California has taken the lead as the only state to enact legislation to add more female directors to corporate boardrooms. The law requiring corporations to have at least one female board member by the close of 2019 applies to publicly traded companies headquartered in California. Doubts about the ability of the new law to withstand the legal challenges that are certain to come were acknowledged by Governor Brown. He put aside those concerns by pointing out the need for legislative action to compel corporate America to do something they have so far shown an unwillingness to accomplish voluntarily, bring diversity and equality to the highest level of business.
Key Provisions of the New Law
The provisions of Senate Bill 826 signed by Governor Brown do not let corporations off the hook simply by adding a woman to their boards of directors by the end of 2019. Companies with at least five directors have until the end of 2021 to increase the number of female directors to at least two. Boards composed of six or more directors must increase the number of women members to at least three.
Corporations that do not comply with the law face stiff penalties imposed by the Secretary of State. A first violation brings with it a fine of $100,000. Subsequent violations are subject to a $300,000 fine. The Secretary of State is authorized to adopt regulations requiring corporations subject to the requirements of SB826 to report the composition of their boards of directors. Failure to comply with any reporting regulations adopted by the state subjects a company to a $100,000 fine.
What’s Behind the Legislation?
There is ample evidence cited in SB-826 to support the Governor’s claim that corporations are not moving fast enough toward parity between the sexes on corporate boards of directors, which is ultimately the body that controls the trajectory of the business and elects the officers of the corporation, which remain predominantly white male as we sit here in 2019. Multiple studies are referenced to show how efforts by women to achieve parity with men in policy-making positions have lagged behind what the government anticipated.
Senate Concurrent Resolution 62 was passed in 2013 encouraging companies to increase the presence of women on their boards of directors. The goal was to have female representation on the board of every publicly held corporation in the state by the end of 2016, but encouragement without a legislative mandate behind it did not succeed.
A report looking at 3,000 publicly traded companies in the United States found that slightly more than 35 percent of new board positions went to women in the third quarter of 2018. However, only 18 percent of the directorships were held by women, and 504 of those corporations had all-male boards while only 37 of them achieved gender parity.
There are some big-name companies which are thought to be young, and modern by comparison to old Fortune 500 Companies, that are not in compliance with the mandate of SB-826. Apple and Facebook along with the parent company of Google must bring more women into their boardrooms to be in compliance by 2021.
Addressing Opposition to the New Law
Many business groups, including chambers of commerce throughout the state, oppose SB-826 claiming the law favors women over men board seats and could be in violation of the U.S. Constitution. The senator who sponsored the bill in the Senate addressed challenges to it by noting the law does not force corporations to remove or replace men holding positions on their boards.
Companies may comply with the law by adding additional positions to their boards of directors to bring in more women. She also pointed to studies cited in the law showing that companies with gender-diverse boards outperform those that do not.
Getting Legal Help to Ensure Compliance
NM Law concentrates its practice in business transactions and trusts and estates. It has provided trusted and knowledgeable representation and advice for more than a decade helping businesses comply with California laws and regulations applicable to them. Its attorneys offer assistance with succession planning, contract negotiations, acquisitions, formation and restructuring, and other matters related to business organizations, including general counsel services. Contact N-M Law today at (949) 253-0000 to schedule an appointment to learn if your board of directors is in compliance with the new law. Need to find a qualified female board Member? We can help with that too. Give us at (949) 253-0000 to schedule a meeting today.
Disclaimer: This article is intended to provide a general summary of the California usury laws and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. June Lin is an attorney at Niesar & Vestal LLP in San Francisco, a law firm specializing in business law and corporate finance.