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Has SB 826, the California board gender diversity legislation, been effective? According to reporting from the WSJ, the answer is a big yes. The WSJ reports that, when the law was signed on Sept. 30, 2018, 93 California–based companies in the Russell 3000 had all-male boards; a little over a year later, only 17 had no women on their boards. During the same period, according to the WSJ, 244 California companies in the Russell 3000 have added at least one female director, and 41 companies added two. Even more surprising, over 90% of companies in the S&P 500 now include two or more women on their boards, compared to 86% in the prior year. And last year a milestone was reached: the elimination of the last all-male board among the S&P 500.  (See this PubCo post.) And the non-profit 2020 Women on Boards has announced that it has met its goal of 20% of board seats of companies in the Russell 3000 held by women. Notably, for the second year in a row, California had the largest increase in companies with 20% or more of their board seats held by women, which, WOB observed, “may be a direct result of the historic legislation requiring companies in the state to diversify their boards.” In California, 68 more companies met the 20% goal in 2019 than in 2018. (See this PubCo post.) According to data from Bloomberg, women “now hold 28% of all board seats at major corporations.”

By comparison, according to Bloomberg, about “a dozen of the largest companies by market value in the S&P 500 Index have no Black board members.” What’s more, Bloomberg reports, “the number of Black corporate directors has stalled or even declined. Although about 10% of directors at the 200 biggest S&P 500 companies are Black, according to executive recruiting firm Spencer Stuart Inc., the percentage of Black executives joining boards in 2020 fell to 11% from 13% the year before.” Similarly, according to Heidrick &Struggles’ Board Monitor U.S. 2020, in contrast to significant gains posted for women among newly appointed directors compared to prior years, increases in racial and ethnic diversity have “been disappointing”: “nearly half, or 44%, of non-executive director appointments in the United States last year were women, the highest proportion since we began tracking board appointments 11 years ago. People of color also have made some progress on boards in the United States—with appointments increasing from 13% in 2010 to 23% in 2019—although the rate of change has been notably slow, taking 9 years to increase by only 10 percentage points.”

What accounts for the difference in gender compared with racial/ ethnic diversity?  Some attribute it to the determined push for board gender diversity by institutional holders, such as BlackRock (See this PubCo post) and State Street (see this PubCo post), along with legislative mandates, such as California’s SB 826 (see this PubCo post). The California law has meant that companies have needed to look outside of the usual channels—other boards and CEOs—to find female board candidates; the WSJ reports that over 60% of the women who joined the board of a California company in 2019 had never served on a public company board. 

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Two recent surveys have looked at how diverse directors are recruited: “Why Do Boards Have So Few Black Directors?,” in the Harvard Business Review, analyzed a survey of a 1,000 directors conducted during 2015 and 2016 to gain an understanding of the institutional and social barriers that “that perpetuate the continuing underrepresentation of Black professionals on boards.”  And the “Black Corporate Directors Time Capsule Project,” a survey undertaken by Barry Lawson Williams, a retired director who has served on 14 corporate boards, sought to “capture the experiences” of 50 seasoned Black directors “for the benefit of the next generation of Black corporate directors.” 

The HBR study concluded that the racial status quo on boards is reinforced by the process for recruiting new directors.  The study found that, when recruiting to fill open board positions, boards that do not include any directors who are racial/ethnic minorities consider almost no candidates who are racial/ethnic minorities (0.2 candidates per open vacancy, on average) and fewer total candidates (2.9, on average).  By comparison, boards that include two or more directors who are racial/ethnic minorities consider an average of 1.0 racial/ethnic minority candidate and 3.9 candidates for each open board seat.  The authors suggest that even invocation of the Rooney Rule (a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions, which requires that at least one racial/ethnic minority candidate be included in every pool from which nominees for open board seats selected) may not suffice: “studies indicate that these rules often do not go far enough. Finalist pools need to have more than one candidate from an underrepresented group to meaningfully influence hiring outcomes.”

