United States: Hurdles Ahead For California's Female Director Mandate

Last Updated: October 11 2018
Article by Teresa L. Johnson, Diem-Mi Lu and Kit Reynolds

On Sept. 30, 2018, California Gov. Jerry Brown signed into law a landmark bill, SB 826, requiring boards of directors of California-based public reporting corporations to have a minimum number of female directors. Though similar regulations aimed at improving gender parity on corporate boards have been implemented in European nations, including Norway, France and Germany – and a handful of U.S. states have adopted nonbinding resolutions aimed at the same – this law is the first of its kind to be passed on the state or federal level mandating such female representation. Though many of the law's supporters believe it is a necessary tool to speed the slow pace at which gender parity in the boardroom would otherwise be achieved, it has faced a number of criticisms, and its implementation may well be delayed or even blocked by constitutional challenges.

Requirements for Covered Corporations

The California law applies to corporations (1) whose shares are listed on "a major United States stock exchange," and (2) whose principal executive offices, according to the corporation's U.S. Securities and Exchange Commission 10-K form, are located in California. Notably, the law applies to corporations not incorporated in California as long as they meet the requirements above. For corporations that meet these criteria, the law requires that they have at least one female board member by no later than Dec. 31, 2019. By Dec. 31, 2021, corporations with five directors on their boards will be required to include two female directors, and corporations with six or more directors will be required to include three.

Two further aspects of the law should be noted. First, it does not prohibit covered corporations from increasing the number of seats on their boards in order to accommodate any additional female directors that are elected. Thus, the law does not implicitly or explicitly require any male board members to be removed in order to comply with its mandate. Second, in all instances, the law ties the definition of "female" to a director's self-identified gender, regardless of the director's designated sex at birth.

Failure to comply with the law will subject covered corporations to financial penalties. The law authorizes the California secretary of state to impose fines of $100,000 for a first violation and $300,000 for subsequent violations, in addition to a $100,000 fine for failure to timely file board member information. Covered corporations will likely also be subject to reporting obligations to allow the California secretary of state to issue annual, publicly available reports regarding compliance with the law's provisions and to levy fines as necessary. However, as long as a female director has held a seat for "at least a portion of the year," a covered corporation will not be subject to fines.

Controversy Regarding the Law's Potential Impact

The passage of the law may have wide-ranging direct and indirect effects. According to the legislative findings included in SB 826, approximately one-fourth (117 of 446)1 of all publicly traded companies in the Russell 3000 Index and headquartered in California have no female board members. There are a total of 7612 publicly traded companies headquartered in California, all of which will have to comply with the law – some as early as the end of 2019. The list includes corporate giants such as Apple and Facebook, both of which have boards that do not currently include sufficient female members to comply with SB 826's year-end 2021 requirements.

Supporters of the law argue that higher female representation on public company boards will have positive effects on California's economy, as numerous independent studies have concluded that companies perform better when women serve on their board of directors or in leadership roles.3 Not only may such diversity result in better financial performance and greater board effectiveness for companies, but the variety of perspectives that female board members bring to the table can stimulate new and innovate ideas.

Aside from pure economic justifications, supporters of the bill consider the law to be important as a matter of equity and fair representation, as women make up over half of the population and close to half of the U.S. workforce, but hold a much smaller percentage of board seats relative to men. Surprisingly, given California's progressive-leaning political climate, California's public corporations have fewer female directors than the rest of the country, with only 15.5 percent of board seats held by women, versus a national average of 16.2 percent for the Russell 3000 Index,4 and 19.8 percent for Fortune 1000 companies.5

In addition, the progress being made on achieving gender parity is slow, and studies show that it will take as long as 40 to 50 years for the numbers of women on boards to match the number of men.6 While California passed a precatory resolution in 2013 (Senate Concurrent Resolution 62) urging all public companies based in California to increase their female board representation along similar lines set forth in SB 826, current statistics show that the resolution has not been able to achieve the gender parity it sought to encourage.

As noted above, the use of quotas has also already been implemented in a number of western European countries, such as Norway and France (which both mandate a 40 percent quota for female board representation), as well as Germany (which requires a minimum of 30 percent female representation on boards). Quotas may also result in more organizational focus from companies and shareholders, encouraging formal recruitment processes in order to find the necessary directors and board composition.

While there appears to be broad support for the goal of achieving greater diversity on corporate boards, questions have been raised as to whether SB 826 will be an effective way to reach those goals, and could even prompt a backlash and risk reversing the pace of progress toward diversity.

Opponents argue that the law prioritizes only one type of diversity (gender) at the expense of a more holistic view of diversity, which includes, among other factors, a consideration of ethnic minority representation. Against the backdrop of the high-profile pending lawsuit by Fair Admissions Inc. against Harvard University (which alleges that Harvard University's admissions policy discriminates against Asian-American applicants), and California's own checkered history with affirmative action policies (the passage of ballot initiative Proposition 209 in 1996 represented the nation's first ban on affirmative action policies at public universities), opponents say there could be a similar backlash against an affirmative action program geared toward corporate boardrooms.

Others have noted that mandatory board quotas implemented in a number of European countries did not lead to the improvement in corporate governance or performance that some had touted, and that a number of studies cited by supporters merely show a correlation between female board representation and subsequent positive corporate outcomes, but not a causal relationship.

