Balancing Act: complying with California’s new board diversity law

07 Dec 2018

Balancing Act: complying with California’s new board diversity law

California is taking steps to close the boardroom gender gap with a new diversity mandate backed by hefty fines.

Researchers predict it will take more than 40 years for US public companies to organically achieve boardroom gender parity. California has decided to accelerate the process for publicly-traded companies headquartered in the state by passing a bill mandating new board diversity requirements backed by fines.

California is the first state in the country to set enforceable board diversity quotas, as opposed to soft targets. 

Senate Bill 826 mandates that by the end of 2019, all US exchange-listed companies with their principal executive office in California must have at least one female board member. By the end of 2021, the requirement increases for companies with larger boards. To comply with the law, a company may increase the number of directors on its board instead of ousting one of its current members.


Senate Bill No. 826's Board Diversity Requirement


Publicly held companies headquartered in CA with <5 directors

Publicly held companies headquartered in CA with 5 directors

Publicly held companies headquartered in CA with >5 directors

Number of female directors required by end of 2019




Number of female directors required by end of 2021





California toughens up

This is not the first time California has made waves on the topic of board diversity. A 2013 California Senate resolution encouraged public companies in the state to add women to their boards before the end of 2016. But while many public Silicon Valley-based tech companies began disclosing their workforce diversity figures in 2014, progress towards greater board diversity in the state has, on the whole, been slow.

Unlike California’s 2013 resolution, Senate Bill 826 carries financial penalties for non-compliance.

Violators face a fine of $100,000 for a first-time breach of the law and $300,000 for each subsequent violation. To avoid a violation, female directors must hold the requisite number of seats during at least a portion of a given calendar year.

Forcing a change

A recent study conducted by the University of San Diego found that as of June 2017, women held only 15.5% of the board seats of the largest publicly-traded companies headquartered in California.

Among the same group of companies, more than one quarter had no women serving on their boards at all.

A lack of female representation in the boardroom is even more prevalent among smaller companies.

The majority of public companies in California with less than $300 million in market capitalization do not have a woman on their boards.

While having one female director would be a good start, the California law goes further to mandate two or three female directors by the end of 2021 for companies with larger boards. The reasoning behind this is that multiple women on a board will have a greater influence on the working style, processes and output of the board. As the representation of women on boards increases, so does their ability to positively affect, and bring new ideas to, the firm they oversee.

Benefits of diversity

Numerous studies have found that publicly-held companies with female directors on their boards fare better financially and are better managed.

A global study of more than 2,000 companies between 2006 and 2012 conducted by Credit Suisse found that those with women on their boards performed better on key metrics, including stock performance.

For companies with a market capitalization of more than $10 billion, the shares of those with women directors outperformed comparable businesses with all-male boards by 26%.

Interestingly, the study found a greater correlation between stock performance and the presence of women on boards following the 2008 global financial crisis and during times of recession. This may be partly explained by the finding that companies with women on their boards also tend, on average, to be more risk-averse and to carry less debt.

In addition, a 2012 University of California Berkeley study found that companies with women on their boards were more likely to institute strong corporate governance structures with a high level of transparency.

Drawing from this body of research, Senate Bill 826 anticipates that having more women on boards “will boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees.”

Follow the leader

While California is the first state in the US to implement such a requirement, several countries in Europe have passed similar laws. Germany is the largest economy so far to address the board diversity deficit in this way, mandating that women hold 30% of public company board seats.

Norway was the first country to legislate a mandatory 40% quota for female representation on corporate boards in 2003. Since then, France, Spain, Iceland, and the Netherlands have all instituted similar quotas.

In the private sector, some big institutional investors like BlackRock and State Street Global Advisors have adopted investment policies or voting guidelines aimed at increasing the number of women represented on the boards of their portfolio companies. They’re joining the chorus of voices publicly advocating for greater board diversity.

Who will be affected?

Legal challenges to the law notwithstanding, Senate Bill 826 will affect a large number of companies. According to a California Senate report, there are currently over 750 publicly-traded companies headquartered in the world’s fifth largest economy.

Based on the current board composition of the largest US-listed companies headquartered in California (those included in the Russell 3000 index), estimates that 377 firms will have to hire at least one female director before the end of 2021.

Many more micro-cap companies will also be affected and are less likely than their large-cap counterparts to currently have female representation on their boards.

A memo from Weil, Gotshal & Manges LLP published by the Harvard Law School Forum on Corporate Governance and Financial Regulation counsels, “Although the new law may be subject to challenge in court, affected public companies and those contemplating an initial public offering within the next year should begin to consider board composition and director recruiting...”

In other words, given how in demand qualified female board candidates will be in California, affected companies would be well advised to begin their talent search sooner rather than later.