ATTORNEY: GUSTAVO BRUCKNER
POMERANTZ MONITOR NOVEMBER/DECEMBER 2018
In late September, California became the first state to require its publicly held corporations to include women on their boards. Pursuant to this new law, SB-826, publicly traded corporations headquartered in California must have at least one woman on their boards of directors by the end of 2019. By the end of July 2021, a minimum of two women must sit on boards with five members, and there must be at least three women on boards with six or more members. Companies that fail to comply face fines of $100,000 for a first violation and $300,000 for a second or subsequent violation.
It is widely accepted that companies with gender-diverse boards of directors outperform their peers. Although it is not uniformly settled as to why this is so, companies with gender-diverse boards tend to have higher returns on equity and net profit margins than their peers. Studies have shown that the greatest benefit to a company’s bottom line occurs when there are three or more women on a board. According to one famous study, “One female board member is often dismissed as a token. Two females are not enough to be taken seriously. But three give the board a critical mass and the benefit of the women’s talents.”
In the United States, women comprise about half of the total workforce; hold half of all management positions; are responsible for almost 80% of all consumer spending; and account for 10 million majority-owned, privately-held firms, employing over 13 million people and generating over $1.9 trillion in sales.
It is generally believed that gender diversity on boards translates to less “group think,” greater expression of non-conforming views, more leadership positions for talented but often overlooked female employees, and less tolerance for underperforming CEOs.
Every company but one on the Standard & Poor’s 500 has at least one woman on its board and 11 of the Standard & Poor’s 500 companies, including Best Buy, Macy’s, Viacom and General Motors, have half or more of their board seats held by women. However, women still only hold 19.9% of board seats at Standard & Poor’s 500 companies.
Sixty-four countries have made some sort of national effort to promote boardroom gender diversity. In 2003, Norway passed a law mandating 40 percent representation of each gender on the board of publicly limited liability companies. Since then, approximately 20 countries have adopted some sort of legislation/quota to increase the number of women on boards, including Colombia, Kenya, Belgium, Denmark, Finland, France, Germany, Iceland, Italy, and Israel. Not surprisingly, a study of global companies found that Norway (46.7%) and France (34.0%) had the highest percentages of women on their boards.
In the United States, there has been a deep reluctance to mandate gender quotas. The Securities Exchange Commission (SEC) requires that companies disclose whether they have a diversity policy, and how it applies to board recruitment practices (Regulation S-K, Item 407(c)). While the SEC recommends that this include “race, gender, and ethnicity of each member/nominee as self-identified by the individual,” ultimately, the definition of diversity is left to each issuer. Many states have passed resolutions encouraging public companies to gender diversify their boards. Some, like Rhode Island, made pension fund investments conditional on increased board diversity. In March, the New York State Common Retirement Fund said it would vote against all corporate boards of directors standing for re-election at companies with no women board members. The California State Teachers’ Retirement System recently sent letters to 125 California corporations with all-male boards warning them that they risk shareholder action if they do not self-diversify. Thirty-five of those companies subsequently appointed female directors.
The political forces in California felt that change was not being effected fast enough. A quarter of California’s publicly traded companies do not have a woman on their boards and there are 377 California-based companies in the Russell 3000 stock index of large firms with all-male boards that could be affected by the new law. 684 women will be needed to fill board seats for Russell 3000 companies by 2021.