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California's Female Board Member Requirement Draws Legal Challenges

By:
Chris Gaetano
Published Date:
Nov 26, 2019
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A law passed in California last year requiring all public companies based in the state to have at least one woman on their board of directors has drawn legal fire from groups that claim the policy is discriminatory and unnecessary, according to CFO.com. The law, which is similar to, though not as stringent as, Norway's, which mandates a 40 percent minimum, says that those companies that fail to have at least one woman on their board by the end-of-2019 deadline can be fined $100,000 for the first violation and $300,000 for the second. By 2021, boards with five members must have two women, while those with six directors must have three.

In response, the Pacific Legal Foundation, a libertarian group, filed a federal lawsuit against the state of California, claiming that the law violates the U.S. Constitution’s equal protection clause, and further shouldn't be necessary because there are already many qualified women to serve on boards. It is the second suit to directly challenge the new law; the first one, filed in August by the conservative group Judicial Watch, also claimed that the law is unconstitutional.

As it is now, women make up about 20 percent of board seats within the top 3,000 publicly traded companies. Laws like California's and Norway's are meant to correct this imbalance, which has been believed to be indicative of structural discrimination. Norway's experience, where a 40 percent minimum law has been in effect since 2006, has been mixed so far. While women now make up 42 percent of board members, this has apparently not trickled down into representation gains in other areas, such as C-suite executives. Another confounding factor is that further research indicates that many of these board positions are held by a small group of elite women who hold board seats at multiple companies, in what is colloquially called the "Golden Skirt" phenomenon. A paper published in 2011 found that eight women had more than four board seats at different companies, while only two men did, and that 21 women had more than three board seats at different companies compared to nine men.

On the other hand, there have been positive effects in other areas. The head of one of Norway's largest domestic investment funds said that the reform has made nomination committees more professional, as they have to work harder to find female candidates. Further, the Mission of Norway to the European Union said that it has changed attitudes and political debate in the country, and the reform generally has support in the business community.

Another paper found that, based on a sample of 341 Norwegian firms, "women directors contribute positively and significantly to organizational innovation. Furthermore, the positive relationship between women directors and the level of organizational innovation is mediated by some decision-making culture dimensions: the degree of cognitive conflict and the degree of preparation and involvement during board meetings."