Pressure Mounts to Add Women to Boards of Directors

Last fall, the California State Legislature garnered a lot of attention by passing a law that requires publicly-owned companies to have women on their corporate boards of directors. But that was only one development in a nationwide campaign to achieve that goal.

The California law says public companies headquartered in that state must have at least one female director by the end of this year. By the end of 2021, company boards with six or more directors must have three female directors, boards with five members must have two female directors, and boards with four or fewer directors must have at least one female.

Failure to comply could lead to potential fines for the approximately 450 public companies in the Russell 3000 index believed to be headquartered in California.

This idea is neither new nor has it been confined to California, note attorneys Elizabeth Petty Davis and Mark Windon Jones of the law firm of Troutman Sanders. Among proxy advisory firms, Glass Lewis earlier announced that beginning this year it will recommend votes against directors at all Russell 3000 companies which only have male directors.

Institutional Shareholder Services has announced a new voting policy, beginning in 2020, where it may recommend voting against a Russell 3000 or an S&P 1500 company’s nominating committee chair (or, on a case-by-case basis, the election of other directors who are responsible for the board nomination process) where the board has no female directors.

Among institutional investors, State Street Global Advisors announced that beginning in 2020, it will vote against an entire nominating committee if a company does not have at least one woman on its board and has not engaged in a successful dialogue with State Street regarding gender diversity for three consecutive years. BlackRock Inc. expects companies to have at least two women on their boards and the California State Teachers’ Retirement System (CalPERS) said it will consider withholding votes at companies lacking women board members.

In March 2017, U.S. Rep. Carolyn B. Maloney (D-NY) re-introduced a bill in Congress that would require public companies to include disclosures filed with the Securities and Exchange Commission that include information about the gender composition of their boards and director nominees. The legislation also would establish a Gender Diversity Advisory Group to study strategies for increasing gender diversity on boards of directors of public companies. Although the bill may get a friendlier reception in the new Democrat-led House, it is unlikely to survive in the Senate.

Some critics have raised concerns regarding the constitutionality of the California law, according to Anna T. Pinedo, an attorney with the law firm of Mayer Brown. When former California Gov. Jerry Brown (D) signed the bill into law, even he admitted that “serious legal concerns” have been raised about it and that the law’s flaws “may be fatal to its ultimate implementation.” But a challenge brought in the court system can be expected to take a long time before seeing any kind of resolution.

A research paper published by the Kenan Institute of Private Enterprise holds that mandating gender diversity through legislation ultimately is expensive for shareholders. The researchers argue this is because the costs of adding female directors will be driven up by competition over a pool of qualified candidates too small to fill the needs of all corporations who will be searching for female candidates at the same time.

“Given the widespread focus on gender generally, and in the board room in particular, it is prudent for companies to consider gender, among other factors, as part of their standard board assessment and planning processes,” argue Davis and Jones. “Investors, legislators and other corporate constituencies are making the issue a priority, so companies should consider doing so, too.”