New legislation promotes female inclusion
November 9, 2018
Women have traditionally been underrepresented in leadership roles in business, but a new California law aims to change that. On Sept. 30, Governor Jerry Brown signed Senate Bill 826 (SB 826), which requires publicly-held companies based in California to have at least one woman on their boards of directors, typically a group elected by shareholders to oversee the activities of a company, by the end of 2019 — the first law of its kind in any U.S. state.
SB 826 addresses a pressing issue: the lack of women on company boards. It is both necessary and effective in promoting diversity in companies, as well as a step toward the larger goal of female representation.
Studies show that there is still a severe lack of women on company boards, necessitating SB 826’s implementation. Board Governance Research LLC, a research firm focused on corporate board practices, conducted an analysis in 2017 that revealed about one fourth of companies based in California had no women on their boards. This indicates that women are underrepresented in companies’ leadership: women may make up about half of California’s population, but they do not have a voice in making many of the decisions that may affect them.
Due to instances in which women may be discriminated against, such as the hiring process, the bill is necessary to help qualified women earn leadership roles in companies. Employers may not be actively trying to exclude women, but could be unconsciously drawing on deeply ingrained stereotypes. For example, employers may not promote women because they do not pay as much attention to their progress due to biases against hem. SB 826 would allow for the conscious inclusion of women.
Though SB 826 would force companies to include more women on their boards, this change will actually benefit the companies. According to a 2013 Thomson Reuters analysis, companies with no women on their boards had worse returns when compared to the Morgan Stanley Capital International, an index used to measure equity performance in global markets. Companies will realize, based on their returns, they will grow as businesses through inclusion and will be encouraged to take action beyond what is required.
Moreover, the quota system requiring companies to have a certain number of female board members has been proven to be effective in many European countries, including Norway, France and Italy. When Norway passed a law in 2003 requiring companies to have boards that are at least 40 percent female, the quota was met by 2008. In addition, concerns of appointing unqualified women are unfounded. A 2014 study by Marianne Bertrand of University of Chicago analyzing the effects of that quota in Norway shows that the average qualifications of women on company boards actually increased after the quota was implemented.
SB 826 sends a strong message to companies, as well as to ordinary people, regarding the importance of gender diversity in leadership roles in the workplace. Whether it will be implemented successfully remains to be seen, but the idea is clear: women should be valued and represented as leaders in the workplace.
At surface level, SB 826 seems to be a step forward for women struggling to reach top leadership positions in companies. There are cracks, however, in this apparently progressive stride for workplace diversity.
Although it strives to combat the pressing problem of gender diversity in the workplace, SB 826 is inherently flawed. It might just be that many men are qualified for board positions in one company, while very few or no women meet such standards. But due to SB 826, the company would be required to have a woman on its board, forgoing a better candidate to abide by the law.
Mandating that companies must have a certain number of female board members would undercut the organizational structure of many businesses, including large companies like Apple, which currently only has two women on a board of eight. This could lead to less experienced boards or a lack of qualified women.
On the other hand, qualified women who are elected onto company boards may be undermined by claims that they were only chosen because of law’s requirements. Such claims would be detrimental to their careers.
Additionally, the legality of the law is rocky. According to Stanford University law professor and former Securities and Exchange commissioner Joseph Grundfest, 7 percent of companies headquartered in California are not chartered in the state. SB 826 would impact all companies headquartered in California, going against the internal affairs doctrine, which states that companies are subject to the laws of their states of incorporation, not those of the states where they are headquartered.
The equal protection clause of the U.S. Constitution, which prohibits states from denying citizens equal protection of the law, is another legal hurdle. In order for SB 826 to be recognized by the national government, California would have to prove that women are truly significantly underrepresented on boards.
Furthermore, SB 826 focuses solely on gender when there are other forms of diversity to take into consideration. The 2016 joint report by the Alliance for Board Diversity and Deloitte found that of those serving on boards of Fortune 100 companies, only 17.5 percent were minorities. To introduce true diversity to boards, factors like race and sexual orientation should also be considered.
Despite having been drafted with the right intentions, SB 826 does not completely address the lack of diversity in high-level positions at companies throughout the state. This act of legislature is not the right way to introduce needed diversity of all kinds into the workplace and fails to solve the diversity issue for California-based company boards.