California has become the first state in the nation to require that public companies include women on boards of directors. Although the new law is expected to face legal challenges, it buttresses a campaign already under way among large asset managers and other shareholders to compel companies to increase diversity in their management structure.

Assessing the Law’s Goals

In signing the bill into law on September 25, 2018, California Governor Jerry Brown hailed the contribution of women to the economy and expressed high hopes for the effect the bill would have on corporate board selections.

Currently, only 15.5% of California companies’ board seats are held by women, compared with 16.2% of seats in companies on the Russell 3000 Index, and over one-quarter of Russell 3000 companies based in California have no women on their boards of directors.

“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,” Brown wrote in a statement. “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation. Nevertheless, recent events in Washington, DC—and beyond—make it crystal clear that many are not getting the message.”

The new law mandates that public companies with headquarters in the state have at least one female director by the end of 2019. Before August 2021, these companies must have a minimum of two women on boards with five members and at least three women on boards with six or more members. Companies that fail to achieve these goals will be fined $100,000 for a first violation and $300,000 for subsequent failures to comply with the law.

Pressure has been building on other fronts to boost the number of women on boards of directors.

Looking to Other Champions of Diversity

Legal experts have been quick to point out that there are likely to be constitutional challenges to the law, as some men may feel discriminated against.

Even if the law is overturned in the courts, however, pressure has been building on other fronts to boost the number of women on boards of directors. State Street Global Advisors said last year that it would vote against boards at more than 500 companies that have taken no action to improve diversity. State Street uses a proprietary stewardship program to assess environmental, social, and governance (ESG) issues at the 12,000 firms where it owns equities.

“The program is focused on having an impact through the use of our voice and our vote,” said Rakhi Kumar, head of ESG investments and asset stewardship at State Street. “If we are saying we are monitoring ESG issues, then the companies we invest in need to be transparent about it.”

Investment giant BlackRock has also issued guidelines calling for more diversity at companies. Detailing how it wants companies in its portfolio to handle diversity, it issued proxy recommendations that every board include at least two women directors.

While California is the first US state to require that women sit on corporate boards, similar quota legislation already exists in nations such as Iceland, Norway, and France. Among 734 publicly traded European companies, women made up just 11% of board members in 2007. In 2015, women accounted for 23% of all board members associated with those same companies—and they made up as much as 44% of the boardroom total in nations with quotas.

“I’m not a great supporter of quotas, but in this case it’s making difference,” Egon Zehnder CEO Rajeev Vasudeva said. “It has changed the conversation—it clearly has been put on the agenda of companies.”

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