California recently became the first state in the US to enact a law requiring companies based there to include at least some women on their boards of directors. The legislation, signed by Governor Jerry Brown on the last day of September, mandates that all publicly traded companies headquartered California (not just those chartered there) have at least one woman on their boards by the end of 2019. For companies with at least five directors, at least two or three of those seats must be filled by women by 2021, depending on the size of the board. Companies that do not comply will be subject to fines by the state.
California’s mandate has ignited a firestorm of controversy, with business groups like the California Chamber of Commerce saying it violates constitutional principles and effectively requires companies to discriminate against men, while even some advocates of diversity in corporate leadership question whether it will have the kind of impact it is intended to have. The state will likely be sued over the law and may lose, which Brown acknowledged in his letter to the state Senate announcing his signature of the bill. “I don’t minimize the potential flaws that may indeed prove fatal to its ultimate implementation,” he wrote. The constitutional issues at hand concern not only the issue of reverse gender discrimination but also a question of jurisdiction, as the Supreme Court has ruled in the past that a corporation’s internal affairs are governed by the statutes of the state in which it is chartered, not where its headquarters is located.
Nonetheless, even if the law is ultimately defeated in court, it is intended partly as a marker of determination on the part of the California state government to ratchet up pressure on companies there to make more progress on diversity and inclusion, particularly in leadership roles where women and minorities remain heavily underrepresented. Simply bringing visibility to the issue counts as a win for some advocates of gender equality, Vox‘s Emily Stewart reported:
“If nothing else, what this law is doing is increasing the visibility and awareness on the issue itself and the importance, and that is a win in and of itself,” said Serena Fong, the vice president of strategic engagement at Catalyst, a nonprofit focused on promoting women in business.
Opponents of the law have noted that corporate America is making progress on its own toward gender parity in the boardroom, albeit more slowly than would be ideal. Citing the ongoing campaigns by activist investment funds like State Street, advocates of a more market-based approach to solving this problem say shareholder pressure is a more effective and legally sound means of forcing companies to gender-balance their boards. Stewart offers a snapshot of the debate:
“The bottom line is, we need to make [board diversity] a reality, and the only way you make it a reality is if the marketplace demands it,” David Katz, a partner at Wachtell, Lipton, Rosen & Katz in New York City, said.
Still, waiting for the markets to come around and corporate culture to change isn’t exactly a satisfying answer for women who want more equal representation now, not when they’re old or dead. The fact that women need to make an evidence-based case for their inclusion on boards, in some ways, proves the point. Nobody asks the opposite question, said Fong, the Catalyst vice president: “Where is the business case for keeping a board all white and all male?”
But the specific business case for having more women on boards may not be as clear-cut as advocates say it is, either. Wharton management professor Katherine Klein’s meta-analysis of studies that have assessed the business impact of boardroom gender equality found that there was no statistically significant difference in the bottom-line outcomes of companies based on the gender balance of their boards. Some studies have found, however, that the diversity of perspectives women bring to top-level corporate leadership helps organizations make better decisions. Knowledge@Wharton solicits the opinions of academics on both sides of this debate:
Annalisa Barrett, clinical professor of finance at the University of San Diego’s School of Business, noted that the legislation also makes reference to “evidence that shows that there are many aspects of business performance that do improve when there are diverse viewpoints around the boardroom table.” …
Klein said “there are hundreds of studies” on gender diversity, and that it would not be a good idea to “cherry pick” findings to support a specific stance. “When you look at the meta analyses on these — which are statistically rigorous efforts—they essentially find zero relationship between the diversity and the gender diversity on the board and company performance. There is no business case for putting women on the board. There is no business case for putting men on the board. Gender has zero impact.”
Both Klein and Barrett agreed, however, that having more women on company boards gives them a bigger say in key decisions. These include selecting a CEO, and ensuring that the CEO “is achieving strategic goals, that the company has a culture that is inclusive and is positive and does not lead to making risky decisions—all of which can be reflected in the incentives plans and the pay packages,” Barrett said.
California is following the lead of several European countries that have mandated women in the boardroom at the national level, a policy Norway pioneered in 2006. David Matsa, a professor of finance at Kellogg School of Management at Northwestern University, studied the impact of Norway’s mandate in collaboration with Amalia Miller of the University of Virginia. Their findings, Matsa wrote at Quartz when the California law was signed, indicated that more women on boards could have certain specific benefits to employees:
Miller and I compared Norwegian companies forced to add women on their boards to other companies (in Norway and other Nordic countries). We found no significant differences in revenues, in rates of mergers and acquisitions, or in most costs. But costs were higher in one area: labor. The cause wasn’t higher wages, but higher relative employment. Companies affected by the quota were more likely to retain workers during downturns. In fact, during the 2008-2009 financial crisis, companies required by the quota to have a significant female board member presence undertook 65% to 80% fewer layoffs.
