Women on the Board

California Becomes First State to Mandate Minimum Number of Women Directors for Publicly Held Corporations

California made history by becoming the first state to mandate a minimum numbers of women directors for publicly held corporations headquartered in the state when Governor Jerry Brown signed controversial legislation on the subject on September 30, 2018. The new law adds Section 301.3 to the California Corporations Code which requires that a domestic general corporation or foreign corporation that is a publicly held corporation (i.e., a corporation with outstanding shares listed on a major United States stock exchange) whose principal executive offices, according to the corporation’s Securities and Exchange Commission Form 10-K, are located in California must have a minimum of one female (defined as an individual who self-identifies her gender as a woman, without regard to the individual’s designed sex at birth) on its board of directors no later than December 31, 2019. The required minimum number of female directors increases as December 31, 2021 to 2 if the corporation has 5 directors or to 3 if the corporation has 6 or more directors. The California Secretary of State is required to publish various reports on its Internet Web site documenting, among other things, the number of corporations in compliance with the provisions. The California Secretary of State is authorized to impose fines for violations starting at $100,000 for the first violation and increasing to $300,000 for subsequent violations.

The statutory changes were accompanied by a number of interesting and compelling findings by the Legislature including the argument that having more women directors serving on boards of directors of publicly held corporations would boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees (including retired California state employees and teachers whose pensions are managed by CalPERS and CalSTRS). The Legislature declared that absent a proactive approach it would like take 40 to 50 years to achieve gender parity. The Legislature also pointed to independent studies that had concluded that publicly held companies performed better when women serve on their boards of directors and noted that other countries, many of them in Europe, had already addressed the lack of gender diversity on corporate boards by instituting quotas mandating 30 to 40 percent of seats to be held by women directors. A key factor in the way that the measure was drafted was the conclusions of several studies that having three women on the board, rather than just one or none, increased the effectiveness of boards.

The data on the dearth of women members on the boards of public companies based in California is clear: as of June 2017, one-fourth of California’s public companies in the Russell 3000 index had NO women on their boards of directors; and for the rest of the companies, women held only 15.5 percent of the board seats. Smaller companies were even more likely to lack female directors. Realizing that may of the public companies headquartered in California are actually formed and organized under the laws of a state other than California (e.g., Delaware or Nevada), the new law specifically extended coverage to these so-called “foreign corporations” by providing that Section 301.3 would apply to a foreign corporation that is a publicly held corporation to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated. This attempt to override the laws of other states has been the subject of numerous objections and many feel that it will not survive the inevitable court challenges. Among other things, the legislation has been loudly opposed by numerous business group that have argued not that it violates existing laws and constitutional protections in that it would displace an existing member of the board of directors solely on the basis of gender. Others have criticized the bill for focusing exclusively on gender-related aspects of board composition while ignoring other forms of diversity.

Regardless of how effective the legislation proves to be in practice, the move is consistent with growing pressure from various groups, particularly institutional investors, to appoint more women to corporate boards. Other factors are also in play that may ultimately lead to changes regardless of the fate of the new California legislation. Studies indicate that companies are becoming increasingly concerned about their image and reputation and that taking aggressive and transparent steps to change the experiences, skill sets and life views is an important way to signal that attention is being paid to societal changes and expectations. Perceived failures in board oversight of corporate culture that has led to high profile disclosures of sexual harassment and other forms of discrimination in the workplace are also relevant. Another consideration is how decisions are actually made in boardrooms and what steps can be taken to improve decision making including incorporating the views of women and other groups that have traditionally not been part of those deliberations. Gender diversity in the boardroom and among executive teams will also be important for companies looking to become and remain more innovative, find ways to capitalize on new technologies and anticipate how technology and changes in societal values will impact the workforce.

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Alan Gutterman
agutterman@rroyselaw.com

Alan Gutterman has over three decades of experience as a partner and senior counsel with with internationally recognized firms, including Cooley, and Pettit & Martin, counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.
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