Remember California's SB 826, the board gender diversity mandate? That law requires each public company with principal executive offices located in California, no matter where they are incorporated, to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors. (See this PubCo post.) Has it made a difference? According to reporting from the WSJ, the answer is a big yes. Given the success of the new law in making progress toward its goals, the question then is—are other states now following California's playbook? Well, kinda, sorta....
As reported by the WSJ, when the law was signed on Sept. 30, 2018, 93 California–based companies in the Russell 3000 had all-male boards; a little over a year later, only 17 had no women on their boards. Since the law went into effect, according to the WSJ, 244 California companies in the Russell 3000 have added at least one female director, and 41 companies added two. Even more surprising, over 90% of companies in the S&P 500 now include two or more women on their boards, compared to 86% in the prior year. The new law has meant that companies have needed to look outside of the usual channels—other boards and CEOs—to find female board candidates; the WSJ reports that over 60% of the women who joined the board of a California company in 2019 had never served on a public company board. And the non-profit 2020 Women on Boards has announced that it has met its goal of 20% of board seats of companies in the Russell 3000 held by women. Notably, for the second year in a row, California had the largest increase in companies with 20% or more of their board seats held by women, which, WOB observed, "may be a direct result of the historic legislation requiring companies in the state to diversify their boards." In California, 68 more companies met the 20% goal in 2019 than in 2018.
But what about other states? Are they following California's lead? A number of states—including Hawaii, Massachusetts, Michigan, New Jersey and Washington—appear to have legislation in the works that is largely patterned after California's, although the timing and diversity goals may vary. In some cases, however, the legislation may not even move out of committee.
Several states have taken, shall we say, a more measured approach. Instead of any kind of board diversity mandate, they have started with requirements for disclosure in annual state filings of data regarding board composition, leading to aggregation of the data and studies of the issue. For example, in Illinois, a bill patterned after California's (also including racial diversity) was introduced in the legislature, but was ultimately stripped of its diversity mandate in favor of transparency about board composition in annual state filings and a study based on the data. As amended, the bill was signed into law and requires domestic and foreign companies (with principal executive offices in Illinois) to include in their state annual filings data on board composition, the corporation's process for identifying and evaluating nominees for the board and executive officer positions, including whether and how demographic diversity is considered, and a description of the company's policies for promoting diversity. In addition, the law mandates posting of a report aggregating the data and the establishment of a rating system assessing the representation of women and minorities on corporate boards. According to RollCall, the original bill may have been pulled in light of threats of litigation "even greater than what we were hearing in California." (Another bill, patterned after California's had been introduced even earlier, but was languishing in committee.)
Even proponents of the California law recognized the possibility of legal challenges—when Governor Jerry Brown signed the bill into law, he acknowledged that "serious legal concerns" had been raised. (See this PubCo post.) And many expected a flood of legal challenges to frustrate efforts to implement the bill. Nevertheless, California's businesses appear to have accepted the requirements of the legal mandate—perhaps also feeling the pressure from large asset managers such as BlackRock and State Street—and have not filed suit. However, two conservative activist groups have mounted legal challenges. Crest v. Alex Padilla was filed in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a "taxpayer suit," the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law's mandate is an unconstitutional gender-based quota and violates the California constitution. (See this PubCo post.) Subsequently, in Creighton Meland v. Alex Padilla, Secretary of State of California, another conservative legal organization filed a complaint on behalf of a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California. The case seeks a declaratory judgment that the statute is unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. (See this PubCo post.)
New York has recently enacted a new law, similar to Illinois', effective June 2020, that will establish a "Women on Corporate Boards Study." The law will require domestic and foreign corporations authorized to do business in the state to report the composition of their boards. Maryland's bill has also been signed into law. It encourages companies doing business in the state to have a minimum of 30% women directors by December 31, 2022, but the requirement to report board composition applies only to domestic companies.
A few other states have introduced resolutions that follow Maryland's "encouragement" approach. For example, a resolution introduced in Ohio would urge all private and public companies and institutions doing business in this state to commit to increase gender diversity on their boards and in senior management positions and to set and publish goals by which to measure their progress. The Iowa and Pennsylvania legislatures have introduced similar resolutions.
So far, Big Kahuna Delaware, the state where the vast majority of public companies are incorporated, remains silent on this issue.
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