California Governor Jerry Brown just signed into law a bill that requires all public companies in the state to put women on their corporate boards. It’s a big statement about the need for diversity in the boardroom. Given how susceptible the law is to legal challenges, however, that’s all it may ever be: a statement.
The law, which applies to all public companies with headquarters in California, requires them to have at least one woman on their board of directors by the end of 2019. It further requires that companies with five-member boards have at least two female directors, and boards with six- or more member boards have at least three female directors, by the end of 2021.
The law is California’s effort to address the underrepresentation of women on corporate boards. At least 485 public companies in the United States have all-male boards, according to the research firm Equilar. Within the S&P 500, women hold only about 20 percent of board seats, according to Catalyst. Meanwhile, the presence of women on boards has been associated with improved corporate performance.
If it’s enforced, the law would force changes by the likes of Apple, Google, and Facebook, all of which have two female board members, and would have to add at least one more before 2021 (or pay fines starting at $100,000). But the question of whether the law will ever be enforced is a significant one. And there are two glaring issues that suggest the answer might be ‘no.’
The first is a dry matter known as the “internal affairs” doctrine, under which, the Supreme Court has ruled, the internal affairs of a company (like its board membership) are governed only by the state in which it is chartered. Fewer than 100 companies are both chartered in California, as the internal affairs doctrine requires, and headquartered there, as the statute requires.
The second glaring issue is the equal protection clause of the United States Constitution. Quota-like systems for diversifying boards have been used in European countries like Norway, France, and Germany. But that pesky Fourteenth Amendment means that California’s gender-based law will receive some serious scrutiny by the courts, and not even the law’s biggest fans seem to think it will stand up. California’s own legislative analysis admits that the law “may be difficult to defend.” For his part, Gov. Brown seems resigned to the fact that the law will be found unconstitutional. In a letter to the state Senate, he said: “I don’t minimize the potential flaws that may indeed prove fatal to its ultimate implementation.”
Gov. Brown seems to think that it’s worth making the statement anyway, particularly with the backdrop of the Kavanaugh confirmation hearings. (“Recent events in Washington, DC . . . make it crystal clears that many are not getting the message,” he wrote in an accompanying message when he signed the bill.) At least one highly respected voice — Joe Grundfest, the Stanford law professor, former SEC commissioner and expert with Cornerstone Research — thinks there’s a better way.
Grundfest makes a forceful case that states should use the power of activist investing, rather than legislation of questionable validity, to shape the behavior of public companies, particularly on this issue. In his words:
“California can use its significant capital market influence to induce major institutional investors to mount more aggressive activist campaigns that can rapidly and materially increase boardroom diversity. These campaigns have a demonstrated history of success. They will not generate years of litigation, will not be limited to California-chartered corporations, and will pose no risk to affirmative action jurisprudence. Properly structured shareholder activism is the better, smarter way to proceed.”
For the moment, though, Sacramento can rest assured that it has made a big and bold statement on the matter.