Women on board: California law requiring female corporate directors could be unconstitutional

In an all-woman workspace on the west side of Los Angeles, a group of female executives mingle, waiting for a workshop to start. They're here to learn how to grab one of the most prestigious — and male-dominated — perks of the corporate world: a seat on the board of directors.

A new law in California means hundreds of companies could soon be hunting for female directors. And it's about time, said Anne Nadel, chief operating officer of a Los Angeles-based plus-sized clothing company.

"I'm definitely a person who loves to jump in and have a trial by fire," said Nadel. "Hopefully I'll be granted the opportunity to be of service."

Late last year, California passed a law requiring all publicly traded companies headquartered in the state to include at least one woman on the board of directors by the end of 2019, and between one and three female directors based on the size of their boards by 2021.

Amid celebrations of International Women's Day on Friday, supporters say the new law is a step in the right direction for increasing diversity among senior executives in the corporate world.  

"Initially, I feel sad that there has to be such a mandate," Nadel said. "And yet I'm also very hopeful that the mandate will allow people to open their minds and they'll see what can come from it. And if that's what it took, then I'm very grateful."

If companies don't comply, they'll initially be fined $100,000 US, and face a $300,000 US fine for subsequent violations. It's the first example of a state-mandated gender quota of its kind in the U.S.

'Inching towards parity'

Among publicly traded companies in California, women hold only about 15 per cent of board seats, and more than a quarter of boardrooms have no women at all, according to Board Governance Research, an independent research firm. 

Shannon Gordon, CEO of theBoardlist, a San Francisco-based networking platform connecting female business leaders with opportunities to serve on company boards, said without the law it would have taken California more than 40 years to reach gender parity among corporate directors.

"There have been measures in place in Europe very similar to this legislation for nearly a decade now, and the numbers in Europe have moved dramatically," Gordon said. "They're inching towards parity and much of that is attributed to the legislation they have put in place there."

Gordon dismisses concerns that the new gender quota might lead to female board members being perceived as tokens.

"It's probably the most common misperception," Gordon said. "There is definitely not a shortage of qualified female candidates. The issue is more one of awareness and exposure to those candidates." 

'Numerous objections'

But some research suggests the law's impact may be underwhelming. A paper by a researcher at Stanford University suggests the law, if applied correctly, would only apply to about 72 California companies. The one Fortune 500 company affected — Apple — would only have to add one more woman to its board by 2021.

However, the most serious issue with the law may be its constitutionality. Even many legislators who support the law acknowledge it's on shaky legal ground.

"There have been numerous objections to this bill, and serious legal concerns have been raised," wrote former California Gov. Jerry Brown when he signed the bill into law. "I don't minimize the potential flaws that indeed may prove fatal to its ultimate implementation."

"There are several bases under which this law could be challenged," said Neil Wertlieb, a law professor at the University of California in Los Angeles who specializes in corporate governance.

"Essentially what the law purports to do is to some extent limit or disenfranchise shareholders from their right to elect to public company boards those directors that they think are most qualified." 

The first problem, Wertlieb said, is the gender quota itself, which may violate equal protection by discriminating based on sex. 

The second constitutional minefield is that the law applies to all companies headquartered in California, even if they're incorporated in other states. This potentially runs afoul of the so-called "internal affairs doctrine" which requires that internal company affairs be regulated by only one jurisdiction. 

"So, for example a lot of public companies are incorporated in Delaware," Wertlieb said. "And those that happen to have their executive offices based here in California will, at least as the law is written, be subject to gender based diversity on their boards of directors." 

Wertlieb believes the law has a "noble goal" but it may ultimately be doomed.

"I think there's a substantial risk that this law will not survive a challenge," he said.

Hopes for broader change

Advocates believe even if the courts water down the law it will still send a powerful message, which could prompt change in other states or even other countries.

In Canada, women represented just over a quarter of board directors on the FP500, the list of Canada's 500 largest corporations, according to 2018 statistics from the Canadian Board Diversity Council.

Montreal native Katheline Coleman, who now works for Google in Los Angeles, said trying to crack the "boys' club" can be frustrating on both sides of the border.

"People are going to reach out to people that they know, and oftentimes, you know, people that are similar to you," Coleman said.

Coleman hopes California's new law will inspire a similar mandate in Canada, which could even be expanded to require visible minorities on boards too.

"I'm a big fan of experiments," she said, "trying to change the law and then see what happens."