What will the law requiring women on boards mean for businesses?

A couple months ago, we wrote about SB 826 - a new California law requiring publicly traded companies to include at least one woman on their board of directors. The law is intended to address gender inequality in the workplace and is the first of its kind in the nation. According to the California Secretary of State’s office, as of the end of 2018, nearly one-quarter of the State’s 445 publicly traded companies did not have a woman on their boards.

The law went into effect on January 1, 2019. All public companies based in California must be compliant by December 31, 2019. The legislation does not stop there. By July 31, 2020, public corporations with five directors must have at least two women on their board, and those with six or more directors must have at least three women on the board.

Companies that are not compliant will receive a $100,000 fine for the first violation, and a $300,000 fine for subsequent violations. Any company that does not report board composition to the Secretary of State will also receive a $100,000 fine.

Law could affect many businesses

Annalisa Barrett, a University of San Diego clinical professor of finance, stated there are 377 California-based large corporations that are a part of the Russell 3000 stock index with all male boards that could be affected by this law. California is home to some of the nation’s largest companies. For example, Stamps.com and TiVo are based in California and both have all male boards. Just for the companies included in the Russell 3000, that would be an influx of 684 women to their boards. There are also hundreds of smaller public companies that may be affected by the new law.

Some Groups believe the law violates gender discrimination policy

There are more than 30 business groups that opposed the legislation, including the California Chamber of Commerce, which stated they believe the law violates discrimination policy. They also think it will be difficult for businesses to implement.

The legislation may also violate federal law

More than just violating gender discrimination policy, the opposed groups believe the new law violates federal law regarding how corporations are governed. Federal law states corporations are governed by laws of the State in which the businesses are incorporated, not where the main office of the business is located. Of the California-based businesses in the Russell index, 80 percent are incorporated in Delaware. Many U.S. businesses incorporate in Delaware for tax reasons.

If businesses incorporated elsewhere are not included, the law would only apply to 72 corporations in California.

European countries found success with similar laws

European countries, including Germany, Sweden, Finland, Iceland, France and Norway, have instituted similar laws to increase the number of women on corporate boards. Norway’s legislation is the strongest, requiring 40 percent of board seats go to women.

The Norwegian law was also initially controversial, but many board members warmed to the idea once it was in place. People with different backgrounds simply have experienced the world in different ways and can provide unique perspectives. The legislation helped eliminate some implicit bias. The increased diversity, it is argued, also improved decision-making and the quality of corporate governance.

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