California’s proposed quota for women on corporate boards

A bill (SB-826, the ‘Bill’) that would impose a quota for women on boards of public companies was recently approved by California’s State Senate and Assembly. Once signed by the governor, the law will require every public company that has its principal executive office in California to appoint at least one female director, as defined under the Bill, to its board by the end of 2019. The required quota will then be increased after 2019 to require two or three female directors, depending on the size of the board. Non-compliance for first violations will lead to a $100,000 fine, increasing to $300,000 for subsequent violations.

Professor Bainbridge has written that the Bill would violate the internal affairs doctrine (or the rule that corporate governance matters are controlled by the law of the state of incorporation) since it requires corporations with head offices in California to comply with the law, irrespective of their state of incorporation. Keith Paul Bishop has further supported this argument saying that the ‘jurisdictional hook’ of the Bill is not compelling. Professor Krawiec has cautioned that we need to be honest about what board gender diversity can and cannot accomplish. I argue here the quota is not only an unsuitable solution to the problems that the Bill identifies but is also likely to have negative consequences.

Do the rationales justify the quota?

The rationale for the quota, as set out in the Bill, is threefold. The Bill states that the quota will (i) boost the economy, (ii) improve opportunities for women in the workplace, and (iii) improve transparency and corporate governance. While each of these rationales are mentioned, the main aim of the Bill seems to be that of speeding up the road to gender parity on company boards. The Bill says that research predicts that it would take 40 to 50 years to reach gender parity if ‘something is not done proactively’.   While the quota would bring gender parity sooner to company boards, it might not necessarily advance the three rationales mentioned.

(i) Woman directors will boost economy by improving profits

The Bill relies on a few empirical studies to support this claim but, unfortunately, most of the studies cited establish correlation rather than causation. In other words, while they show that an increase in the number of women directors is associated with an increase in profits, they do not prove that the latter is a result of the former. This could mean that women directors are hired by companies that are already performing well. Further, there are almost as many studies with results showing a negative correlation between the number of women directors on a company’s board and profits. 

Another problem with this the belief that raising the number of women directors will make firms more profitable is that a company’s performance is not only dependent on board composition. Rather, performance is also influenced by external factors like market conditions, costs of production, etc. As a result, we cannot be at all confident that hiring women on company boards will boost the economy.

(ii) Improving opportunities for women in the workplace

The next rationale for the Bill is that it will improve opportunities for women in the workplace. To be sure, companies will have to hire at least one woman director to comply with the law and, to that extent, it will increase opportunity for women at the board level. It is useful to look at the experience of countries in Europe that have imposed similar quotas for a few years now. The Bill cites the example of countries like Norway and Germany to establish that a quota measure will improve women’s representation on boards. However, there is research showing that Norway’s quota resulted in the ‘golden skirt’ phenomenon where the same few women directors were appointed by many companies. This would mean that the quota did not help more women break the glass ceiling and make it into board positions; rather, it allowed a small number of women to hold multiple board positions. Additionally, the quota does nothing to ensure that women employees below the top management level have the same opportunities as their male colleagues and are promoted on to the next level.

The Bill specifically mentions that many technology companies in California went public without having any women on their boards. However, since technology companies have fewer women entering the work-force to begin with, it might then be worth asking whether the board should have gender parity or simply reflect the demographics of the rest of the company. The bigger problem that needs to be addressed in the technology sector is that many companies reportedly have a work culture hostile to women and this makes it difficult to retain women in the workforce. These problems cannot be addressed by mandating a quota at the top. 

(iii) Improving transparency and governance

The Bill cites a study which finds that companies with women on their boards are likely to create ‘a sustainable future’ by amongst other things, ‘instituting strong governance structures’. Literature suggests that gender diversity on the board results in better attendance at board meetings and directors being better prepared for meetings. However, studies also suggest that diversity of viewpoints and a willingness to voice these diverse viewpoints is the key to enhancing corporate governance. This means that boards should ensure that candidates from different backgrounds and networks are hired. Norway's experience, however, suggests that a strict quota may ensure that the same women are appointed on one board after another. While these women might be competent, this does not ensure viewpoint diversity or a willingness to question management where necessary. To achieve that, diversity efforts at the board level will need to go beyond gender.

Unintended consequences

Introducing the quota as provided for in the Bill is likely to result in some unintended consequences. The fact that the quota comes with a heavy penalty would mean that companies might comply with it as a check the box measure. This may give rise to a perception that the woman director is a mere token and takes away from her abilities. Another likely consequence is that companies might view adding a woman director to comply with the quota as a 'greenwash' tool that allows them to signal that to the public that they are promoting gender equality while ignoring issues like harassment and hostile work culture.  Further, the Bill, if signed into law, will act as another disincentive for companies to go public (which is already a trend in the technology industry). The Bill would also likely factor into companies’ choice of state to incorporate and establish their principle executive offices. Overall, this would do more harm than good to the economy of the state, as investors lose opportunities, companies deprive themselves of access to capital, and workers lose jobs.

Dr Akshaya Kamalnath is a Lecturer (Corporate Law) at Deakin University. Her doctoral thesis was entitled, 'Gender diversity on Company Boards: A Corporate Law Analysis'.