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Glass Lewis Blog: California Senate Votes for Board Gender Quotas

Approval means the policy could become law with financial penalties

Gender diversity in California boardrooms is already best practice. It could soon become the law of the land, after the State Senate approved a bill that includes the first boardroom gender quotas in the United States.
SB 826 would require California’s publicly-traded companies to have a minimum of one woman on the board by the end of 2019, punishable by a cash fine. That minimum would go up from 2022, to two women for boards with five or fewer directors, or three women for boards of six or more.

For the first time, the number of companies in the Russell 3000 that had all-male boards dropped below 20%. This can largely be attributed to institutional investors’ focus on gender diversity in 2017.

While other states have passed non-binding resolutions urging greater focus on board gender diversity, California would become the first US state with a quota and hard deadlines, joining the ranks of several European countries, along with India and Israel, that have taken similar measures to advance gender representation.
Research demonstrates that increasing the number of women participating can dramatically change a board’s dynamic for the better, emphasising collaboration over competition and broadening perspectives on issues to consider a wider set of potential stakeholders. Nonetheless, quotas are often considered a controversial solution, representing an attempt to jumpstart gender balance rather than growing it organically – and placing restrictions on the board’s criteria for selecting the right candidate.
Where implemented, the result has been a dramatic increase in female representation, along with allegations of tokenism and unqualified appointments, particularly in markets where gender diversity is a nascent movement. While the law is likely to draw criticism along such lines (and on principle), these concerns may be less relevant within the US market given the relatively deep pool of qualified female candidates already in place.
The process of tapping into that pool is already in progress without any quotas in place – but it’s going fairly slowly.The first fiscal quarter of 2018 saw the percentage of women on Russell 3000 boards increase from 16.5% to 16.9%, with nearly one-third of new directorships going to women. For the first time, the number of companies in the Russell 3000 that had all-male boards dropped below 20%. This can largely be attributed to institutional investors’ focus on gender diversity in 2017, as well as an increased focus on corporate engagement, in which board composition is generally one of the main topics of conversation.
Recent examples show that while board diversity is still inching slowly upwards, shareholders and employees alike are taking notice. Amazon’s initial opposition to a shareholder proposal that would have required director searches to include minority candidates (often called the “Rooney Rule”) was met with strong employee backlash, to the point that management relented and implemented it as formal policy. Still, critics of the Rooney Rule method note that an obligation to interview does not necessarily equate to a guarantee of hire, citing that women or minority candidates at these companies are often interviewed to “check the box” and ultimately lose out to male or white candidates. This scenario played out at Transdigm, where two men and two women had been interviewed for directorships before the board ultimately welcomed the two men. Transdigm would eventually onboard a female director after the annual shareholder meeting due to opposition.
Given its reputation as a progressive stalwart, it’s perhaps unsurprising that California is the first state to legislate boardroom gender diversity. Given the composition of its business sector, it’s also somewhat appropriate. There are currently 74 California-headquartered companies in the S&P 500, and many of these are information technology companies in the Silicon Valley—an industry and location notorious for being especially insular to female perspective. SB 826 could serve to burst that particular tech bubble, and potentially prompt further changes across the United States: California’s laws and regulatory standards often serve as a template for the rest of the country on emerging issues.

Anna Lee is an analyst covering the US market for Glass Lewis. This article was originally published on the Glass Lewis website, here.