers, and shareholders.

Although it has its detractors there are others who think mandates of board diversity are long overdue. It will be interesting to see if Senate Bill 826 withstands the challenges and if other states follow California’s lead and address the lack of diversity in the boardroom through legislation.

For more details, visit the California Legislative site.   

 

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