Why businesses are adding women to their boards
Pushed by a groundbreaking California law mandating it, more companies are putting women on their public corporate boards. The law faces pressure in court and may not stand, but its rippling effect has already started to increase the visibility and awareness of the important benefits of board diversity. Investors are taking notice and trying to get ahead of the curve. Here’s where the issue stands, and why companies and shareholders are getting the message that, mandated or not, gender diversity on corporate boards makes good business sense.
Women on public corporate boards is good for shareholders. According to a study published by MSCI in March 2018, having three or more women on a company’s board of directors translates to a 1.2% median productivity above competitors. In contrast, those with mostly male boards saw growth in employee productivity 1.2 percentage points below industry medians.
Having a more diverse workforce and board of directors leads to a greater diversity of ideas, MSCI found. But it’s not just greater diversity of ideas which leads to innovation; greater board diversity also sets the tone for a more inclusive workplace culture from the top of the organization. According to MSCI, strong talent management practices have long been proven to lead to growth in revenue by employees.
Wall Street is starting to get the picture. The share of female board members in the Russell 3000 index, which includes most public companies on major U.S. stock exchanges, increased to 20% in the second quarter of 2019 from 19% the previous quarter, according to Equilar Inc., a governance-data firm. When Equilar began tracking the measure in late 2016, 15% of board seats were filled by women.
This increase in diversity is partly as a result of California pushing for action. On September 30, 2018, former Governor Jerry Brown signed a law, Senate Bill 826, making California the first state to mandate female representation on corporate boards.
What does the California bill do?
SB 826 requires public companies with principal executive offices in California to meet certain gender-inclusion requirements on their boards, based on a tiered system. All publicly held corporations had to have at least one woman director by December 31, 2019. By the end of 2021 companies must meet the following requirements:
1. If the number of directors is six or more, it must have a minimum of three female directors;
2. If the number of directors is five, it must have a minimum of two female directors; and
3. If the of directors is four or fewer, it must have a minimum of one female director.
The California Secretary of State will publish names of compliant and non-compliant companies annually. Failure to comply with the new law by the end of 2019 (or 2021 for larger boards) will lead to fines of $100,000 for each first violation and $300,000 per violation in subsequent years.
As of September 2019, 68% of the 94 public companies in California with all-male boards when the law passed have added at least one woman, according to Athena Alliance, a nonprofit that helps women land board directorships.
The law faces an uphill legal battle
On August 9, 2019, Judicial Watch, a Washington-based conservative activist group, filed a lawsuit, Crest v. Alex Padilla, in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826. They allege that spending taxpayer money enforcing SB 826 is illegal under the California constitution. They further allege that the legislation’s quota system for female representation on corporate boards employs express gender classifications. As a result, they claim, SB 826 is immediately suspect and presumptively invalid under the equal protection provisions of the California Constitution and triggers strict scrutiny review.
California is not alone
But SB 826 is not alone. It mirrors requirements that European countries have previously passed to increase women’s representation in business governance. France, Spain, Norway and Iceland already require public companies to have at least 40 percent female board representation. Similar requirements exist in Italy (one-third), Germany (30 percent), the Netherlands (30 percent, nonbinding) and other countries.
In addition, Illinois’s governor, in late August 2019, signed a bill requiring public companies based in the state to report on the composition of their boards, by gender and ethnicity, as well as on how they promote diversity at the board and executive level. Other states are likely to follow.
What can Wall Street do to change the landscape?
Whether SB 826 survives judicial scrutiny or not, some public and private investors are starting to take independent action towards including more women on board seats. BlackRock, the world’s largest asset manager with $6.3 trillion of assets under management, stipulated in its Proxy Guidelines for 2018 that it “expects to see at least two women directors on every board.” Vanguard, with more than $5 billion in assets under management, did not assign a metric, but nevertheless advocated for gender board diversity, noting in its Open Letter to Directors of Public Companies Worldwide that its position on board diversity is “an economic imperative, not an ideological choice.”
Based on these high-profile examples, even if California’s law is struck down, it looks like companies are recognizing that gender diversity on boards is a smart financial move. While this trend is just beginning to gather momentum and more action will be needed both from Wall Street and the government, you as a company investor, advisor or decision makers should consider getting ahead of the curve and putting a plan in place for more gender diversity on your company’s corporate board.