California Passes New Law Aimed at Increasing Corporate Diversity

California has become the first state to require all publicly traded companies based in California to have at least one woman on their board of directors in a push to increase equality in the workplace.

The law, signed by Gov. Jerry Brown on September 30, 2018 requires public companies whose principal offices are located in California to have at least one woman on the board by the end of 2019. Additionally, if the company has up to five directors on its board the law will require two women board members by the end of 2021, or three women if the company has six or more directors. Approximately a quarter of the 445 publicly traded companies in California don't have a single woman on their board currently.

California's Chamber of Commerce and 29 other business groups opposed the law, sending a letter to the state senate arguing that the measure is unconstitutional, that it takes into account only gender and not other diversity, and that it seeks to manage the directors of companies that are incorporated in other states. Companies that don't comply with the law will be fined $100,000, while subsequent violations will warrant a $300,000 fine.

However, since the bill specifically creates a classification based on gender, it may raise questions of equal protection under both the U.S. Constitution and the California Constitution. When the government legislates on the basis of gender, courts typically subject that legislation to a heightened level of scrutiny. Essentially, this means the government has to prove it has a very compelling reason for doing what it is doing, and that there isn't a better way of accomplishing that goal.

Currently, only five percent of the companies on the Standard & Poor's 500 list have female CEOs. It has been found that women who have served as a chief executive are far less likely than men to go on to be CEO at another company, and less likely to serve on corporate boards. A decade ago, Norway instituted quotas requiring women to make up 40 percent of the directors at listed companies, spurring many countries in Western Europe to follow suit. As each country passed a similar law, business leaders would routinely protest. However, now a decade later, seemingly none of their worst fears have been realized.

An often-touted concern is that a small group of women would end up on many corporate boards, but it turns out this is also an issue for men as well. Still, the Economist found that some of the benefits often hyped for increasing the number of women on boards-such as closing the wage gap between men and women, or having a positive impact on company decision-making-haven't necessarily come to fruition.

The bill was one of Gov. Brown's last opportunities to approve or veto before he leaves office due to term limits. The approval also took place against the backdrop of the controversial U.S. Supreme Court confirmation process of Judge Brett Kavanaugh, who was being accused of sexual assault by his high school classmate, Christine Ford.

In his statement on signing the bill into law, Gov. Brown deliberately cc'd the U.S. Senate Judiciary Committee and wrote: "I don't minimize the potential flaws that indeed may prove fatal to [the law's] ultimate implementation. Nevertheless, recent events in Washington, D.C.-and beyond-make it crystal clear that many are not getting the message." He noted that as far back as 1886, corporations have been considered persons as far as the 14th Amendment is considered.

Only time will tell what legal challenges, if any, this new law will be up against and if it is able to bring about meaningful change to corporate boardroom diversity. Yet, what is certain is the old adage, "as California goes, so goes the nation."

Please contact Jonathan Stilz at [email protected] or (949) 975-7500 if you have any questions about any issue discussed in this article, or any other related matter.

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