You might remember that the first legal challenge to SB 826, California's board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a "taxpayer suit," the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds and taxpayer-financed resources for those purposes, alleging that the law's mandate is an unconstitutional gender-based quota and violates the California constitution. A bench trial began in December in Los Angeles County Superior Court that was supposed to last six or seven days, but you know, one thing and another, closing arguments were just completed and the case has now been submitted. As we await the Court's decision—and in anticipation of International Women's Day—it might be interesting to review some of the testimony from the trial.
SB 826 requires that, by December 31, 2021, all public companies listed on a major exchange and headquartered in California, no matter where they are incorporated, include at least two women on their boards if the corporation has five directors, and three women directors if the corporation has six or more directors. A minimum of one woman director is required if the board has four or fewer directors. The statute also requires that the office of the California Secretary of State post on its website reports on the status of compliance with the law. Under the statute, the Secretary may impose fines for violations, ranging from $100,000 to $300,000 per violation. To date, the Secretary has neither proposed nor adopted regulations regarding fines or imposed fines for violations.
In the litigation, the plaintiffs claim standing as "taxpayers," under "California's common law taxpayer standing doctrine and Code of Civil Procedure Section 526a, which grants California taxpayers the right to sue government officials to prevent unlawful expenditures of taxpayer funds and taxpayer-financed resources." They contend that, in so-called "taxpayer suits," it is "immaterial that the amount of the expenditure is small or that enjoining the illegal expenditure will permit a savings of tax funds." Further, they allege, the Assembly Appropriations Committee indicated that SB 826 would require "ongoing General Fund costs of approximately $500,000 each year for the Secretary of State to develop regulations, investigate claims, and enforce violations of the statute's provisions and unknown additional costs to produce a required annual report."
In the complaint, the plaintiffs contend that the law's requirement for female representation on corporate boards "employs express gender classifications. As a result, SB 826 is immediately suspect and presumptively invalid" under the equal protection provisions of the California Constitution and subject to "strict scrutiny" in the California courts, requiring the state to have a compelling governmental interest and the classifications to be narrowly constructed to serve that interest, according to the plaintiffs. The complaint requests entry of a judgment declaring any expenditures of taxpayer funds to implement or enforce SB 826 to be illegal and issuance of an injunction permanently prohibiting the Secretary from expending taxpayer funds to enforce or implement the provisions of the legislation.
Even proponents of the California law recognized the possibility of "equal protection" claims and other legal challenges—when then-Governor Jerry Brown signed the bill into law, he acknowledged that "serious legal concerns" had been raised. (See this PubCo post.) And many expected a flood of legal challenges to frustrate efforts to implement the bill. Nevertheless, California's businesses appear to have accepted the requirements of the legal mandate—perhaps also feeling the pressure from large asset managers such as BlackRock and State Street—and have not filed suit. However, several groups have filed challenges.
The summary of the events at trial below is based on a variety of press reports. The trial got underway on December 1. Law 360 reported that, in her opening statement, the Deputy Attorney General urged the court to reject the challenge to SB 826, "arguing it benefits the state and is constitutional." According to the AP, she also contended that the law was "necessary to reverse a culture of discrimination that favors men" and that it benefits the state by" improving companies' bottom lines and the state's economy."
The law is constitutional, she said, according to Law 360, because "the Legislature took a thoughtful approach while crafting it." According to Reuters, the Deputy AG asserted that "the state had a compelling interest in gender diversity on boards, and that the law was tailored to address a historic lack of women on boards. 'It did not set a quota....No man has to lose his seat.'" That's because, Law360 reported, instead of creating quotas, she said, the law allows companies "to add seats to make room for women while not requiring any men to lose seats." She also contended that "the plaintiffs lacked standing and viable facial challenge." Not only does the state have a compelling interest in gender diversity on public company boards "'because it benefits the public and the economy as well as taxpayers, retirees and children,'" she said, but "'before S.B. 826, more than a quarter of public corporations headquartered in California did not have a single woman on their boards, and for smaller corporations the number was closer to 50%. 'These stats show that, as described by the bill's co-author, the ceiling was bolted shut with men, and the evidence will show that women have been left out,'" the Deputy AG said.
Law 360 characterized the state's presentation as "far more detailed, passionate and comprehensive" than the plaintiffs' opening, which was rather "a matter-of-fact" walk-through of the plaintiffs' case. Plaintiffs' counsel, from Judicial Watch, explained that, among other things, "they aim to shift the burden of proof to the state to prove the constitutionality of the law... by establishing the taxpayer status of the plaintiffs." SB 826, the plaintiffs' counsel contended, "requires the state to spend hundreds of thousands of dollars to enforce, and... such expenditures render it illegal under the state constitution because it 'employs express gender classifications.' Because such classifications are required under the law, the law can only be justified by a compelling governmental interest, and the classifications have to be narrowly constructed to serve that interest, the plaintiffs said."
