California passed a pioneering law mandating that each publicly held company headquartered in the state have at least one female on its board of directors (Senate Bill No. 826; Corporations Code §301.3). The purpose of the law is to address the lack of representation of women on boards of directors, as at the time it was signed, one-fourth of California’s public companies had no female directors. San Diego was the worst county in the state for board diversity – 44 percent of companies headquartered in San Diego had no women on their boards – the highest percentage of any county in the state, according to a 2018 report by USD Business Professor, Annalisa Barrett.
The law applies to both domestic corporations (those incorporated within California) and foreign corporations (incorporated in Delaware, or any state or country other than California) with principal executive offices in California. The law states that by the end of 2021, a corporation with four or fewer directors must have a minimum of one female director; a corporation with five directors must have a minimum of two female directors; and a corporation with six or more directors must have a minimum of three female directors.
The state may also fine companies not in compliance – $100,000 for their first violation and $300,000 for any subsequent violation, with each seat that is not filled counting as its own violation.
According to a report released by KMPG at the end of February 2020, 96 percent of California’s companies have complied with the new law – only 4 percent still had all-male boards by the year-end deadline, down from 29 percent when the law took effect.
Senate President Pro Tempore, Toni Atkins, a co-author of the bill, has said the results are validating, and that having more women in the boardroom makes sense, both for profitability and equality. California is setting a precedent for the entire country to follow, and indeed, other states are following suit, with similar measures being introduced in Washington state, Massachusetts, New Jersey, and Illinois. Investment bank Goldman Sachs has said it won’t take a company through an IPO unless it has at least one female board member.
A challenge to the constitutionality of the law was just dismissed this week by a California federal judge. A shareholder of OSI Systems, Inc. sued the Secretary of State, claiming that the law violated the 14th Amendment’s Equal Protection Clause. Judge Mendez in the U.S. District Court for the Eastern District of California dismissed his case, holding the plaintiff had no standing because the statute applies only to corporations, and he is a shareholder, “a distinction with a difference.” See Meland v. Padilla, 2:19-cv-02288 (E.D. CA, April 20, 2020).
At least a dozen other countries have addressed the issue of lack of gender diversity on corporate boards by mandating that 30-40 percent of board seats be held by women directors. Germany requires that 30 percent of public company board seats be held by women. In 2003, Norway was the first country to mandate 40 percent of board seats be held by women. Similar mandates have been legislated by France, Spain, Iceland, and the Netherlands.
If you have questions about complying with this new law or believe you need to take legal action to assert your rights, contact Haeggquist & Eck, LLP online or call (619) 342-8000 and ask how you can arrange a complimentary consultation with one of our attorneys.