But how do prospective candidates gain initial introductions? The Williams survey found that Black directors were nominated to boards primarily “because of business, community or other board relationships”; the author found that 85% of board searches did not involve an executive search firm and only 17% of first board appointments were made primarily through executive search firm contact. Black directors indicated that race played a major role in only 14% of board searches; rather, having the desired skill set and experience as a corporate executive were the most significant factors. An important pipeline, the Williams survey showed, was service on a non-profit board, which provided experience in how boards function, collaboration skills, “how to listen and express their voice,” and additional skills and leadership experience as well as access to new, potentially influential, relationships. Civic, industry and government involvement were also mentioned as possible pipelines. In the Williams survey, when respondents were asked what they wished they done differently, although it was important to “avoid being considered a single-issue director,” the “primary thing most Black directors would have done differently was to promote diversity more and sooner, including getting off boards that lacked a clear commitment.” Most respondents in the Williams survey expected that relationships would continue to be the most important avenue for being nominated for board service over the next five years.

The HBR study also found that social networks were the primary method of introduction.  Over half (54%) of Black directors were known to a fellow board member prior to being appointed (33% known to the CEO), while that was the case for only 35% of white directors (31% known to the CEO). Executive search firms were used to recruit 33% of Black directors, but only 25% of white directors. According to one Black director, in selecting board members, “people tend to go to people that they’re familiar with [and] have grown to know and trust. Often, people don’t have very diverse circles of people that have that level of trust and confidence.” Accordingly, recruiting through social networks can have the negative effect of “perpetuat[ing] long-standing racial inequities.”  And the internal pipeline does not seem to be an effective springboard for Black directors:  none of the Black directors in the HBR study were current or former executives of the company, while 12% of white directors had occupied those positions. (See this PubCo post.)

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In September, over 40 companies signed the Board Challenge, an effort to increase the number of Black directors “by challenging companies to take the pledge to appoint a Black director within the next year.” According to the Board Challenge,

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Even proponents of SB 826, the California board gender diversity law, recognized the possibility of “equal protection” claims and other legal challenges—when Governor Jerry Brown signed that bill into law, he acknowledged that “serious legal concerns” had been raised. (See this PubCo post.) And many expected a flood of legal challenges to frustrate efforts to implement the bill. Nevertheless, California’s businesses appear to have accepted the requirements of the legal mandate—perhaps also feeling the pressure from large asset managers such as BlackRock and State Street—and have not filed suit.

However, two conservative legal groups did file complaints. The first, Crest v. Alex Padilla (as amended), filed in California State Court, was framed as a “taxpayer suit” that sought to enjoin Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the statute, claiming violations of the equal protection provisions of the California constitution.  (See this PubCo post.)

In the second case, Meland v Padilla, a conservative legal organization filed a complaint in the U.S. District Court for the Eastern District of California on behalf of a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California.  The case sought a declaratory judgment that the statute was unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute.  At the time the complaint was filed, the company had an all-male board and, the plaintiff asserted in the complaint, was required under the statute “to add a female member by the end of 2019 and two more female board members by the end of 2021 or face fines for failing to comply with the Woman Quota.”

The Court dismissed the complaint, finding that none of the provisions of SB 826 affected the plaintiff’s 14th amendment rights to an extent sufficient to establish standing under Article III. The plaintiff had argued that the statute was compelling him, as a shareholder, to vote in a way that perpetuated sex-based discrimination and, therefore, that he had standing to challenge the requirement. However, the Court contended, the plaintiff’s argument “misse[d] the mark” and “ignored and/or distorted the plain language of SB 826.”  Rather, SB 826 “places a requirement and a possible penalty on publicly held corporations, but Plaintiff is not a publicly held corporation. He is a shareholder. And that is a distinction with a difference.”  Under SB 826, neither the requirement nor the penalty is imposed on the plaintiff, the Court maintained.

In addition, the Court reasoned, the plaintiff is not being forced to vote for any particular director: “notwithstanding SB 826, Plaintiff, as a shareholder, can vote in shareholder elections as he pleases. If, at future shareholder meetings, Plaintiff prefers a male board member nominee, there is nothing in SB 826 preventing him from casting a vote in favor of that nominee.” The plaintiff was not affected in any “personal or individual way.” For the same reasons, the Court held that the plaintiff did not have prudential standing. Only the company faced fines under SB 826; the impact on the plaintiff was “merely incidental.”  Because the Court held that the plaintiff lacked standing, the Court did not address whether the plaintiff had otherwise adequately stated a claim. Accordingly, the Court dismissed the complaint without prejudice. This case has, however, been appealed to the 9th Circuit. (See this PubCo post.)