How California’s ‘Woman Quota’ Is Already Changing Corporate Boards

For 46 publicly held companies in California with all-male boards, the clock is ticking.

The corporations, including pharmaceutical, financial and software companies that tend to be on the smaller, younger side, have only until revelers ring in 2020 to name a woman to their boards of directors or face a $100,000 penalty.

A bill signed into law by former Gov. Jerry Brown in September 2018 required public companies with headquarters in California to name at least one female director by the end of 2019.  The law further mandates that companies with five-member boards have at least two female directors by the end of 2021; corporations with six or more directors need at least three women. The penalties for failing to comply rise accordingly.

The Golden State became the first in the nation to legislate the requirement for female board members, inspiring lawmakers in Massachusetts and New Jersey to introduce similar proposals. Illinois enacted a pale version of the California law, requiring publicly traded companies to report each year their boards’ demographics and plans to promote diversity.

Researchers tracking the situation in California say the new law appears to be having the intended effect, with more than 90% of publicly traded companies based in the state now in compliance — and with women added to at least two dozen all-male boards just since July. But the measure has also drawn legal challenges, as many observers predicted.

In acknowledging “serious legal objections” to the law, Brown said when he signed that it was nonetheless important to send a message to the male-dominated business world. That message has resulted in at least two lawsuits. One was filed in November by the libertarian Pacific Legal Foundation, a public interest law firm, on behalf of a shareholder of OSI Systems Inc., a manufacturer of airport security, medical and other equipment based in Hawthorne.

In that suit, filed in U.S. District Court in Sacramento, Creighton Meland Jr., a retired corporate attorney, maintains that the “woman quota” would force him to discriminate when voting for OSI board members. Instead of voting for the best candidate, he said, he would have to consider the person’s sex as well. OSI, which did not respond to multiple requests for comment, has a seven-member board that includes founder and Chief Executive Deepak Chopra (not the internationally famed holistic medicine proponent).

“We’re not claiming that the injury to him is having a woman on the board per se,” said Anastasia Boden, a senior attorney with the Pacific Legal Foundation, who is handling the Meland case. “The 2020injury is forcing people to make decisions based on sex.”

That would violate the equal protection clause of the U.S. Constitution, which was meant to create a sex- and race-blind society, she said, adding: “This law … just reduces people back down to their immutable traits.”

An earlier challenge was filed in August by Judicial Watch, a conservative group based in Washington, on behalf of three California taxpayers. That suit argues that spending taxpayer money to enforce the law would violate the state’s Constitution. Jill Farrell, a Judicial Watch spokeswoman, said the case was scheduled to be heard March 9 in Los Angeles County Superior Court.

Both suits name Secretary of State Alex Padilla, whose office handles corporate filings and processes the records of entities that conduct business in California. Padilla has asked a judge to throw out the Judicial Watch lawsuit, saying taxpayers have not been harmed and thus have no standing to sue. Paula Valle, a spokeswoman for the secretary of state, said his office would review the Pacific Legal Foundation suit and “respond in court.”

Although the number of women in boardrooms is rising, sexual parity remains a distant prospect in California and globally. According to the accounting giant Deloitte’s most recent report on the issue, released in October, women hold just 16.9%  of board seats worldwide, a 1.9-point increase from 2017. Norway, with 41% of board seats held by women, the highest percentage in the world, was the first country to enact legislation requiring female representation, in 2005.

In California, women now hold 21.2% of the board seats at the state’s 444 largest corporations, according to 2020 Women on Boards, an education and advocacy organization based in Los Angeles. In the boardrooms of the 414 companies on the Russell 3000 lists in both 2018 and 2019, female corporate directors gained 183 seats between July 2018 and June 2019. Still, 36 of the Russell 3000 companies in California had no women on their boards as of June. The Russell 3000 tracks the performance of the 3,000 largest U.S.-traded stocks.

State Sen. Hannah-Beth Jackson — the Santa Barbara Democrat who wrote the legislation, Senate Bill 826 — noted when the measure became law that a quarter of California’s publicly traded companies did not have a woman on their boards.

This was despite the fact that women made more than 70% of buying decisions, she said, making their input “critical to discussions and decisions that affect corporate culture, actions and profitability.”

Of the legal challenges, Jackson said recently in a statement: “I certainly respect the constitutional right of anyone to challenge the law in our courts. However, I strongly believe that this measure meets constitutional requirements and will be held up in court. Significant research has shown the importance of adding women to boards to improve profitability and add to the economic well-being of the state, as well the interest of the state to advance gender equality.”

The law itself does appear to have spurred some companies to add women to their boards. Skechers, Stamps.com and TiVo, for instance, all named women to previously all-male boards after SB 826’s passage; they and several other companies contacted for this story did not respond or issued a “no comment” to requests for interviews.

“We knew that someone would sue,” said Betsy Berkhemer-Credaire, a Los Angeles executive recruiter and board member of the California chapter of the National Assn. of Women Business Owners, which lobbied extensively for the measure. She said she doubted that the cases would get far.

“I don’t expect it to be much beyond a kerfuffle,” said Berkhemer-Credaire, who is also chief executive of 2020 Women on Boards. “The reason I sound so cavalier about it is that we’ve already won the hearts and minds of corporations and good-governance leaders throughout the country. We’ve already won the public awareness campaign.”

Institutional investors have helped to spark public awareness about the relative lack of diversity in the boardroom. TIAA’s “Women on Boards” initiative, which began in 2018, targeted about 470 mid- and small-cap companies, asking that each company either add a female director or adopt a formal policy to emphasize diversity. More than one-third of the companies had added a female director by the end of the 2019 proxy season. Companies that did not cooperate faced TIAA opposition via proxy votes.

The long-running failure of some technology companies to include women on their boards helped to fuel support for the mandate. Twitter, the social networking entity founded in San Francisco in 2006, tweeted the naming of its first female director in November 2013, days after becoming a public company. Diversity proponents had disparaged the company for having a board consisting only of white men, including three directors named Peter.

One company that determinedly maintained an all-male board, until recently, was Skechers. The nearly three-decade-old footwear brand, based in Manhattan Beach, would seem to be the sort of fashion and fitness entity that would benefit from female feedback in the boardroom.

In 2014, CtW Investment Group, which was working with union pension funds investing in Skechers, pushed other shareholders to urge Skechers to freshen its largely insider board by adding diversity of “gender, race and experience.” Only last May did the company name Katherine Blair, a partner with Manatt, Phelps & Phillips, as its first female director.

Blair said by email that she was too busy to speak. The company did not respond to requests for comment, but Robert Greenberg, the chief executive and board chair, said in the statement naming Blair that her background “expands the diverse viewpoints of our board.” Her appointment brought the nine-member board to 10.

Two other companies that named women to their boards after the law went into effect would not weigh in on the topic.