To fix the stubbornly low numbers of women serving on corporate boards, investors have tried to pressure companies to add more female directors. Lawmakers have pushed to make boards report their diversity statistics and have passed resolutions urging companies to add more female directors voluntarily. Start-ups have curated lists of qualified, director-approved female candidates.
But now California has a new tactic: Force boards to hire women — and levy monetary fines if they don't.
The state legislature recently passed a bill that would require every publicly traded company with its principal offices in California to have at least one woman on its board by the end of 2019. The bill, which is opposed by many business groups and could face legal challenges, is waiting for Gov. Jerry Brown's signature.
If the bill does become law, one key provision will take effect in 2021: Boosting the mandated number of female directors to three for any company with six or more directors. (The average company in the Russell 3000 index has nine board members.) Those kinds of numbers could help women who serve on boards alone — or with just one other woman — avoid being treated as token members whose voices aren't adequately heard, checking a box for gender diversity but not really reaping its rewards, governance and diversity experts say.
When boards add just one woman, or even two women, said Alison Konrad, a professor at the Ivey Business School at Western University in Canada, the women “seem to still be viewed as representing a category. Part of this is a cognitive thing — being the only X in a field of Os. The thing that makes you different than everyone else becomes very highly salient in others' minds, and that affects how they perceive everything you do.”
Her research and others' have found that it is not until women have three members on a board that they reach a “critical mass” where their contributions make the most impact. Having three or more female board members has been linked to more innovation and limits the chances that women's views will be sidelined. It also increases the chance of culture change on a board, Konrad said, making it one that listens more to management, leading executives to be more apt to share bad news.
"What we found in the interviews is that when one woman on the board — especially the first woman on the board — is added, it was hard to be heard, hard for her to have a voice,” said Konrad, who has interviewed more than 50 experienced female directors and chief executives in her research. Even some male CEOs picked up on it. “They said it was like she was trying to beat through a brick wall.”
California's law would be a first in the United States, though mandates for female representation on boards are more common in Europe, where quotas in countries like Norway and France require 30 to 40 percent of directors to be women. In the United States, women hold 17.7 percent of board seats at companies in the Russell 3000 index, according to data from the research firm Equilar.
Yet a bill that requires more women isn't a cure-all for boosting the numbers of female directors or bringing diversity's apparent benefits to corporate boards. (Multiple studies have shown links between greater gender diversity and things like less-costly mergers, higher returns on equity and earnings per share, and fewer corporate scandals, while other research has questioned whether having more women actually leads to better results, or if better-run companies just tend to add more women.)
For one, some have raised questions about legal challenges California's bill could face. “As written, the bill violates the US Constitution's Commerce Clause because it applies to corporations headquartered in California even if they are chartered elsewhere,” wrote Joseph Grundfest, a Stanford University law professor and former SEC commissioner, in an email. “The Supreme Court has repeatedly explained that a corporation's internal affairs, such as the rules regulating the composition of its board of directors, are governed by its state of incorporation, not the state in which it is headquartered.”
Grundfest wrote that only 7 percent of corporations headquartered in California are also chartered there, according to an analysis based on Compustat data. Many publicly traded companies file their articles of incorporation in Delaware, a state where the courts, tax system and laws are seen as attractive to many businesses.
In an emailed statement, California state Sen. Hannah-Beth Jackson (D), who introduced the bill with California Senate President Pro Tempore Toni Atkins (D), said that she takes questions about constitutionality “very seriously, and I believe constitutional issues are ultimately for the courts to decide. Due to persistent inequality and discrimination at the highest levels of corporate leadership, women are being denied access and opportunity, and I believe there is an extremely compelling state interest in California moving forward to protect women and the state’s economy.” From “establishing labor laws to reporting requirements and tax laws, states have historically and consistently developed ground rules for companies operating in their states.”
Meanwhile, diversity alone is not enough, say governance advisers — boards must also welcome different viewpoints and be willing to embrace new members. That could be harder for women joining boards that, even in 2018, are holdouts: Roughly a quarter of California's public companies in the Russell 3000 index (or 117 companies) have zero female directors, according to research cited in the legislation, and just 12 percent of the state's Russell 3000 companies have three or more women on the board.
"It’s truly a two-step process,” said Shannon Gordon, CEO of the Boardlist, which manages a directory of female board members recommended by other top executives and investors. “Step one is getting them in the boardroom. The step after that is to make sure it's an effective and well-functioning team.”
Konrad notes that another challenge may be getting women to sign on if they think they're being added only because of their gender. In interviews for her research, she had female directors say they would avoid board opportunities if they sensed that their expertise wasn't what led to the invitation. She said chairmen and CEOs in particular need to make sure they demonstrate not only to the new female directors — but to their fellow directors — the valuable expertise they bring to the boardroom.
If the bill is signed into law, “do not,” she emphasized, “say it's because we have to fill the California quota.”