According to the AP, the Deputy AG also contended that the state made almost no expenditures to implement the statute, and the second day of trial heard testimony from a division chief testifying on behalf of California's Secretary of State in support of that point. The AP reported that she testified that the law was "essentially toothless" and there were "no plans to penalize companies for not complying." That's because the "law is not enforced. 'It's required but there's no penalty, so it's essentially voluntary,'" she said, and "there was no follow up if they failed to file the required report." And many companies did fail to file the report as required by the law. Fines were discretionary, she said, under the law. Although there were no current plans to adopt regulations that would provide for fines, she could not say that the state would never impose fines. Instead, "the focus had been on education and outreach, sending a letter to corporations to notify them of the law." The Secretary's office was, however, providing the annual reports that were required under the law.
The AP also reported about a letter entered into evidence from then-Secretary of State Alex Padilla to then-Governor Brown two weeks before the bill was signed. In the letter, Padilla "warned the governor that his office couldn't enforce the law as it was written." While he supported the "admirable objectives" of the law, he "said his office didn't have the capacity or authority to collect fines. 'Any attempt by the secretary of state to collect or enforce the fine would likely exceed its authority,' Padilla wrote. Padilla said it would cost more than $10 million to create infrastructure for the program. Fines anticipated would be inadequate to fund the estimated $900,000 it would cost each year to maintain it."
A few days later, a University of Michigan professor of business administration and business law, Cindy Schipani, was on the stand for two days, testifying as a corporate governance expert. As reported by Law 360 (here and here), she made several points. First, she said that women are "grossly underrepresented" on boards of California companies compared to the national average, referring to a pre-SB 826 study showing that "only 15.5% of all public board seats in California are held by women, 26% of the state's public boards have no women members and 58% of smaller companies' boards have no women." In addition, she testified about a number of studies and reports that concluded that gender diversity could improve profitability and that supported her contention that the deficit in women directors on California boards "does not stem from a lack of qualified women candidates." Schipani even read from one report, which said that women "'now constitute a substantial portion of highly talented labor. They have caught up to and surpassed men in college attendance and attainment of bachelor's and master's degrees. Currently, in the United States, [nearly 37%] of new MBAs are earned by women. Companies that fail to fully utilize this labor talent will limit their own growth and opportunities for economic gain....This is not a problem that will fix itself.'"
SideBar
As discussed in this article in Politico,
"[m]ale executives and shareholders have long protested that they can't possibly find enough qualified women to diversify their boards. Now, four years later, California's experiment has quietly proved them wrong: They can, and in fact will, find qualified women if given a strong nudge. Contrary to the concerns of many executives before the law went into effect, the California law shows that they will find women who are just as qualified as men, suggesting that the real hurdle to gender diversity came down, at least in many cases, to a lack of effort. And once those women arrive, they make finding more women easier—which, studies show, will bring their firms higher productivity and performance thanks to the robust debate and fresh ideas coming from their boards."
But the mandate made companies do something different—"Much of it came down to networking and new hiring practices." The nonprofit 50/50 Women on Boards found that "in 2018 and 2019, companies first turned to other firms—law firms, accounting firms and banks—they worked with to find qualified women in those networks." The CEO of 50/50 explained that "'[t]hey either want to know those persons individually, or [have] a friend of theirs know the person individually,' she said." According to an academic who has studied the impact of SB 826, companies also used "headhunter agencies. She found women were more likely to be recruited that way than through personal networks after the mandate. Rather than firms simply tapping the few women that were already on boards, 'the women who came on boards after the quota seem to be new, truly new, outside of existing networks,' [she] said. 'It suggests women were previously overlooked because they didn't have the networks.' It also appears that, rather than kick men off their boards to add women, companies opted to simply increase the board's size. The average board size rose from 7.8 to 8.4." Another study "found that the women added after the mandate were just as qualified as existing board members. 'The pool of female director candidates is sufficiently deep,'" the academic added.
Why is having board gender diversity useful? As reported by Law 360, Schipani testified about research demonstrating that board gender diversity "can avoid harmful 'group think,' as women can bring expertise in compliance, ethics and social [responsibility,] as well as being 'typically more familiar with consumers,' Schipani said." According to Law 360, the Judge then asked Schipani "if she was saying that women are different from men. Schipani answered that research shows women do bring 'different perspectives' and care about certain issues 'in a different way.' The judge repeated her question, and Schipani said studies show women 'can bring different skills to the table.'" The Judge then asked: "'So men wouldn't have those skills?" Schipani responded, 'Oftentimes, those skills get missed.'"
