California Governor Jerry Brown recently signed legislation requiring all publicly-held domestic corporations and publicly-held foreign corporations headquartered within the state to comply with certain minimum gender-based requirements related to the composition of their board of directors. The new law could be viewed as a step in the right direction to advance gender equality at the highest levels of management, but is not without both proponents and opponents.

The Legislation

The newly enacted Senate Bill No. 826 (the “Legislation”) establishes the criteria for whether a corporation is required to have female directors and, if so, how many. The Legislation provides that, by the end of the 2019 calendar year, any publicly-held domestic corporation or publicly-held foreign corporation that has its principal executive offices located in California as disclosed on the entity’s SEC 10-K (each, an “Applicable Corporation”) is required to have at least one female director.

The Legislation further provides that, by the end of the 2021 calendar year, if an Applicable Corporation has:

• four or less directors, then the board must have at least one female director;
• five directors, then the board must have at least two female directors; or
• six or more directors, then the board must have at least three female directors.

An Applicable Corporation not in compliance with the Legislation by the applicable deadlines will be subject to strict and hefty penalties, including a $100,000 fine for a first violation and a $300,000 fine for each subsequent violation.

The History

The Legislation is not the first attempt by California to mandate board participation based on sex. In 2013, California passed a resolution “requiring” public corporations with their principal place of business in California to have at least 30% of the governing board comprised of women. The resolution was not legally enforceable and companies did not take it seriously. A study conducted after the resolution passed showed that only approximately 20% of entities successfully participated in the initiative. In 2017, Pennsylvania passed a similar legally unenforceable resolution, but took it one step further by encouraging not only public companies doing business in Pennsylvania to endeavor to fill a minimum of 30% of its available board seats with women by December 31, 2020, but also encompassed private companies and nonprofit corporations.

Countries in Europe have been out front on this issue. Since 2003, when Norway became the first European country to establish a “quota” that public companies have at least 40% of board seats held by women, France, Iceland and Spain have each enacted similar 40% quotas. In 2015, Germany became the largest economy to establish a gender-specific board quota, but limited the threshold to 30% of board membership. European Union data from 2015 showed that women represented 44% of available public company board seats in Iceland and, from 2007 to 2015, female board participation in 734 large public companies throughout Europe rose from 12% to 23%. The data further showed European countries that established a gender specific board quota did in fact have more gender diverse boards than European countries without similar board requirements.

Reactions to the Legislation

Reactions to the Legislation have been mixed with no shortage of opinions. Katherine Klein, a professor at The University of Pennsylvania’s Wharton School of Business, acknowledged that increased female participation on the board is a step in the right direction for gender equality but cautioned on the Legislation. Specifically, Professor Klein stated:

[t]he mixed part comes from the research evidence regarding women on boards, [which says that] changing the gender composition of a board does nothing for company performance. It doesn’t make it better; it doesn’t make it worse.

Other prominent female business leaders had similar reactions. For example, Sally Susman, an executive vice president at Pfizer, stated:

While this initiative is well intended, I don’t believe that legislating a mandatory quota for board representation is the best approach. In my view, it undermines the credibility of the women who are selected, and diminishes the progress we have already made towards board diversification.

Ms. Susman provides a strong and reasonable argument that it should not take government imposing itself on companies to encourage heightened female participation in the decision-making process; this should happen naturally.

Supporters of the Legislation argue the new law is good for the company in terms of profitability, irrespective of the cultural impact. California State Senator Hannah-Beth Jackson, a co-sponsor of the Legislation, said: “[I]t’s not only the right thing to do, it’s good for a company’s bottom line.” Proponents also contend that diversity and the free flowing exchange of ideas will help improve the quality of decisions being made for the organization.

While there will be those in favor of and against the Legislation, as well as studies and data supporting each position, the jury is still out on whether the Legislation will result in a real practical difference in terms of profitability and cultural impact for an Applicable Organization.

The Takeaway

If your publicly-held corporation is formed in California or is formed in another jurisdiction and has its principal executive offices located in California, then you must begin taking the necessary steps to comply with the Legislation. This may include amending Articles of Incorporation or Bylaws to increase the minimum number of directors on the board and identifying and electing appropriate board members.

While it is unclear whether the Legislation will eventually stand in the eyes of law, it is apparent that governments are encouraging the corporate world to increase diversity and female engagement in the boardroom and management. At least in California, an Applicable Corporation must start transitioning its organization to not only comply with the Legislation, but to embrace the premises on which it seeks to build.

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