Nearly all California companies have complied with the state's new requirement to have at least one female board member by the end of 2019. Out of more than 560 companies reviewed, only 21 had no women on their board as of mid-February 2020, compared with the 123 companies that had none around the same time a year earlier, according to S&P Global Market Intelligence's board composition data.
Market Intelligence examined whether companies subject to the rule in February 2019, meaning they were publicly traded on a major U.S. stock exchange and headquartered in the state, had complied with the requirement one year later. The review excluded companies that moved their headquarters into or out of California over that period.
The law, which the state passed in 2018, also requires companies with boards comprised of five members to have at least two female directors and larger boards to have at least three women directors by the end of 2021. In total, the law was expected to more than double the total number of female-held board seats in the state.
The initial requirement to have at least one female director prompted at least 246 women to join the board of a publicly traded company for the first time in 2019, according to the data. For example, SJW Group, a San Jose-based water utility, recruited three female directors who had not previously sat on the board of a publicly traded company.
Despite the uptick in women board members in California men still significantly outnumber women, particularly in the healthcare and the technology, media, and telecommunications sectors. While more than half of the companies reviewed had a market cap higher than $500 million as of the end of 2019, most of the companies that had not complied with the gender diversity mandate as of February 2020 had a market cap under $500 million.
The state legislatures of Massachusetts and New Jersey are considering legislation similar to that of California's in their 2020 session. In addition, Illinois in 2019 passed a watered-down version that requires publicly traded companies headquartered in the state and traded on a major stock exchange to report to the state on their board diversity in general by Jan. 1, 2021.
"A diverse board will be able to more fully consider the different impacts that might hit a company and the different ways a company could strategically place itself" to address those risks, said Courteney Keatinge, senior director on ESG research at the proxy advisory firm Glass Lewis & Co. LLC. "Diverse groups tend to come up with better answers."
Moody's Investors Service in a Sept. 2019 report seemed to support that notion, finding that gender diversity on boards of North American companies was correlated with higher ratings.
Moody's looked at more than 1,100 publicly traded North American companies and found women generally made up about a quarter of the boards of companies it had rated Baa1 or higher. Gender diversity levels largely declined by rating category to less than 5% for the two Ca-rated companies reviewed. Moody's noted that the higher rating could also be due to higher-rated companies tending to have greater levels of board independence.
Moreover, companies are coming under pressure from more than just California's new law to have diverse boards. Several major asset management funds and influential proxy advisory firms have pressed companies listed on either the Russell 3000 or S&P 1500 indexes to include women on their boards, also noting that studies have found board gender diversity to be positively associated with better company performance.
"When the big investors start waiving the big sticks saying these are things they expect from companies, the directors are listening," said Dayna Harris, a partner at Farient Advisors LLC, a corporate governance and executive compensation consultancy. The directors are "the ones that are on the hot seat if they're not being viewed as responsive to today's expectations."
IT, healthcare and consumer sectors lag the most behind
As for how individual sectors are faring, companies from the energy and utilities, industrials, materials, and real-estate sectors have complied with the one female board member mandate.
But nine information technology companies, two consumer companies, two finance companies, and eight healthcare companies — specifically pharmaceuticals, biotechnology and healthcare equipment companies — did not have one woman on their board as of February 14, 2020.
The largest 10, by market capitalization, of the companies in noncompliance are Allakos Inc., Enphase Energy Inc., Inseego Corp., A10 Networks Inc., Telenav Inc., Harrow Health Inc., Youngevity International Inc., Second Sight Medical Products Inc., U.S. Auto Parts Network Inc., and Consumer Portfolio Services Inc. The healthcare, and technology, media and telecommunications sectors make up most of the companies reviewed.
From another sector, the currently non-compliant U.S. Auto Parts is engaged in a "thorough search process to add a female director this year," said Sean Mansouri, a spokesman for the company. Mansouri noted that U.S. Auto Parts previously had a female board member who stepped down in 2019.
Lisan Hung, Vice President and General Counsel of Enphase, a supplier of power electronics for home solar installations, said the company's corporate governance practices promote diversity, including gender, in the evaluation of prospective board candidates. "We will continue to consider the value of diverse representation on our board as we actively seek to find highly-qualified director candidates to complement our needs and build value for our stockholders," Hung said.
Legality of California mandate in question
Despite the success of the law, its future is uncertain. The Libertarian-leaning Pacific Legal Foundation in November 2019 challenged the legality of the law in a case (Meland v Padilla, No. 2:2019cv02288) pending before the U.S. District Court for the Eastern District of California in Sacramento.
The foundation filed the lawsuit on behalf of Creighton Meland, a shareholder in OSI Systems Inc. headquartered in California. The lawsuit claims that the female board member requirement "imposes a sex-based quota directly on shareholders and seeks to force shareholders to perpetuate sex-based discrimination," which violates the Equal Protection Clause of the 14th Amendment. The foundation did not respond to a request for comment.
For its part, OSI added a woman to its board in mid-December 2019. She is Kelli Bernard, a chief executive for the Los Angeles metro area and the region at AECOM. According to the data, OSI is the first board Bernard has served on.
Since this data was first compiled, some companies may have moved headquarters from or into the states reviewed for this article. Moreover, a small number of companies were excluded from the analysis because the gender identities of those companies' board members were not readily obtainable.