SB 826: Women directors on public company boards

Just as some believed the #MeToo movement was starting to fade from the headlines and public priorities, California's Legislature enacted a wave of new laws governing sexual harassment and gender equality. These laws include bills directly affecting investors, directors, and board members in California, which will likely have substantial influence on corporate governance for years to come.

California Senate Bill 826 requires publicly-held corporations with principal executive offices in California to add female directors to their boards. All such corporations must have at least one female on their boards by the end of 2019. By the end of 2021, California corporations with five directors must have at least two female directors, and corporations with six or more directors must have at least three female directors.

The law also empowers the Secretary of State to publicly report the number of corporations in compliance, as well as corporations relocating their headquarters or becoming private, and to impose fines for violations of the law ($100,000 for initial violations; $300,000 for each subsequent violation).

Proponents of the bill argue that it increases opportunities for women, both on corporate boards and within those companies. The bill's authors noted that as of 2018, one-fourth of California's publicly-held corporations had no female directors, and only 15.5 percent of board seats in California were held by women. In signing the bill, Gov. Jerry Brown wrote, "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."

However, dozens of businesses have publicly opposed the bill, arguing that prioritizing gender over other aspects of diversity will undermine comprehensive diversity programs. Some have suggested that the law is unconstitutional because it requires companies to choose female candidates over male candidates or even to replace current male board members with females. In preparing for the law to take effect, many corporations are reviewing their by-laws to explore best options for compliance. These include increasing the company's number of board seats in order to create new opportunities for women. Other businesses are enhancing and expanding their board of directors recruiting process, often by considering less traditional candidates. The law will likely be the subject of a legal challenge.