California is often categorized as a rogue state, enacting everything from net neutrality laws to zero-carbon emission goals independent of the federal government.
Over the weekend, Governor Jerry Brown signed another bill into law that will shake up corporate board rooms. Despite the imperfect nature of the legislation, it’s a bold and necessary step toward achieving gender parity.
The law requires every publicly traded company based in California to have at least one woman on its board of directors by the end of 2019. By the end of 2021, a five-member board must have at least two female directors; if the company has six or more board members, three will have to be female.
The bill was proposed by state senator Hannah-Beth Jackson (D-Santa Barbara) and Sen. Toni Atkins (D-San Diego), who point out that women make up 52% of the state’s population but just 15% of the directors of its public corporations.
The law is ‘highly unusual’
The law faces significant criticism, particularly from members of the academic community who argue that the second order effects may cause more harm than good.
California may be overstepping its bounds, according to Jill Fisch, the Saul A. Fox distinguished professor of business law at the University of Pennsylvania Law School who specializes in corporate governance.
“The law doesn’t apply solely to companies that are incorporated in the state of California, and that’s extremely unusual. Historically, U.S. law has deferred to the state of incorporation for most corporate governance issues. There’s potentially an argument that California could be overreaching here,” said Fisch.
According to a paper by Stanford Law professor Joseph Grundfest, the legislation applies to 72 corporations headquartered and chartered in California, or 1.59% of all publicly traded companies in the U.S.
“The bill will increase the number of board seats occupied by women by trivial amounts, if at all. These trivial changes will, however, come at great risk to the evolution of affirmative action jurisprudence,” Grundfest writes.
Even Brown acknowledged the “serious legal concerns” and “potential flaws that indeed may prove fatal to its ultimate implementation.”
Still, others are hopeful that a law in the most populous state of the U.S. can shape the country’s conversation around diversity.
“I don’t think any piece of legislation at this point will be a panacea or solve for everyone or everything. I don’t fault the bill — we’re making strides in the right direction,” Shannon Gordon, CEO of theBoardlist, a San Francisco-based platform that connects public and private companies with 4,400 qualified female board member candidates, told Yahoo Finance.
theBoardlist typically sees a 30% increase in search volume during the transition from August to September. This year, the firm saw a 70% increase month-over-month.
“We have experienced quite an uptick in call volume and usage on our platform in the wake of this legislation. It’s part of the conversation — companies are actively having discussions in relation to diversity. Ideally this will have a halo effect for companies that aren’t directly impacted,” said Gordon.
Setting a precedent for other states?
European nations like Norway and France have implemented similar quotas that have mixed results of success. The California law is rooted in the right intentions, given the bleak representation of females in powerful leadership positions.
As the saying goes, it’s lonely at the top. The share of female CEOs of Fortune 500 companies currently stands at 4.8% after reaching an all-time high of 6.4% last year. This comes after the departures of Campbell Soup’s Denise Morrison and HP’s Meg Whitman. Among the board members of all Fortune 500 companies, 22.2% are women.
Still, California’s law is unlikely to have a ripple effect across the country.
“It’s not particularly unusual for California to be out there and doing something different. I’d be really surprised if we saw a domino effect. This is a heavy-handed approach,” said Fisch.
Redefining diversity
One argument against California’s imposed quota system is that it prioritizes a narrow definition of diversity.
“No single legislature can determine what the ideal or the appropriate board composition is for any company. There are lots of types of diversity other than race and gender. We should also be looking at factors like background, different levels of expertise and age,” posited Fisch.
She pointed out two key issues that institutional investors are concerned with right now — board refreshment and diversity in expertise.
“Companies are bringing young people onto boards, dealing with issues of a stale board, with a bunch of people that have been together too long and are engaged in group think. The other concern is making sure that you have directors who can tie into or have expertise in a lot of complex corporate issues,” she said.
The Tesla case
That diversity in opinion shouldn’t be limited to a female perspective. For companies that are expanding globally, prospective board members should be familiar with regulatory and cultural challenges that come from working abroad. In a case like Tesla (TSLA), having board members who can be responsible for decisions regarding social media policy, especially in light of CEO Elon Musk’s behavior on Twitter, are crucial, according to Fisch.
Of Tesla’s nine board members, two are women, which is neither abysmal nor praiseworthy. Under the new law, the company will have to bring on one more female board member.
Tesla’s two female directors are Robyn Denholm, who currently serves as COO of Telstra, Australia’s largest telecom company, and Linda Johnson Rice, CEO of Johnson Publishing Company and Fashion Fair Cosmetics.
However, the bigger issue at hand is how closely aligned the directors are with Musk and how similar their professional backgrounds are. Five of the board members are personally intertwined with Musk and his various businesses.
Kimbal Musk is Elon’s younger brother and an early investor in Tesla. Brad Buss was CFO of SolarCity, which is now owned by Tesla. Antonio Gracias is a director of Musk’s SpaceX and was previously on the board of SolarCity until its acquisition. Ira Ehrenpreis is a founder and managing partner of DBL Partners, which is an investor in Tesla. Steve Jurvetson, who resigned from his venture capital firm Draper Fisher Jurvetson, is on a leave of absence from Tesla’s board since sexual harassment allegations were filed against him late last year.
“That’s a great example of what’s wrong with Tesla. The concern isn’t the lack of women — the problem is lack of diversity in many other respects,” said Fisch.
Melody Hahm is a senior writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.
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