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A Taste Of Europe For California Business

panoramic view of the California State Capitol
Photo of the California State Capitol by Lev Lazinskiy

Women make up a little more than 50 percent of the U.S. population, but only occupy around 18 percent of board seats at the country’s 3,000 biggest publicly traded companies.

It should go without saying that, as a general rule, large companies should include women on their boards of directors. It doesn’t, quite, when a dozen Fortune 500 companies and 17 percent of companies in the Russell 3000 Index still have all-male boards. But on the other hand, The Wall Street Journal reported that U.S. women are on track to gain the highest percentage of new board seats ever in 2018. We still have some distance to go, but we are moving in the right direction.

We’re not moving fast enough for California, however. The state’s legislature passed a measure last week that would require publicly held corporations “whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California” to have at least one woman on their boards by the end of 2019. This requirement would rise by 2021 to at least two women for boards with five directors and at least three for boards of six directors or more. The law would apply to companies organized in other states if their main executive offices are in California.

Gov. Jerry Brown has not indicated whether he will sign the bill, according to The Wall Street Journal. If he does, it will be one more step toward making his state just a little bit more European. No other U.S. state has required gender diversity for corporate boards by law, though a few have passed nonbinding resolutions to that effect. But countries including Germany, Italy and France have mandatory gender ratios.

This sort of top-down totalitarianism ignores the reality of how corporate boards work and what board members do. Most boards are built, in large part, to provide a company with networking advantages. Public company boards include people who can open commercial or political doors on the company’s behalf. Candidates are often selected based on their resumes more than their personal skills. Female board membership will naturally follow female progress into the upper echelons of business and government power. If we focus on creating equal opportunity throughout the corporate organization chart, equal opportunity in the boardroom will inevitably follow.

Large, complex enterprises also benefit from a board that has a diverse and well-honed skill set, with members who can evaluate the business from the point of view of many constituencies, including those of female customers and employees. Studies from consulting firms and business schools support the idea that a well-constructed board should reflect diverse perspectives and backgrounds, including greater levels of female representation. Some shareholders have even begun to use their power to encourage companies without female board members to change. BlackRock Inc. and State Street Global Advisors have both taken steps, including withholding proxy votes, to pressure companies with all-male boards to rethink their approach.

Shareholders are naturally interested in promoting corporations’ success by any reasonable means. Politicians, on the other hand, have less motivation to care about “reasonable” where business is concerned. They mouth platitudes about what is good for business, but the mouthiest of them often have a scant track record when it comes to actually running one. California’s legislation is little more than a collection of such platitudes wrapped around a politically appealing mandate that has little to do with business success. If politicians thought the measure were truly crucial for business, it would apply equally, although in modified form, to noncorporate businesses such as law firms, and to privately held corporations as well.

If, just to conform to California’s law, a company adds a woman who lacks clout with other board members and top executives, little has been accomplished. The law explicitly allows companies to add a new seat in order to fill it with a female candidate without having to displace an incumbent man. But I like small, highly qualified and well-focused boards more than I care for boards that contain figureheads and underqualified automatons who cannot truly challenge a CEO or other executives, whatever their gender.

Meanwhile, the well-qualified women who might have received board seats anyway will face needless additional skepticism. No one wants to think the only reason they made it into the room was to fill a quota. Quotas, by their nature, undermine the credibility of any person who may have been selected merely to fulfill them. Who wants to be the token female on a California company’s board of directors?

And, of course, quotas necessitate some level of discrimination against the people they don’t cover, which could potentially violate the law. If the governor signs this bill, I would expect a legal challenge to follow shortly.

The bill also does not address the fuzzy edges of the gender spectrum. What about women who are transgender or intersex? Common sense suggests that they should qualify when the law is designed to diversify board rooms, but given the potentially hefty price tag for guessing wrong – $100,000 for the first violation, $300,000 for each subsequent violation – the law could inadvertently push boards away from considering such candidates. I can’t imagine that anyone wants corporations to get into the business of policing their board members’ gender identities, either.

Corporations will not miss the fact that the workarounds to the legislation are fairly simple: Don’t go public if you are headquartered in California. If you are already public, take the company private, or merge with a company that already has a compliant board and fire the redundant staff. Or move your headquarters out of California. Or don’t put your startup’s headquarters in California in the first place if you hope to someday take your enterprise public while still inviting onto your board the candidates you think best serve your needs, regardless of their gender.

Advocates of “Calexit” – California’s secession from the United States – continue to work to get their plan on the 2021 ballot, but maybe their plan doesn’t go far enough. Maybe California should consider becoming a long-distance member of the European Union, where the priorities of corporate governance and the definition of “free enterprise” are more in keeping with the state’s current political values. If most Americans wanted our private sector to look more like Europe’s, it already would.

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