Another insight into the impact of female leadership on governance comes from a study Miller and I conducted of women-owned firms in the US, which showed these companies were less likely to use temporary workers and leased workers (workers who are actually employees of a third-party, making their work arrangement less secure). We found that women-owned companies reduced their workforces less than other firms during the 2008-2009 recession—the implication being that women-owned and/or women-led firms are often more employee friendly.
Also writing at Quartz, Brian Bolton, Associate director of the Global Board Centre at IMD Business School, argues in favor of mandates like California’s, insisting that “even the largest institutional investors aren’t always able to effect corporate behavior,” and “left to their own devices, companies don’t always know best”:
Another issue concerns how companies define “diversity”. Recent research suggested that when companies do expand their definition of “diversity” beyond gender or ethnicity, they end up appointing directors with different experiences and perspectives—but at the expense of women and minorities. That is, boards do not increase the number of diverse directors on the board, but rather increase the types of diversity on the board. A board may go from having one female and two non-white directors, for example, to having two female and one non-white director. So firms may appoint more women but at the expense of having fewer other underrepresented minorities or vice versa.
Bolton furthermore notes that one root cause of there being so few women on boards is that women, especially those who have children, are systemically hindered from pursuing the career paths that typically lead to boardroom. Without a structural change in the corporate world, businesses have insufficient incentive to support their high-potential female employees and develop them into board-ready executives:
California’s new law is just such a structural initiative. The same is true about national quotas for gender diversity in Norway, France, Italy and many other countries. Changing histories of economic, cultural and social traditions is a long-term investment. And men and women have always responded to how markets incentivize them. Mandating quotas for gender diversity changes the labour market incentives for both men and women.
At the Harvard Business Review, Shivaram Rajgopal and George Fleck make another important point about which companies are already adding women to their boards, and which are not:
Between April 1 and September 24 2018, 228 women have been appointed to boards relative to 433 men. That data points to the well-known gender disparity in the board room. However, when we probed a little deeper, a different picture emerges. When we focus on companies with a market capitalization of $5 billion or more, interestingly, the male tilt goes the other way. That is, 57 women have been appointed to boards of such large companies relative to only 19 men. Hence, pressure from the media and large institutional investors appears to have largely worked in such companies at addressing the gender imbalance.
However, when we consider the board composition of firms just going public, things do not look all that good for gender balance. Only 51 women have been appointed to the boards of firms that went public relative to 455 men. That is, only around 10% of board members of firms that IPO’d since April 1, 2018 are women! Why such a large imbalance? Venture capital is a notoriously male-dominated business. VCs usually invest their money in start-ups that go public and hence they end up serving on the boards too.
Highlighting another potential pitfall of California’s effort, Black Enterprise’s Samara Lynn wonders if the law will really only mandate board representation for white women:
While there remains a lack of representation of women on boards, the number of black men and women corporate directors are even smaller. Women’s presence on boards have been increasing albeit progress has been slow and incremental. Women make up about 22% of Fortune 500 boards. People of color on boards are scarcer. In 2017, African-Americans accounted for 10.9% of new corporate directors.
Part of the problem with getting more people of color on boards is companies often want to appoint those at the c-suite level—preferably CEOs–to boards. In the last few years, the number of black CEOs of publicly-traded companies has dwindled with several high profile business leaders stepping down from their positions, including Xerox’s Ursula Burns and former AMEX CEO Ken Chenault.
In any case, Kathy Gurchiek writes at SHRM, companies are rightly being compelled to address the male-dominated boardroom, whether voluntarily or not. Stewart Landefeld, a corporate partner at Perkins Coie in Seattle, tells Gurchiek that there is “a very deep pool” of women available to fill those positions in California and throughout the country:
Landefeld co-chairs onBoarding Women, which was founded in 2014 by Seattle business owners to foster the development of female board directors in Washington state. At that time, women made up 14 percent of the directors on the boards of the state’s companies. Representation “lagged significantly behind the rest of the country,” according to the group. Its goal is to increase the number of women on public company boards there to 30 percent by 2020; as of March, women occupied 22.9 percent of Washington’s board seats.
“If you want to diversify your board, you can diversify it very easily,” Landefeld said. He suggested:
- Consult www.theboardlist.com, which has curated names of more than 2,000 women qualified to serve on private and public company boards.
- Reach out to Women Corporate Directors, a global organization with chapters throughout the U.S. Members include CEOs, board members and chairs, lead directors, C-suite executives and heads of global divisions.
- Contact regional organizations such as onBoarding Women that have lists of qualified board candidates. Other regional groups include the Athena Alliance, a nonprofit in Moss Beach, Calif., that helps women attain board seats.
- Contact business schools for recommendations of potential board members. For example, the Women Board Directors Development Program is a two-day seminar for executive women offered through Foster’s School of Business at the University of Washington.
- Be clear with recruiters that you want to interview male and female candidates.
This post is published for informational purposes only and does not constitute legal advice or an opinion on the legal matters discussed within. Employers should consult their general counsel whenever they have questions pertaining to laws, regulations, or potential liabilities.