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Jun 17, 2019

How California’s public companies are responding to the women on boards quota

The golden state is the first in the US to mandate female board representation. But is such a quota constitutional?

Quotas are controversial. Nobody likes being told what to do, least of all directors of public companies. Politically imposed quotas are especially controversial in the US, where debate around the government’s role in public life extends to much more fundamental issues such as healthcare and public safety.

But against this backdrop last year, California’s then governor, Jerry Brown, signed a bill into state law on October 1, 2018 mandating that public companies headquartered in the golden state must have at least one female director on their board by the end of 2019.

California state Senator Hannah-Beth Jackson championed the bill, as she had with another bill years earlier. ‘In 2013 I sponsored and co-authored a resolution urging California’s publicly traded companies to add women to their corporate boards,’ Jackson tells IR Magazine. ‘We referenced the body of research out there that shows the impact that having a woman on the board has on performance, governance structure, transparency, productivity and profitability. The bill passed with bipartisan support.’

At the time, women occupied just 15.5 percent of the board seats at California-headquartered companies.  In early 2018, however, when Jackson revisited the issue, she was disappointed to find that this number had risen to only 16 percent. ‘We’d made virtually no progress at all. It was very clear that just asking wasn’t going to achieve the goal,’ she says.

So the quota was introduced. It mandates that companies with their executive offices based in California, as per SEC filings, must have at least one female board director by the end of 2019. By the end of 2021, boards with five directors or fewer must have at least two female directors and boards with six directors or more must have at least three female directors. Each director seat that is not filled by a female director by the deadline carries a fine of $100,000 in the first year, rising to $300,000 in subsequent years. 

Lynda Galligan, corporate governance attorney at Goodwin, advises corporate boards at a range of California-based companies. She points out that while the quota may be viewed as heavy-handed by critics, it is in line with the pressure public companies are coming under from some of their largest institutional investors. ‘California companies without a woman on their board are facing pressure beyond this legislation,’ Galligan says. ‘Institutional investors are putting pressure on to add women to their board, and ISS and Glass Lewis now have policies to vote against the chairs of nominating and governance committees.’

Indeed, Vanguard and BlackRock have formal policies in place to do this, while State Street Global Advisors announced in March 2019 that it would be voting against all members of the nominating committee at its portfolio firms with all-male boards.

Why California?

In 2018 women held 17.7 percent of all Russell 3000 board seats, according to 2020 Women on Boards’ Gender Diversity Index. At Russell 3000 companies headquartered in California, female representation was just below the national average in 2018, at 17.3 percent. So why California?

To many, the state is seen as a bastion of liberal views, which could explain why it has taken the lead on board quotas. But the golden state is also internationally known for Silicon Valley, the original birthplace of many Fortune 500 companies of today and tomorrow. Central to that is the flourishing venture capital (VC) community, which plays a very influential role in the San Francisco Bay Area, especially.

Many of the largest IPOs this year – as well as in recent memory – originated in the Bay Area VC community, from Snap to Uber, Lyft to Slack. While the California board diversity law applies only to publicly listed companies, the end destination for many VC-backed companies is the public markets. And while the gender diversity statistics in public company boardrooms might make some grimace, they’re considerably better than the female representation at VC-backed companies.

‘Typically, the board of those companies comprises the CEO, another founder and then VC investors – the majority of whom are men,’ Galligan says, having worked with many VC-backed boards.

This lack of boardroom diversity makes itself plain in the figures: across the top 25 US IPOs in 2017, women held 9.2 percent of the board seats, according to 2020 Women on Boards. In 2016, women held just 8.2 percent of those board seats.

The corporate response

As far as the response from established public companies goes, Galligan says she’s seen a positive commitment from board chairs and nominating and governance committees to comply with the California law. ‘For the few companies that don’t have women on their board, it’s something they’ve been trying to correct for some time,’ she says. ‘Nominating committees are really stepping up and seeking out women directors to join the board this year.’

When the quota was passed, there were 100 companies in California that were non-compliant, according to a report from CBS News. One of those was 8x8. But just 24 days later, on October 25, 2018, the company announced the appointment of Monique Bonner. According to Victoria Hyde-Dunn, director of investor relations at 8x8, the board had been looking to add a female director for more than a year, working closely with an executive search firm.

‘This was a very thoughtful and extensive search,’ Hyde-Dunn points out. ‘We wanted somebody who had a good reputation, particularly in marketing strategy and global strategy. Our CEO and chairman were looking for the right candidate back in October 2017, when I joined the company.’

Those companies that still lack board representation will be keen to avoid appointments that might be labelled tokenistic, but the 8x8 case study serves as a reminder of how long it can take to find the right match of skills and background.

The rate of change: fact and fiction

Critics of quotas argue that there isn’t a sufficient talent pool of board-ready women, which can lead to tokenistic appointments – an argument that Jackson calls ‘offensive’.

