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Calif. board gender mandate could prompt big changes at smaller firms

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Calif. board gender mandate could prompt big changes at smaller firms

The California Legislature has passed a measure that would require hundreds of companies headquartered in the state to have between one and three women sit on their boards, a mandate experts say could prompt a sea-change for smaller-sized businesses in the state.

SB 826 would require publicly held corporations headquartered in California to have at least one female board member by the end of 2019. Companies with a five-member board would need to have at least two female directors by the end of 2021, and boards with six or more directors would be required to have at least three women by then.

The measure would apply to domestic and foreign companies with shares traded on a major U.S. stock exchange, which the California Senate Rules Committee determined would be more than 760 companies. The legislature passed the measure in late August and is awaiting governor action. Gov. Jerry Brown has not said whether he will sign it.

Roadblocks to diversification

Companies have come under increasing pressure from big investors and asset managers to add women to their boards. Gender diversity advocates point to studies they say suggest companies tend to perform better when they have women on their boards.

Many larger companies headquartered in California already have at least one woman on their boards but many smaller companies do not. One problem, according to some, is that a smaller pool of women fit the profile companies traditionally seek for a board member because fewer women are in C-suite positions. A recruiter said another hurdle is convincing the first woman to join an all-male board is more difficult than getting a woman to agree to become the second or third female to join a board.

"You'll find a really capable candidate and they'll look at the constitution of the board and it really causes them to have pause because they don't want to be just the token female," said Asa Sphar, managing partner with CSI Executive Search, a recruiting firm for multiple sectors including energy. To convince the woman to take the job, he said "you have to make a case that the company is on a course to be more gender diverse and that this is not just a ... token nod to gender diversity,"

Women are more willing to join boards that have other women because the dynamics change once multiple women are on a board. "When there are three women in a room, that's really when it stops becoming a distinguishing factor," said Courteney Keatinge, director of environmental, social and governance research at proxy advisory firm Glass Lewis. "And that makes a big difference when it comes to the kind of discourse" that occurs.

The gender diversity mandate could also be the first step that prompts companies to pursue other diversity objectives, said experts. What often happens, said Lee Hanson, vice chairman of the recruiting firm Heidrick & Struggles, is that once a company brings someone from a diverse background on board the company tends to continue to diversify its leadership.

"We're absolutely seeing that with clients who do have good diversity on the board and who still feel that additional diversity can be helpful," Hanson said. "It's been a little bit of a sea change."

The bill

SB 826 would require California's secretary of state to review and issue reports regarding corporations' compliance, including how many companies moved their headquarters to other states or went private. Companies would be subject to a $100,000 fine for the first violation and $300,000 for any subsequent violations. The legislation was amended at the last minute to also state that companies will not be found in violation if they had a female board member for at least a portion of a year.

California is home to some of the nation's biggest technology and media companies such as Apple Inc., Alphabet Inc.'s Google, Facebook Inc., Walt Disney Co. and Netflix Inc.; major energy companies such as Chevron Corp., Sempra Energy and PG&E Corp.; and financial companies such as Visa Inc. and Wells Fargo & Co. All 10 of those companies have at least one woman director and six of them have three or more female directors.

An analysis by the group Board Governance Research looked at the companies the bill would apply to that are also listed in the Russell 3000 index of the largest U.S.-traded stocks and found that the top 50 companies, with an average of nearly $30 billion in 2015 revenues, all had at least one female director. But nearly half of the 50 smallest companies on the index and headquartered in the state had no female directors as of June 2017.

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"Larger companies have been more receptive to adding women to their boards and they're receiving much more pressure from institutional investors" than smaller companies, said Annalisa Barrett, CEO and founder of Board Governance Research. Bigger companies are also "generally more apt to make changes to their governance structure in response to demands from shareholders." And smaller companies tend to have smaller boards, which means they have fewer opportunities to add women to their ranks, she said.

California would be the first state in the U.S. to set a quota for women on boards although several other states, including Massachusetts, Illinois and Pennsylvania, in recent years have passed nonbinding resolutions. A number of other countries, including Germany, Norway, France, Spain, Iceland and the Netherlands, have also set quotas for women in the boardroom of domestic companies, according to language in the California legislation.

Supporters of the California bill, including the National Association of Women Business Owners, argued that women comprise about half of the state's population but are severely underrepresented at the corporate executive level, according to a report by the Assembly Committee on Judiciary.

Bill opponents say a quota is not the right approach

Yet opponents of the legislation, such as the California Chamber of Commerce, see multiple problems with the state setting a gender-specific quota. Many companies are working to improve their overall leadership diversity and setting a quota could force companies to chose a woman over a man that might meet other diversity objectives, Jennifer Barrera, the state chamber's senior vice president of policy, said.

The chamber also contends the bill may be on shaky legal ground and could violate the U.S. Constitution's Equal Protection Clause and related components of California's constitution.

In addition, Barrera said the mandate fails to recognize that shareholders vote on board members. The Assembly's Judiciary Committee also raised this issue. While the analysis said that companies could avoid a shareholder vote initially by adding another seat to the board, it noted that at some point that seat would be up for re-election and require a shareholder vote.

Moreover, to ensure a woman is picked by shareholders the board would need to nominate only female candidates. "This is not to say that by-laws could not be changed and future elections could not be structured in ways that would ensure a minimum number of female board members; it is merely to suggest that compliance will not be a simple matter of adding another seat to the board," the committee said.