New California Law Mandates Female Representation on Boards of Directors by December 2019
On September 30, 2018, Governor Jerry Brown of California signed Senate Bill (SB) 826, a pioneering law mandating each publicly-held company headquartered in California to have at least one female on its board of directors. The purpose of the law is to address the lack of representation of women on boards of directors, as one-fourth of California’s public companies do not have female directors.
SB 826 applies to both domestic (those incorporated within California) and foreign (those incorporated in any state or country other than California) corporations with principal executive offices in California.
SB 826 requires the following:
- By December 31, 2019, covered corporations must have at least one female on the board.
- By December 31, 2021:
- if a corporation has six or more directors on its board, then a minimum of three directors must be female;
- if a corporation has five directors on its board, then a minimum of two directors must be female; and
- if a corporation has four or fewer directors on its board, then a minimum of one director must be female.
Covered corporations have until December 31, 2019, to comply or face penalties. A corporation complies with the law for a particular calendar year if at any point in that year the requisite number of women simultaneously served on the board of directors. If a corporation is out of compliance, the following fines can be imposed:
- $100,000 for “failure to timely file board member information with the Secretary of State pursuant to a regulation adopted pursuant to [SB 826]”
- $100,000 for a first violation
- $300,000 for a second or subsequent violation
The California secretary of state will track and report compliance statistics annually. No later than July 1, 2019, the secretary of state will publish a report on its website documenting the number of covered corporations that have at least one female director. The first compliance report will be published by March 1, 2020.
SB 826 is likely to be challenged on several grounds. Opponents of the bill contend it violates the equal protection clauses of the U.S. Constitution and the Constitution of California, as well as the Unruh Civil Rights Law (California Civil Code Section 51), and believe that the bill conflicts with California Corporations Code Section 2116 (the internal affairs doctrine).
The authors of a recent article analyzing when and why diversity improves board performance noted concerns with diversity initiatives that focus primarily on increasing representation of one group without including other potential determinants of success. They noted that a 2015 study found a positive relationship between female board representation and accounting returns, but found that there was no significant relationship between female board representation and market performance. Other research found no relationship to performance at all. “The research found that diversity doesn’t guarantee a better performing board and firm; rather, the culture of the board is what can affect how well diverse boards perform.” They concluded that board diversity is important, but “raised concerns [about] ‘checking the box’ initiatives and ‘tokenism’” and resolved that “concentrating on only one form of diversity isn’t enough.” Further, they found that “social diversity (e.g., gender, race/ethnicity, and age diversity) and professional diversity are both important for increasing the diversity of perspectives represented on the board.”
SB 826 leaves many questions unanswered, including the following:
- Is there a good faith exception?
- What happens if there is a proxy contest and the female nominated by the company loses?
- A board of six or more directors must have a minimum of three directors. Would a board of six directors that is 33 percent female (2 female directors) be fined $100,000.00, while a board with 30 directors that is 10 percent female (3 female directors) would be compliant?
- The law says there is no violation if the required number of females held a seat for at least a portion of the year. What qualifies as “a portion of the year”?
- How will SB 826 ensure these efforts advance broader diversity and the business case that stems from diversity?
- Will SB 896 lead to claims of discrimination or reverse discrimination?
- What will happen if a candidate advances a company’s broader diversity and inclusion efforts but is male?
Despite the expected legal challenges to SB 826 and the open questions, companies may want to begin to address board diversity by practicing “the 3 Cs”:
If an employer determines that it is a covered corporation, it can then assess whether its board is currently compliant with SB 826. If it is currently out of compliance, the company can begin taking steps to ensure compliance by the end of 2019.
- Compliment Diversity and Inclusion Initiatives
SB 826 provides an opportunity for employers to complement their diversity and inclusion strategies, if the changes are implemented with intentionality. Employers can take efforts to resist the “check the box” approach and select candidates that fit the organization’s needs and help the organization achieve its diversity and inclusion goals across gender and other protected classes such as race and ethnicity.
- Continue Unconscious Bias and Cultural Awareness Training
Employers may want to prioritize unconscious bias and cultural awareness training. A critical first step in developing an inclusive environment is developing an awareness of our own biases—conscious and unconscious—and how our biases influence decision-making related to hiring, retention, employee development, and promotions.
SB 826 is an effort to close the gender gap. To maximize SB 826’s effectiveness, employers can think critically about its implementation by incorporating its requirements into larger diversity strategies.