Practically speaking, there is a concern that SB 826 may make the board nominating process unduly burdensome, as nominating and governance committees struggle to find the right composition and mix of candidates that comply with this new gender quota requirement, as well as subject matter expertise, director independence and any other requirements imposed by a company's governing documents or institutional investor guidelines.

It is worth noting that material progress toward gender diversity in the boardroom is already being made absent government intervention. In the first quarter of 2018, nearly one-third of new directorships in the Russell 3000 Index went to women, and for the first time, fewer than 20 percent of companies in the index had all-male boards.7 Institutional investors have been a major force in bringing about this change. The California Public Employees' Retirement System, the largest public pension fund in the U.S., and the California State Teacher's Retirement System, the largest teachers' retirement fund in the U.S., have proactively recommended that more women be added to the boards of companies in which they invest. Earlier this year, BlackRock, the world's largest asset management company, stated in its proxy voting guidelines that absent a credible explanation, it would normally expect every board to include at least two female directors. Shareholder activism can be a much more effective method for attaining gender diversity, as such investors have the advantage of working with companies nationwide (and not just those that are headquartered or incorporated in California), and have the clout and resources to actively engage with company leadership.8

Possible Constitutional Challenges

It is also highly likely that SB 826 will face legal challenges in the courtroom. Opponents have argued that it violates both Article I of the California Constitution (which prohibits disqualifying a person from employment on the basis of their sex) and the equal protection clause in the 14th Amendment of the U.S. Constitution. The equal protection clause subjects laws involving gender classifications, like SB 826, to heightened levels of scrutiny, requiring a showing that the legislation in question serves an important (under intermediate scrutiny) or compelling (under strict scrutiny) state interest, and that it is narrowly tailored to be the least restrictive means of meeting the state's goal – a showing that some believe the state would be unable to make for SB 826. If challenged in court, it is unclear whether California would be able to offer specific evidence of discriminatory behavior to establish that an important or compelling government interest is at stake. However, some courts have found that past discrimination against women, and differences in opportunity, justify an explicit gender classification. Even so, the law may also be attacked on the grounds that the use of a quota system is not the least restrictive means of achieving the state's interest in remedying past discrimination.

Others have argued that the law is open to challenge based on its attempt to unconstitutionally reach beyond the state's borders. As the law applies to corporations headquartered in California regardless of where they are incorporated, critics allege that it violates the internal affairs doctrine. The internal affairs doctrine is a conflict-of-laws principle developed through case law under the commerce clause, which recognizes that only a corporation's state of incorporation should have the authority to regulate its internal affairs, including the composition and election of its board of directors.9 In response to opposition based on the internal affairs doctrine, the bill's author's office has pointed to Section 2115 of the California Corporations Code. Like SB 826, Section 2115 imposes specified California corporate requirements on corporations incorporated outside the state. However, drawing a comparison between the two laws is not particularly auspicious, as Section 2115 has faced its own legal challenge.10

Legal challenges to SB 826 could result in protracted and costly litigation, and possibly overturn, limit or at best delay the effectiveness of the new law.


In his signing statement, Brown acknowledged the opposition and potential challenges facing SB 826. Nonetheless, he wrote that recent events in Washington, D.C., and elsewhere make it clear "that many are not getting the message." Copying the United State Senate Committee on the Judiciary, Brown closed by stating that "it's high time" corporate boards better reflected the gender diversity of the nation overall.

While it remains an open question as to whether SB 826 will withstand potential constitutional challenges, the issue of gender imbalance on corporate boards is one that legislators and institutional shareholders continue to be focused on, especially in the current climate. As such, companies should consider establishing policies and procedures that will allow them to proactively assess and monitor their overall board composition and pipeline of future directors in ways that will foster gender and other forms of diversity in their boardrooms.


1 California Senate Bill No. 826, Section 1 (2018).

2 Id.

3 Meggin Thwing Eastman, Damion Rallis and Gaia Mazzucchelli, The Tipping Point: Women on Boards and Financial Performance, MSCI ESG Research LLC, (Dec. 2016); Julia Dawson, Richard Kersley and Stefano Natella, The CS Gender 3000: The Reward for Change, Credit Suisse Research Institute, (Sept. 2016); for a review of studies examining the relationship between diversity in corporate leadership and company performance more broadly, see also, Appendix to Quick Take: Why Diversity and Inclusion Matter: Financial Performance, Catalyst, (Aug. 1, 2018).

4 Annalisa Barrett, Women on Boards of Public Companies Headquartered in California 2017 Report, 3, Board of Governance Research (2017).

5 2020 Women on Boards, 2017 Gender Diversity Index, 2 (2018).

6 United States Government Accountability Office, Corporate Boards, Strategies to Address Representation of Women Include Federal Disclosure Requirements (Dec. 2015); Boards Will Reach Gender Parity in 2055 at Current Pace, Equilar Blog, (Jan. 31, 2017).

7 Equilar GDI: One-Third of New Board Members Were Women in Q1 2018, Equilar Blog (May 9, 2018).

8 Joseph A. Grundfest, Mandating Gender Diversity in the Corporate Boardroom: The Inevitable Failure of California's SB 826, 1 Stanford Law School and The Rock Center for Corporate Governance, Working Paper Series No. 232 (Sept. 12, 2018).

9 See, Edgar v. Mite Corp., 457 U.S. 624 (1982).

10 Vantage Point Venture Partners v. Examen Inc., 871 A.2d. 1108 (Del. 2005).

Originally published in Law360

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