Susan Keating, CEO of WomenCorporateDirectors (WCD), tells IR Magazine that of WCD’s 2,400 members worldwide, the majority serve on either a public or a private company board. She now senses an opportunity for WCD to make a real difference in California, where the group hosted its annual Global Institute in May – the first time the event has been held anywhere other than New York. In addition, Keating says, the group has launched a new training pilot for its members.

‘We’ve been piloting a program called BoardNext in Los Angeles and New York,’ she says. ‘There are women who don’t currently serve on boards but are in the C-suite or run major businesses, and they would like to get on boards. The program tells them how to do that and prepares them for what is expected of board directors so they can get up to speed faster.’

One of the biggest obstructions to more diverse boardrooms is that the turnover of existing directors is so low. Keating says it’s unlikely board or term limits will suddenly become powerful tools for improving boardroom turnover, but greater focus could be placed on director performance.

‘How many companies today are not doing assessments of board directors?’ she asks. ‘That’s a best practice and needs to be consistent. In doing these assessments, you really figure out whether you have the right people on the board today and for the future.’

Four out of 10 new board directors in the US today are female, according to the Spencer Stuart Board Index, so it follows that increased turnover should lead to more diverse boardrooms. But increased turnover isn’t just cited as a way to create more diverse boards; it’s also a way to make more effective boards. According to PwC’s 2018 annual corporate directors survey, a significant number (45 percent) of directors think someone on their board should be replaced: 24 percent think one director should be replaced, 16 percent think two should be replaced and 5 percent think more than two should be replaced.

Davia Temin, president and founder of crisis and reputation management firm Temin & Co, says boards are confronted with governance issues today that simply weren’t on their agenda several years ago. ‘We do a lot of work around corporate culture, reputational risk and #MeToo with boards,’ she says. ‘The places where I find this is being taken seriously are where there are female board members. They’re urging organizations to act where they’ve never acted before.’ This, Temin says, calls for a new breed of directors and, crucially, for female perspectives.

Ripple effect or constitutional battle?

It’s too early to assess whether California’s quota move will have a meaningful effect on female board representation, or whether the companies with all-male boards will simply put up with and pay the fines for non-compliance. And it’s far too early to assess whether the quota has a positive impact on the performance of California’s public companies.

In fact, it may be too early to assume the quota is even enforceable. When signing the bill into law, Brown noted that it might face a legal challenge. ‘It’s a bit strange to have legislation enacted and have the governor say he expects it to be challenged,’ Galligan says. ‘It’s expected to be challenged under California civil rights law and the constitution.’

Jackson, however, anticipated the legal challenge and wrote the law accordingly. ‘We demonstrated, through the body of data available on this subject, that having women on these boards is a benefit to these corporations and the state’s economy, and it strives to create gender equity in the workforce,’ she says. ‘If there is a challenge, we hope we have demonstrated that there is a strong state interest. The discrimination has been historical and it’s been against women.’

Despite the unsure legal future of the quota, other states have been inspired by California’s bold move. According to Jackson, representatives from the legislature in six states – including New Jersey, Illinois and Washington – have been in touch to discuss the feasibility of passing a similar quota.

It remains to be seen whether California’s efforts will cause a ripple effect across America, or be remembered as just a drop in the ocean.


Does board diversity really matter to investors?

Several high-profile institutional investors, such as BlackRock, Vanguard and State Street Global Advisors, are factoring board diversity into their investment and voting decisions. But beyond the firms that grab the headlines, how much does board diversity really matter to investors?

Just over one third (35 percent) of IROs have received a question about board diversity within the last year, according to IR Magazine’s new Board Diversity report, while three in 10 investors (30 percent) say they have asked a question about board diversity within the last year. These questions most commonly arise at large and mega-cap companies, where 52 percent and 54 percent, respectively, of IRO respondents say they have been asked about board diversity by investors.

When Victoria Hyde-Dunn, director of investor relations at 8x8, joined the company in October 2017, it had an all-male board. She says she did receive investor questions about whether the company was trying to address this, until its appointment of Monique Bonner in October 2018. Hyde-Dunn announced the appointment through a press release, which she made sure was forwarded to her key investors.

Overall, 22 percent of IROs say investors are either interested or very interested in board diversity, while 44 percent are neutral and 34 percent say investors are either not interested or not interested at all, according to IR Magazine’s research. On the investor side, 18 percent of respondents say they are interested or very interested, 38 percent are neutral, and 44 percent say they are not interested or not interested at all.

Two caveats accompany these findings: the first is that IR Magazine and its online sister publication Corporate Secretary often hear differing reports on whether this subject matters to investors, with corporate secretaries saying they field questions on board diversity much more frequently than IROs – and this survey did not involve corporate secretaries. The second is that the investor survey was completed by fund managers and analysts. Had it included stewardship teams at those investors, the results might have been different, but the findings raise questions about how well stewardship teams are integrating key ESG factors into the investment decisions of their portfolio managers.


This article originally appeared in the Summer 2019 issue of IR Magazine

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...