Women Directors: Forcing the Issue

It has been a surprisingly strong catalyst to nudge boards to add more female directors. But now, California’s first-in-the-nation law that mandates women on boards is facing a critical court challenge.

The libertarian group Pacific Legal Foundation recently filed a federal lawsuit, saying California’s law violates the US Constitution’s equal protection clause. The group also says that a mandate isn’t necessary since there are plenty of qualified women to serve on boards.

The suit—the second one challenging the law—comes at a critical juncture for the movement to boost women representation at the top of corporate circles. In 2018, before the law went on the books, 168 of the 435 Russell 3000-listed firms based in the Golden State had board compositions that were at least 20% women. This year, the number of those firms is 236 out of 444.

The number has improved nationwide, too. There are 26 states that headquarter at least 20 Russell 3000-listed firms. In 2019, 17 of the states exceeded the 20% threshold, up from just four a year earlier, according to the advocacy group Women on Boards. Overall, about 45% of new board seats at publicly traded firms are being filled by women. According to Jane Stevenson, vice chairman of Korn Ferry’s Board and CEO Services practice, the California law has “generally raised the level of consciousness across the United States and the need for boards to be proactive and ahead of the mandate curve.”

Along with this suit, in August, the conservative activist group Judicial Watch filed a suit on behalf of three California taxpayers, also calling the law unconstitutional. The law requires publicly traded companies based in California to have at least one woman on their boards by the end of the year. By 2021, boards with five members must have two women, while those with six directors must have three. The fine can be $100,000 for a first violation and $300,000 for subsequent violations.

Several states are considering similar legislation, while similar statutes are on the books in Norway, France, and a handful of other nations. Experts say that adding women to both senior executive and corporate boards can lead to better business outcomes, including smarter business decisions, fewer scandals, and higher employee retention. “In an ideal world, boards would prefer that there are no mandates. Unfortunately we have not seen enough progress," says Tierney Remick, vice chairman and coleader of Korn Ferry’s Board and CEO Services practice. "On top of which, where mandates have been implemented, there has been impressive broad based boardroom diversity which in turn has led to to strong business outcomes.” 

That the California law is being challenged isn’t entirely surprising. When the state’s then-governor, Jerry Brown, signed the law, he admitted that the legislation had flaws. Nevertheless, Brown said that forcing the issue of gender representation on boards was necessary. “Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America,” Brown wrote when he signed the legislation.

Even with the increasing numbers, experts say boards should look a lot more balanced between men and women than they do now. “What makes boards powerful is when there is enough diversity that diverse labels go away and everyone is just looked at as a director,” Stevenson says.