Business & Corporate Articles

Will California Continue To Take the Lead On Changing the Landscape of Corporate Boardrooms?

On August 31, 2018, the California State Assembly will vote on Senate Bill 826, which imposes gender diversity quotas on publicly-traded companies headquartered in the state of California. Passed by the California State Senate on a 22-11 vote on May 31, 2018, SB 826 will require these companies to have at least one female director on their boards by the end of 2019. By the end of 2021, a company with five directors must have at least two female directors, or if its board has six or more directors, at least three female directors. Companies may comply with these requirements by filling current openings on the board with female directors or increasing the overall size of the board to create seats for female directors. The penalty for noncompliance is a fine equal to the company’s directors’ average annual cash compensation. Second and subsequent violations will result in fines equal to three times the company’s directors’ average annual cash compensation.

The purpose of SB 826 is to proactively diversify and achieve gender parity on corporate boards, which studies have shown will have a positive impact on a company’s bottom line and lead to increased profitability, performance, productivity, effectiveness, innovation, and sustainability. Supporters praise this bill as a necessary continuation to California’s intention and efforts to improve diversity on boards. In September of 2013, California was the first state to pass Senate Concurrent Resolution 62, a non-binding resolution urging that all public companies in California increase the number of females on their board by the end of 2016. One study conducted by research firm Board Governance Research showed that about twenty percent of companies headquartered in California put women on their boards as a result of SCR 62. Additionally, five other states followed suit and passed similar resolutions. Nevertheless, despite these efforts, over one-fourth of California-based public companies in the Russell 3000 index still have no women serving on their boards.

If SB 826 passes the assembly and is signed into law by the governor, California will be the first state in the country to impose such a requirement. However, it won’t be the first of its kind as several countries have implemented gender quotas for corporate boards. For example, Israel was the first country in the world to legislate a gender quota in 1999, requiring at least one female director on publicly-traded company boards. Other countries that have legislated gender quotas include Belgium, France, Germany, Iceland, India, Netherlands, Norway, and Spain.

Even if SB 826 passes, it will face tough opposition. Critics, including the California Chamber of Commerce acting on behalf of dozens of organizations, argue that this law is not only unconstitutional on a federal and state level, but it conflicts with California civil rights law and the internal affairs doctrine, a choice of law rule in corporations law stating that the laws of the state of incorporation shall govern a company’s internal affairs. Moreover, some critics further argue that this bill only addresses and prioritizes one element of diversity, ignoring other factors necessary to increase overall diversity on corporate boards such as race and sexual orientation.

The landscape of corporate boardrooms is inevitably changing as the push for diversity is creating a shift in the business world. Companies may soon encounter the need to make decisions and adjustments to address diversity internally if they haven’t already, whether as a result of SB 826 or otherwise. Thus, the ultimate question is, will SB 826 be able to help diversify and achieve gender parity on corporate boards if it passes? Only time, and data, will tell.

More information about S.B. 826 can be found here:

Christine Wu is an attorney at law.

**This article is for information purposes only and does not contain or convey legal advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting an attorney. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**