Board Diversity Legislation: What You Need to Know
September 18, 2018
Diversity on corporate boards continues to be a pressing topic. According to research from Catalyst, Women on Boards 2020 and a recent study from McKinsey, gender diverse boards are 21 percent more likely to experience above-average performance. This, in turn, continues to push investors to demand that companies diversify their boards. Within the past year, BlackRock, State Street and Vanguard have changed their voting guidelines and will withhold votes for sitting directors at companies that do not have women on their boards. The hurdle is expected to rise in 2020 when these investors expect at least two female directors to be present on every board. Some states are even pushing board diversity legislation for public companies.
Across the pond, several European countries have pushed for country-wide mandates to drive female director representation on corporate boards. According to our 2018 Global Trends in Corporate Governance report, countries such as Germany, Belgium, Norway and even India have all implemented formal mandates for gender diversity.
Until recently, the push for Board Diversity in the US was advocated by investor groups and non-profit groups. However, recently the California Governor, Jerry Brown, signed into law Senate Bill 826, which requires that companies headquartered in the state and traded on a major stock exchange have women on their boards. Now companies with their principal executive offices located in California will face monetary penalties if they do not have at least one woman director serving on their board as of December 31, 2019.
To date, four other states have passed non-binding resolutions encouraging companies to diversify their boards: Massachusetts, Illinois, Colorado and Pennsylvania. Given this pending board diversity legislation, our team at Farient wanted to assess the potential impact of the legislation and to revisit this topic that had we posted on in 2017: The Data Is in on Board Diversity: Women Still Comprise Less Than 25 percent of S&P 500 Boards, See How Gender Diversity on Boards is on the Upswing, What is Driving Gender Diversity on Boards? and Gender Diversity on Boards: Reaching Gender Parity.
A Call to Action: Board Diversity Legislation
California Senate Bill 826 has two distinct compliance hurdles for California-based companies to scale. The first requires that all California registered companies will have at least one female director on their board by the end of 2019. The second, slated to take effect in 2021, requires a minimum number of female board members determined by the size of the board and will require the following:
- Boards with six or more directors will require a minimum of three women directors
- Boards with five directors will require a minimum of two women directors
- Boards with four or fewer directors will require a minimum of one woman director
Corporate Impact from Diversity Mandates in California
Were it to be ranked as an independent country, California would have the fifth largest GDP in the world. There are 71 (15 percent) S&P 500 companies and 462 (16 percent) Russell 3000 companies registered in the state. How many of these companies will fail to meet the 2019 and 2021 hurdles of the board diversity legislation and, as a result, may relocate their headquarters to a different state?
Currently, 96 California-based Russell 3000 companies do not meet the 2019 hurdle of having at least one women on their board. These companies include household names such as Skechers and Stamps.com. Joining them is Nektar Pharmaceuticals, the only S&P 500 company that doesn’t meet these criteria.
However, the higher standards of 2021 will have a more widespread impact. According to our analysis, 40 S&P 500 companies in California including big names such as Alphabet, Apple and Facebook would fall short of the hurdle (each has 2 female directors, one shy of the required 3) if their board composition remains the same. If California SB-826 were extended across the U.S., 46 percent of the S&P 500 would fail to meet the mandate. In the event the other 49 states follow California’s lead, an eye-popping 4,000 additional board seats would need to be filled by women in Russell 3000 companies.
Number of Companies Falling Short of CA-SB 826[sc name=”CA Senate Bill 826″ ]
How will Companies Respond
Now that California Senate Bill 826 is signed into law, corporations have several avenues for compliance and avoidance of monetary fines. First, they could move their headquarters, an expensive and uncertain solution given other stakeholders working towards Board Diversity. Second, they could replace outgoing male board members with women, thereby meeting the requirements. Finally, companies could add board seats and fill them with women directors. Farient expects that this last option will be most widely employed, based on our previous research, “What is Driving Gender Diversity on Boards?”, which highlights that when faced with pressure to increase gender diversity, companies usually add board seats instead of replacing existing directors.
Will the Dominoes Fall?
Now that the bill is law, we will be monitoring how quickly – if at all – other states follow. In this time of reduced government regulation and enforcement, it is interesting to see stakeholders hold companies accountable to what are quickly becoming established best practices.
Farient will continue to watch how companies respond to this evolving landscape. To meet this mandate going forward, it will be interesting to see if more qualified women are awarded their first board seats or if companies draft existing women board members.