Mandating a Seat at the Table
Valerie Achille, CLS ’21
On September 30, 2018, then-Governor of California Jerry Brown signed into law SB 826, making California the first state to mandate the inclusion of female directors on corporate boards.[1] By the end of 2019, all publicly traded companies must have a minimum of one female director on their board.[2] By 2021, boards with five directors must have at least two female directors and boards with six directors must have at least three female directors.[3] Corporations that fail to comply with the new requirements can be fined $100,000 for a first-time violation and then $300,000 for subsequent violations.[4]
The purpose of SB 826 is to increase the number of female directors in order to produce equitable gender representation in corporate boards. At the time the bill was introduced, women held only fifteen percent of board seats.[5] Moreover, a quarter of California’s publicly traded companies did not have any women at all on their boards.[6]
There have been concerns about the constitutionality of SB 826. On August 6, 2019, Judicial Watch, a conservative activist group, filed a lawsuit in Los Angeles County Superior Court challenging the new law.[7] In its complaint, Judicial Watch argues that SB 826 is unconstitutional under the California Constitution because it creates a quota system.[8] Since there is a specific number of women that must be on the board, the plaintiffs argue that the law effectively makes boards discriminate against qualified male candidates. For example, if two qualified candidates (one male and one female) apply and the board has not met its requirement for female directors, the board would be required to choose the female candidate solely based on her gender.[9]
With this constitutional challenge on the horizon, proponents of SB 826 must overcome an additional obstacle. The California Assembly Committee on Judiciary determined that in order to defend the constitutionality of this bill, the defenders of the bill would need to show specific evidence of discriminatory behavior; citing statistics that women are grossly underrepresented on corporate boards alone would not be sufficient.[10]
The short-term effects of SB 826 demonstrate that the law merits preservation. The new law has led to real change in the demographics of company boards. As of July 2019, all S&P 500 companies have at least one female director on their board of directors.[11] The number of Russell 3000 companies with all-male boards has decreased from 500 to 376 companies.[12]
Despite its good intentions and good results, SB 826 may not be able to withstand these constitutional challenges. The new law reveals the difficulty for states to make significant impact in gender representation while remaining within the parameters of the Constitution.
[1] Patrick McGreevy. Gov. Jerry Brown Signs Bill Requiring California Corporate Boards to Include Women. Los Angeles Times, (Sept. 30, 2018) www.latimes.com/politics/la-pol-ca-governor-women-corporate-boards-20180930-story.html.
[2] Associated Press. Lawsuit Challenges California Law Requiring Women on Boards A Conservative Activist Group Is Challenging California’s First-in-the-Nation Law Requiring Publicly Held Companies to Put Women on Their Boards of Directors. US NEWS, (Aug. 9, 2019) www.usnews.com/news/best-states/california/articles/2019-08-09/lawsuit-challenges-california-law-requiring-women-on-boards.
[3] Id.
[4] Patrick McGreevy. Gov. Jerry Brown Signs Bill Requiring California Corporate Boards to Include Women. Los Angeles Times, (Sept. 30, 2018) www.latimes.com/politics/la-pol-ca-governor-women-corporate-boards-20180930-story.html.
[5] Governor Signs Jackson Bill to Make California the First State to Require Women on Corporate Boards. Senator Hannah-Beth Jackson- Representing Senate District 19, (Oct. 2, 2018) sd19.senate.ca.gov/news/2018-10-01-governor-signs-jackson-bill-make-california-first state-require-women-corporate.
[6] Ibid.
[7] Judicial Watch. Judicial Watch Sues California Over Gender Quota Mandate for Corporate Boards. Los Judicial Watch. (Aug. 9, 2019) www.judicialwatch.org/press-releases/judicial-watch-sues-california-over-gender-quota-mandate-for-corporate-boards/.
[8] Ibid.
[9] Maj Veseghi & Sarah Ray, Bill to Impose Gender Quotas in Boardrooms Reflects Larger Trend, Daily Journal (Sep. 11, 2018) https://www.lw.com/thoughtLeadership/bill-to-impose-gender-quotas-in-boardrooms-reflects-larger-trend-daily-journal
[10] Assembly Judiciary Committee Staff Report, at 6.
[11] Lawsuit Challenges Constitutionality of California Law Mandating Women on Public Company Boards. O’Melveny, (Aug. 14, 2019) www.omm.com/resources/alerts-and-publications/alerts/lawsuit-challenges-constitutionality-of-california-law-mandating-women-on-public-company-boards/.
[12] Id.