Tests could sink women-on-boards law
Measure to require diversity in corporate leadership likely to face series of legal, constitutional challenges
“Here the state is imposing a quota requirement on private property .. where there’s no indication that the publicly traded corporation wants to have that requirement.” — Joseph A. Grundfest, professor of law and business at Stanford
When Gov. Jerry Brown signed into law a measure that made California the first state to require public companies to add women to their boards of directors, he professed himself undeterred by its potentially fatal legal flaws.
“It’s high time corporate boards include the people who constitute more than half the ‘persons’ in America,” he wrote in a Sept. 30 signing statement about Senate Bill 826.
The law requires all publicly traded companies with California headquarters to have at least one woman on their boards by the end of 2019. By the end of 2021, companies with five-member boards would have to have at least two female directors; corporations with six or more directors would need at least three women. Companies that fail to comply will face substantial financial penalties.
The measure has sparked robust debate about whether it can withstand what some observers say will be inevitable court tests. In an October CALmatters survey of subscribers to the California Target Book — state political operatives, lobbyists, labor and business advocates and other Capitol leaders — SB 826 tied with the state’s tough new net neutrality protections as the law most likely to be overturned by the courts after passage.
“Although there isn’t a great deal of argument about the intent of the law, it’s going to face a lot of challenges on legal and constitutional grounds,” said Albert Lung, who is of counsel at Morgan, Lewis & Bockius, a law firm in Palo Alto.
Lung said he doubted that a company on its own would contest the measure in court be-
cause opposing women’s rights in the #MeToo era would not play well in the court of public opinion. Far likelier, he said, is a challenge from a business group or a think tank.
Santa Barbara Democratic Sen. Hannah-Beth Jackson, who wrote the legislation, countered Lung’s suggestion that the law would automatically face a court battle for survival.
“We made sure we did everything we could to meet those constitutional guidelines,” she said. “Rather than end up in a big battle over this in the courts, let’s have companies recognize there are benefits.”
The California Chamber of Commerce and a number of local chambers opposed the measure, saying the law effectively creates a quota system that violates the U.S. Constitution and the California Constitution and civil rights law.
“If there are two qualified candidates for a director, SB 826 would require the company to choose the female candidate and deny the male candidate the position, based on gender,” CalChamber said in an alert to the California Senate before its vote on the measure. That, the organization said, would violate the man’s constitutional protections.
CalChamber also said the measure conflicts with corporate codes, notably the “internal affairs doctrine.” That principle recognizes that companies should have to follow just one set of ground rules — those of the state in which a company is incorporated.
More than 80 percent of the Russell 3000 companies with headquarters in California were incorporated in Delaware, according to an analysis of Equilar Inc. data by Board Governance Research, a company that provides independent research on corporate governance practices.
In a bill analysis issued before the measure passed, the California Assembly Committee on Judiciary said the bill created “an express gender classification” and thus would be subjected to “heightened scrutiny” under the equal protection clause of the 14th Amendment of the U.S. and state constitutions.
The Assembly Committee on Judiciary noted that “the dearth of women in the boardroom mirrors a larger pattern of gender inequity in leadership roles across the private and public sectors.”
“To defend the constitutionality of this bill, it would not appear to be enough to simply cite statistics showing that women are grossly underrepresented on corporate boards,” the committee analysis continued. However, the analysis said supporters might prevail because courts have held in some cases that past discrimination and differences in opportunity might justify “gender classification.”
Joseph A. Grundfest, a professor of law and business at Stanford and a former commissioner of the Securities and Exchange Commission, said in a paper for the university’s Rock Center for Corporate Governance that he viewed the law as seriously flawed.
“Here the state is imposing a quota requirement on private property — a publicly traded corporation — where there’s no indication that the publicly traded corporation wants to have that requirement,” Grundfest said in an interview.
“From that perspective, this bill pushes the envelope on affirmative action in a rather aggressive manner.”
Legal matters aside, California companies have work ahead of them to satisfy the law once it takes effect on Jan. 1.
One-fourth of California public companies in the Russell 3000 index have no women on their boards; among the others, women hold just 15.5 percent of the board seats. Smaller companies are more likely to lack female directors, according to Board Governance Research. Among the 50 California-based companies with the lowest revenues, only 8.4 percent of the director seats are held by women.
Companies that maintain all-male boardrooms or boardrooms with few women would seem to be operating counter to their own best interests. A 2016 McKinsey & Co. study showed that companies where women are most strongly represented at the board or top management levels outperform those with all-male boards.
A number of countries, including France, Finland, Iceland, Norway and Spain, have mandated female representation on corporate boards. Some Asian countries are following suit.
Raymond A. Cardozo, a partner at the San Francisco office of Reed Smith, which advised Jackson’s office on the legislation, said the law’s goals were popular with the public at large and institutional investors, who have long pressured companies to make boardrooms more equitable. That broad appeal might insulate the measure.
“I hope it doesn’t get to that,” he said, referring to a legal challenge. “This may be a situation where the passage of the law itself will produce action and will basically make it unnecessary to litigate or determine those constitutional questions.”
But activists say that they have been advocating for change for decades and that the needle has barely budged. Meanwhile, they say the pipeline overflows with qualified female candidates eager to take a seat at the table.
Maria Contreras-Sweet, one of five female directors on the 15-member board of Sempra Energy, parent company of San Diego Gas & Electric, declined to weigh in directly on the question of whether the new measure could survive a legal challenge. But she said she applauds the measure’s goal.
“The important thing is that we achieve the goal,” said Contreras-Sweet, who ran the U.S. Small Business Administration under President Barack Obama. “Whether it’s legal or appropriate, why don’t we stand up and accept that every study says when you add women to corporate boards the companies do better? I dare someone to prove otherwise.”
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, said she suspected that any legal challenge would come from CalChamber, “even though … I’ve told them it would be embarrassing.”
She has many tales from the trenches. One client, under pressure to seek a woman for his corporate board, said: “Find me a woman who doesn’t talk too much.”
Berkhemer-Credaire recently became chief executive of 2020 Women on Boards, a nonprofit group founded in 2010 to address the slow progress toward increasing the number of women on corporate boards. She said she would embrace a legal brouhaha that could help to spell the end for a corporate system that excludes women from the top tiers. She has heard from other states, including New York and Massachusetts, that are watching as California sets the pace.
“I welcome the additional publicity,” she said. “I relish the fact that this will keep the issue in the national headlines. I hope they do file a lawsuit. Bring it on.”