California Passes Law Requiring Boards of Publicly-Held Corporations to Include Women by 2019 (SB 826)

woman on boardOn September 30, 2018, California Governor Jerry Brown signed into law a radical initiative to add women to corporate boards of directors for publicly-held corporations headquartered in California.   According to Brown in a letter to the California State Senate, “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.”  The California Senate approved Senate Bill 826 by a vote of 23 to 9 after the State Assembly narrowly passed the proposal with the bare minimum 41 votes a day earlier.  The Bill was then approved by the Governor and filed with the California Secretary of State.

Brown lawIn an effort to “close the gender gap” in business, the new law requires publicly traded corporations whose principal executive offices are headquartered in California to include at least one woman on their boards of directors by the end of 2019.  By December 31, 2021, this requirement will expand to require that a minimum of two women must sit on boards with five (5) members, and there must be at least three women on boards with six or more (6+) members.  The corporations’ SEC 10-K form will be used to determine the location of the principal executive offices.

The bill requires that by July 1, 2019, the Secretary of State publish the number of domestic and foreign corporations whose principal executive offices are located in California and who have at least one female director. The bill also authorizes the Secretary of State to impose fines for violations of the bill, and provides that funds from these fines are to be available, upon appropriation, to offset the cost of administering the bill.

Penalties for non-compliance will be high, including fines of $100,000 for a first violation and $300,000 for a second or subsequent violation.  Companies must demonstrate their compliance by filing their board member information with the Secretary of State by the respective deadlines. Who Will Be Affected by this Law?

According to Hannah-Beth Jackson (D-Santa Barbara), who introduced the legislation with Senate President Pro Tem Toni Atkins (D-San Diego), “a quarter of California’s publicly traded companies do not have a woman on their boards…With women comprising over half the population and making over 70% of purchasing decisions, their insight is critical to discussions and decisions that affect corporate culture, actions, and profitability.”

business partnersAs of June 2017, among the 446 publicly traded companies included in the Russell 3000 index and headquartered in California, representing nearly $5 trillion in market capitalization, women directors held 566 seats, or 15.5% of seats, while men held 3,089 seats, or 84.5% of seats.
More than one-quarter, numbering 117, or 26%, of the Russell 3000 companies based in California have no women directors serving on their boards.
Only 54, or 12%, of these companies have three or more female directors on their boards.  (SB 826 Sections e (1) to (3)).

The new law could affect the 377 California-based companies in the Russell 3000 stock index of large firms with all-male boards.  In addition, hundreds of smaller firms will also be affected by the law, according to Annalisa Barrett, a clinical professor of finance at the University of San Diego’s School of Business.  More than 80% of the Russell 3000 companies headquartered in California are incorporated in Delaware, according to Barrett, who also heads the firm Board Governance Research LLC.

The conflict created by the new law, the business groups warned, will create “confusion and ambiguity” that “will only lead to costly fines as proposed under the bill and potential litigation.” If the law survives a legal challenge, 684 women will be needed to fill board seats for Russell 3000 companies by 2021, Barrett said.

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

 

Will This New Law Hold Up in Court?

CA Supreme CourtDespite Governor Brown’s enthusiasm for the new law, he admitted that “despite potentially ‘fatal’ legal problems in the measure, it is time to force action.”  Business groups have questioned the legality of a state imposing such requirements on corporations, many of which are incorporated in other states. But Brown was not persuaded by the opposition.

The new law may be vulnerable to a court challenge, said Jessica Levinson, a clinical professor of law at Loyola Law School in Los Angeles. “I’m not at all convinced it would pass legal muster,” she said. “It’s a clear gender preference in that you are saying you need to single out women and get them on boards. The question is can you make that preference and will it hurt men.”

 

The legislation is opposed by more than 30 business groups, including the California Chamber of Commerce, which said it appears to violate existing law and the state and U.S. constitutions because it will “displace an existing member of the board of directors solely on the basis of gender.”

What Are Other Countries Doing?

Europe Map.jpgAccording to Section 1(d) of the Bill, other countries have addressed the lack of gender diversity on corporate boards by instituting quotas mandating 30 to 40 percent of seats to be held by women directors. Germany is the largest economy to mandate a quota requiring that 30 percent of public company board seats be held by women; in 2003, Norway was the first country to legislate a mandatory 40 percent quota for female representation on corporate boards. Since then, other European nations that have legislated similar quotas include France, Spain, Iceland, and the Netherlands.

What Do You Think About this New Law?

Are we overdue for this type of government-mandated gender-inclusion, or is there another way to elevate women on corporate Boards without imposing quotas and strict fines?  Will this new law attract or repel companies from doing business in California? Add your comments below.

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*This article is for informational purposes only, and does not constitute legal advice or create an attorney-client relationship. This article does not make any guarantees as to the outcome of a particular matter, as each matter has its own set of circumstances and must be evaluated individually by a licensed attorney.

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