SideBar
As discussed in Politico, although some studies have shown a negative effect, such as a 2010 study in Norway that found a decrease in stock price, many show a correlation between board gender diversity and "better firm performance. Companies with women on their boards have been found to have less volatile stocks, make smarter mergers and acquisitions, have less long-term debt, are more innovative and are more socially responsible." In Norway, an academic "found that board members felt the increase in diversity improved their firm's work and governance, such as better handling crises and coming up with improved strategies." According to another study, having more than one woman on a board—especially a critical mass—is "important for business benefits." The study, conducted in Israel, showed that "boards with at least three directors of each gender were nearly twice as active, proposing new ideas or asking for more information.... That's played out in California, too." In focus groups conducted by the CPP, "women have said that when they were the only ones on the board 'they felt like the token female, causing them to, sometimes unconsciously at the time, hold back...[They] also heard that women speak up more when there are more people who look like them in the room.'"
As reported, plaintiffs' counsel asked Schipani whether she was an advocate for gender parity or just an expert on the subject. She responded that she had studied the issue as an academic for 20 years, and she was "reporting what the studies say." Under cross-examination, she also rejected the contention that the law had a discriminatory effect against men: "boards lacking women can simply expand the number of seats to come into compliance with S.B. 826, so no, the law does not require men to lose seats."
She also discussed the inadequacies of other "softer approaches such as term limits" or the Rooney Rule, which would require that a woman be included in the candidate pool for every open board seat, Law 360 reported. These alternatives to a mandate, she said, were unlikely to produce "meaningful results. 'I have not in my 20 years come up with a solution that seems to work.'" Likewise, term limits were "helpful in providing 'more opportunities. However, it doesn't help if gender matching appears to still be in play, because if you limit the term of a male and open that seat, and if the men are still filling the seats that men vacated with men, it's not going to be helpful.'"
A week or so later, Law 360 reported, the Court heard from Hannah-Beth Jackson, who served as a California state senator from 2012 through 2020, and authored SB 826. She contended that prior non-mandatory attempts to achieve board gender diversity were just not effective. For example, in 2013, she had authored Senate Concurrent Resolution No. 62, which encouraged California boards to include a minimum number of women on their boards within three years. But later studies showed that the resolution "barely moved the needle at all." Yet, in her view, "one of the most discriminatory or least represented areas for women is in the corporate boardroom." Similarly, in the 1990s, the Legislature developed "a registry of women with the experience and credentials to serve on public boards," but Jackson said, these too were ineffective.
Jackson made several appearances on the stand over a number of
weeks. Under cross-examination, Law
360 reported, plaintiffs' counsel questioned her
about discussions in some of the studies on which she had relied
indicating that, while there was a correlation between board gender
diversity and profitability, no "causal link" was ever
established, and an article in The
Economist even rejected the contention that more board
gender diversity could increase profits. Jackson "said
she did not pay much attention to the article because it focused on
European companies and experts she spoke with did not have faith in
its methods. 'I was not going to compare apples to oranges, it
was irrelevant, misleading and inappropriate,' Jackson
said." When asked why she didn't examine the studies in
that article, she responded that no studies were mentioned.
On the day scheduled to be the last for testimony,
reported Law 360, with plaintiffs' counsel
continuing to suggest that Jackson "ignored studies or news
articles that did not support the contentions" behind SB 826,
and Jackson continuing to push back, her cross-examination turned
"confrontational." As reported, plaintiffs' counsel
"suggested during his questioning he could stretch the
proceedings out further. 'Senator, we can keep you here, or we
can try to finish...I'm trying to help you finish.'"
In response, Jackson said, "'I would appreciate it, sir,
if you would not threaten me....Please don't try to threaten
me.'" The Judge then said that she was the only person
threatening anything, and she was "threatening everybody. We
have to be done with this case today, as far as taking on
testimony."
SideBar
The most recent report from the California Partners Project, Mapping Inclusion: Women's Representation on California's Public Company Boards by Region and Industry, found "much to celebrate in the progress California has made. All-male boards are a thing of the past—from nearly a third of public company boards in 2018 to less than two percent now—and women hold a record number of California public company board seats." The report asserts that the "California experiment proves that where there's a will, there's a way. Concern that there were not enough qualified women to serve on boards is unfounded." Most revealing perhaps, the report tells us that, in 2021 "more women have joined California's public company boards than men, likely for the first time." But just barely—469 of the 930 directors that started in 2021, or 50.4%, were women. Whether this new statistic is attributable to SB 826 is anyone's guess—correlation is not necessarily causation and investors and others have also pressured companies on diversity issues—but it certainly helped to dial up the heat. According to the report, as of September 30, 2021, women held 1,844 board seats at California-headquartered companies, compared to only 766 in 2018—that's an increase from 15.5% of all public company board seats in California to 29.6% (See this PubCo post.)
As noted above, the case is now with Judge. The decision could be released any day.
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