California is the first state to require companies to include women on their boards — and proponents say it already is making a difference in the effort toward gender parity.
A new California law that demands public corporations include women on their boards of directors is just the latest salvo in years-long efforts to increase gender parity at the top of U.S. corporate ranks.
Signed Sept. 30 by Gov. Jerry Brown, the law requires corporations headquartered in California must have at least one female director on their board by the end of 2019. Companies with more than six board members need three female directors by the end of 2021. Those with fewer than six members need two women.
California was also the first five years ago to create a non-binding resolution calling on companies to improve gender diversity on boards. Several others, including Illinois, Pennsylvania, and Massachusetts, soon followed suit.
The law is expected to face legal challenges, a fact even Gov. Brown mentioned when he signed it. “There have been numerous objections to this bill, and serious legal concerns have been raised,” Brown wrote in a signing letter. “I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation. Nevertheless, recent events in Washington, D.C. — and beyond — make it crystal clear that many are not getting the message.”
Why It Matters
A majority of companies in the S&P 500 have at least one woman on their boards, but only 25 percent have more than two, according to a study by PwC. As for the gender makeup of association and nonprofit boards, a recent study by Heidrick & Struggles may provide an insight: Of the more than 500 association and nonprofit board members surveyed, only 30 percent of respondents were women.
Years of research supports the view that having more women serving on boards of directors is a smart move, said Susan Keating, CEO of WomenCorporateDirectors (WCD) Foundation, a not-for-profit organization that advocates for women on boards.
“Greater gender diversity on boards has been tied to stronger financial performance, higher employee productivity, and — something that seems extremely timely right now — better oversight of underperforming CEOs,” Keating told Convene. “Whether you are a public company or private one, you can’t argue with the business case for having more women directors in your boardroom.”
While Keating wouldn’t speculate on whether other states may follow in California’s footsteps, she told Convene she believes the law and the surrounding debate over it will cause companies across the U.S. to reconsider the makeup of their boards.
Recently, major index funds such as State Street, Vanguard, Fidelity, and BlackRock began requiring that companies within their indexes have a minimum of two female directors on the boards.
“The heightened awareness [created by the law] means companies, regulators, board members, nom-and-gov committees — all kinds of entities — are giving diversity more attention and thinking about ways to drive and potentially increase diversity on their boards,” Keating said.
In order to do that, Keating said, corporate executives will have to overcome what many proponents believe are commonly used excuses to leave women out of the boardroom, like the inability to find women CEOs because “no pipeline exists.”
Alison Konrad, a professor at the Ivey Business School at Western University in Canada, heard that excuse and others as she researched the 2006 paper she co-authored with Vicki Kramer and Sumru Erkut, “Critical Mass: The Impact of Three of More Women on Corporate Boards.”
The authors interviewed 50 experienced women directors and chief executives about their experiences. Konrad told Convene that one female CEO dismissed the pipeline fallacy, saying, “‘There is no way that there aren’t women who aren’t capable. Here I am, and I know I don’t get invited [to serve on boards] at the same level as a man who would be in my position.’”
Outside the U.S., a number of countries have implemented similar mandates as California’s law. France and Norway, for example, both require listed companies to reserve 30 to 40 percent of board seats for women.
Those numbers contrast sharply with figures in the U.S., where just 71 boards of 3,000 top companies have reached between 40 percent and 50 percent female representation, according to Equilar Research Services.
Combatting Excuses With Data
WCD has 2,400 members that include women CEOs serving on boards, Keating said, so she has little doubt there are significant numbers of business women who are qualified to serve on boards. Although WCD isn’t an employment search firm, the group has helped place more than 500 women on corporate boards.
That’s why it is working on creating a database that includes women and other diverse candidates so that “if companies are saying there’s just no pipeline, we can say that there is,” Keating said.
The group also is developing a database of research that supports the belief that companies with women on their boards are far more successful than those without women.
One such study, “The Tipping Point: Women on Boards and Financial Performance,” was conducted this year by MSCI, a provider of financial market indexes. The study indicated that U.S. companies with at least three women on their boards experienced median gains in return on equity (ROE) of 10 percentage points and earning per share (EPS) of 37 percent. Companies with no female directors experienced median changes of -1 percentage point in ROE and -8 percent in EPS, the study showed.
Such research backs Konrad’s findings, which showed that three or more women on a board reach a “critical mass,” where their contributions make the most impact and their views are less likely to be sidelined.
“With three women on the board, the women we talked with said [that] they were able to change the culture, to make it more participative and egalitarian,” Konrad said, “rather than a competitive, dominating, win-lose kind of communication.”