California law mandating women on corporate boards: Dream or nightmare?

A new law that went into effect in California at the beginning of this year is likely to affect businesses and those who own and manage them in Minnesota and elsewhere.

The law mandates that publicly traded corporations headquartered in the Golden State diversify their boards of directors by adding women. This year, they must have at least one woman, and by next year those with boards with five members must have at least two women, and those with six or more must have at least three. Failing to observe the law comes with stiff penalties, including fines of $100,000 for a first violation and $300,000 for subsequent offenses.

Although confined to companies centered in California and whose stock is publicly traded, the measure may spread to other parts of the country, as California laws have a tendency to seep into the national conscience and across the country.

Signed by then-Gov. Jerry Brown in the fall of 2018 during the rising wave of the MeToo movement, the law was prompted by the revelation that one-fourth of California's 445 publicly traded companies did not have any women on their boards of directors, which its chief sponsor condemned as a "man-cave" condition.

The California measure comes at a time when women are increasing their presence on corporate boards. A record 20.4% of all seats on boards of publicly traded companies last year were held by women, an increase from 17.7% the previous year. A review of the 3,000 largest publicly traded companies in this country reflected that women comprise 45% of the nearly 600 new board members who were added to boards of directors in the third quarter of 2019.

Many of their appointments were spurred by California-based companies responding to the new law as well as corporations in other jurisdictions that are contemplating similar measures or, perhaps, taking pre-emptive action.

While there is no inkling that a comparable measure may be introduced in Minnesota, it seems only a matter of time before someone gets around to doing so, depending upon the composition of legislatures and the governor's office in the years ahead. Two states, Massachusetts and New Jersey, are currently considering similar legislation. Illinois has enacted a diluted version of the California bill, requiring companies to report the number of women and minorities on their boards, and to develop plans to increase diversity in terms of race and gender.

Another claims that the California mandate violates the Equal Protection clause of the U.S. Constitution, with an interesting twist. One of the claimants in that case is a shareholder of a public company, who asserts that forcing him to vote for members of the board of directors based upon gender constitutes impermissible state-compelled sex discrimination in violation of the U.S. Constitution.

While women in business dream of emulating the California law elsewhere, their aspirations may turn into a nightmare. If the California law is stricken by the courts there, as many surmise may occur, it is unlikely that the concept would progress in Minnesota or many other states.

Further challenges can be expected to actions taken by directors on corporate boards that have been unlawfully stacked with women if the measure is deemed unconstitutional.

On the other hand, rulings upholding the measures are likely to prompt comparable ones in the other states. Minnesota, with its dozens of publicly traded companies, may be a prime target for such a measure in the future.

But regardless of the legal battles, the concept of diversification of boards of directors is here to stay as women comprise 52% of the population and 70% of consumers.