California’s Gender Diversity on Boards Law and Its Broader Implications for Public and Private Companies
by Joshua Schneiderman
In late 2018, California enacted SB 826, a first-in-the-nation law requiring that a public company headquartered in California have at least one woman on its board of directors. While the law is particularly important for public companies that must act to comply in 2019 or face penalties, it has broader implications that are relevant to all businesses, whether public or private.
Let’s cover the basics of SB 826. Under the law, a publicly held corporation that has its principal executive offices in California must satisfy the following:
- By the end of 2019, the corporation must have at least one woman on its board.
- By the end of 2021, the corporation must comply with the following:
- If the corporation has a board consisting of six or more directors, at least three such directors must be women.
- If the corporation has a board consisting of five directors, at least two such directors must be women.
- If the corporation has a board consisting of four or fewer directors, at least one such director must be a woman.
Corporations that are subject to the law must file information on the makeup of their board with the California Secretary of State. Failure to comply could subject a corporation to the following fines:
- $100,000 for failure to make the requisite filing with the California Secretary of State
- $100,000 for a first violation
- $300,000 for repeat violations
While there is some rumbling that SB 826 violates the U.S. Constitution, the California Constitution and various other civil rights laws by effectively creating a quota system, whether the law withstands judicial scrutiny, its very enactment has widespread implications for businesses.1
Passage of SB 826, for instance, came on the heels of an increasing trend in institutional investors encouraging the companies in which they invest to have increased gender diversity on their boards. In early 2018, BlackRock Inc., which manages more than six trillion dollars in assets worldwide, issued a new set of proxy guidelines stating, “we would normally expect to see at least two women directors on every board.” The prior year, State Street Global Advisors announced that it would begin pressuring companies to increase gender diversity on their boards, and voted against several nominating committee chairs at public companies that failed to make progress in this area.
Also, particularly noteworthy, in mid-2018, Atlantic Street Capital became the first private equity firm to initiate a broad-based institutional effort to recruit women for its portfolio company boards when it hired Susan Stautberg, founder and former CEO and chairman of WomenCorporateDirectors, as Governance Advisor. Supporting the principles behind this initiative, a 2018 report issued by the Global Accelerator Learning Initiative (GALI)—a partnership between the Aspen Network of Development Entrepreneurs (ANDE) and Emory University that has collected data from nearly 14,000 early-stage ventures—found that early stage companies with women as members of their founding team are significantly more likely to report having revenues than companies that lacked women as part of their founding team.
Whether or not SB 826 ultimately withstands judicial scrutiny, the trend is clear – investors are increasingly recognizing the value of and demanding that public and private companies increase gender diversity at the highest levels of their organization. Companies that take initiative to address this reality stand to benefit from the increased investor focus, while those that disregard the increased investor focus could be unwittingly shutting the door to investor opportunities.
- Some have also argued that SB 826 violates the Internal-Affairs Doctrine (a doctrine that says the laws of the state of a corporation’s incorporation should govern issues relating to the internal affairs of a corporation) insofar as it purports to apply to California-headquartered corporations that were incorporated in another state.