California Bill Pushes Board Diversity

Yesterday, the California Assembly passed Senate Bill 826, which requires that companies headquartered in the state which are traded on a major stock exchange have women on their boards. If the bill is signed by Governor Brown, companies with their principal executive offices located in California will face monetary penalties if they do not have at least one female director serving on their board as of December 31, 2019.

Among the companies included in the Russell 3000 Index which are headquartered in California, 85 (19.5%) had no women on their boards as of June 30, 2018.

The Russell 3000 Index does not include many of the microcap companies headquartered in the California. A recent study of microcap boards nationwide found that most do not have female directors; therefore, it stands to reason that the number of companies affected immediately by the bill is much higher than 85. In fact, Board Governance Research LLC has identified more than 120 California-headquartered companies which have all male boards.
The bill further requires that nearly all companies headquartered in California have more than one female director by December 31, 2021.

The number of female directors required varies by board size, as follows:

Number of Directors on Board
4 or fewer board members would have to have 1 female directors by 12/31/21
5 would have to have 2 female directors by 12/31/21
6 or more would have to have 3 female directors by 12/31/21

Based on board size and composition as of June 30, 2018, 377 of the Russell 3000 companies headquartered in California will need to add a total of 684 female directors by December 31, 2021.

Boards which do not add the requisite number of women to their boards by the 2019 and 2021 deadlines will have to pay fines to the Secretary of State. The first time a company is not in compliance, the fine will be $100,000. In the event of subsequent years of noncompliance, the fine increases to $300,000. However, while the monetary impact of non-compliance is important, the reputational damage may be even more impactful. Since the bill requires that the California Secretary of State publish an annual update of compliance, the scrutiny from the press and public will likely lead to negative publicity for any company with an all-male board.

However, one could argue that this negative publicity will occur even if the Governor does not sign the bill. Therefore, companies headquartered in California would be well served to begin the process of identifying female director candidates if they have not already done so. And, given the nationwide attention that the bill is receiving (e.g., today’s story in the Wall Street Journal), companies across the US with all male boards should expect intensified scrutiny as well.

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