Many prominent shareholders, such as institutional investors and PE firms, are putting pressure on the companies they own to report on the diversity characteristics of their board members and to increase the number of women and other groups on their boards. And while many companies are responding to this pressure and creating roadmaps to improve their board diversity, significant barriers remain.
To find out how companies are currently approaching the issue of board diversity, Toppan Merrill commissioned Mergermarket to speak with three leading experts as well as one public company executive.
Toppan Merrill question: California has become the first state in the country to pass a law mandating a gender diversity requirement on the boards of companies based in the state. What do you think of the law? Do you think legislative action such as this is necessary to improve board diversity? Leading industry experts weigh in...
Naz Zilkha, Dechert says: The California statute is fairly transformational. It has some opposition on constitutional and other grounds that does raise interesting questions. Studies have shown that a huge number of California companies will need to make changes to their boards to meet the new requirements, and how it plays out will almost certainly influence whether other states consider adopting similar statutes. The California law in particular is interesting because it applies both to companies that are incorporated in California as well as those with headquarters in the state. That means that companies with a principal office there, but that aren't necessarily California corporations, will fall under the statute. Some opponents of it argue that this could create legal issues, because of a choice of law rule called the Internal Affairs Doctrine, which says the rules governing how boards should conduct themselves should consist of a single set of rules of the state in which the company is incorporated.
The other thing that I think some people haven't considered is that removing someone from a board to appoint a woman could violate the constitution by imposing gender inequality. Companies may simply increase the size of their boards in order to appoint more women, but we don’t know how every company will act in practice. Some boards may not want to increase their size – they may be large enough already, and it's costly to add more people.
But you know, the California law is not a new concept. Europe has been doing this for quite some time – in fact, there are a number of countries that have gender quotas or disclosure requirements for diversity on their boards. So this is a new area in the U.S., but not in Europe.
Lori Zyskowski, Gibson Dunn adds: It does seem to be the case that the California law is encouraging greater board diversity at a faster pace than might happen otherwise. I’ve seen many clients based in California that are very focused on adding a woman to their board by the end of this year as is required by the law. They're also looking out for the next few years as they look to see whether they're going to need two or three female members of the board by 2021, depending on their board size. So while I would hope that such a measure is not necessary, I have to say that it does have an impact.
Whether or not the law is constitutional is a different issue. I think Governor Jerry Brown even said there were some questions as to whether it would withstand court scrutiny. But I don't believe there have been any cases against it, because in such a lawsuit, a company would have to argue that this law is wrong. It would almost certainly hurt their reputation both with their employees and with potential customers or other stakeholders.
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