California breaks new ground in mandating gender diversity on corporate boards

On September 30, 2018, the State of California became the first state in the United States to pass legislation mandating gender diversity in board representation.

The new law applies to publicly traded companies with principal executive offices in California according to the corporation’s SEC 10-K filing. The law requires that these corporations have at least one woman on their board of directors by the end of 2019. The legislation steps up the requirement from one to two female directors by the end of 2021 for five-person boards and increases the requirement to three female directors for boards with six members or more.

Violations of the law come with financial consequences for noncompliant corporations. Failure to timely file board member information with the Secretary of State will result in a $100,000 fine. In addition, each director seat that is required to be held by a female director that is not held by a female director, is considered a “violation” under the legislation: the first violation will result in a $100,000 fine and subsequent violations will result in a $300,000 fine.

The legislation was sponsored by California state senators Hannah-Beth Jackson and Toni Atkins, who argued that asking corporations to make changes to their corporate boards simply wasn’t effective and that legal requirements with financial penalties were necessary. The text of the law cites numerous independent studies conducted by McKinsey, Credit Suisse, MSCI, Inc. and the University of California, Berkeley, purporting to evidence that companies with women board members had higher earnings, instituted stronger corporate governance structures, carried less debt and outperformed shares of comparable businesses with all male board members. The law is also part of a broader national conversation on gender diversity in board representation. Asset manager State Street Global Advisors recently announced a new policy in which it will withhold votes from the slate of board members on nominating committees where the corporation does not have at least one female director. State Street’s policy will apply in the United States, United Kingdom and Australia in 2020 and expand to Asia and continental Europe in 2021.

California’s new board legislation has come under criticism from a number of commentators as being unconstitutional and creating the potential for backlash against the more incremental progress being made in board diversity. It is expected that the law will inspire a wave of lawsuits, including actions seeking to declare the law invalid under the equal protection clauses of the U.S. and California constitutions, as well as the “internal affairs doctrine,” which is a conflicts of law principle that corporate governance matters of corporations are generally controlled by the law of the state in which it is incorporated.

Dentons’ Venture Technology Group can help you assess the implications of the new legislation on your business and board composition.