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Are State-Mandated Quotas for Women on Corporate Boards Effective?

(July 18, 2019, Route Fifty) In 2018, California passed a bill requiring companies to have at least one woman on their board. A mid-year report shows just how hard that law will be to enforce.

Despite all the economic gains women have achieved in the past few decades, that progress isn’t reflected in corporate boardrooms. The lackluster female representation at the highest echelons of business has become the source of extreme comparisons—like reports that show there are more CEOs of large companies named John than there are female CEOs in total—and spurred debates in state legislatures.

In 2018, California became the first state to require that women must be represented on the board of directors of publicly traded companies with their main offices in the state. To accomplish this, legislators established a quota and a timeline—by December 2019, every company has to have one woman on its board, and by December 2021, that number increases to two women for corporations with five or fewer directors, and three for corporations that have six or more directors.

While advocates celebrated the move to prod companies to diversify, at least with gender representation, a recent report from the California Secretary of State shows that tracking and enforcing the mandate may be more difficult than state officials anticipated. The report found that 184 California-based companies have a female director, but didn’t say how many still lack female representation, or how many companies are subject to the law. The data also seems to have some omissions—an analysis by a San Francisco Chronicle columnist found the list of companies based in the state failed to include Apple, which employs over 36,000 people in California.

State officials, however, responded that the report is merely an initial benchmark. “What was mandated for July was just a count of how many companies were in compliance. After December, when companies are required to submit this data, we will publish a much more comprehensive list,” said Paula Valle, the

Some of the people least surprised by California’s challenges with data collection are those who have been working to increase female representation on boards for years, including Charlotte Laurent-Ottomane, the executive director of the Thirty Percent Coalition. “Data collection is an issue we’ve had all along,” said Laurent-Ottomane. “You can go on companies’ websites and try to guess from the list of directors’ names, or you could use proxy statements, but those only come out once a year. Until companies are obligated to disclose this information, we’ll continue to have this problem.”

Laurent-Ottomane is trying to work with the SEC to get federal requirements around public disclosures of gender, race, and ethnicity as they relate to board composition, but she said it’s unlikely such mandates will arise out of the current administration. In a recent speech, SEC Commissioner Hester Peirce denounced efforts to diversify boards, comparing laws like those in California to “Baby on Board” signs in cars. The “Lady on Board” trend, as she called it, makes women seem like they “cannot fend for themselves” and “undermine[s] the respect

In the absence of a federal mandate requiring diversity quotas or reporting guidelines, a patchwork of states have followed in California’s footsteps. Legislators in MassachusettsIllinoisNew Jersey, and New York have all proposed similar bills, although none that have passed go as far as California in establishing a quota requirement. Some of the bills “encourage” corporations to diversify their boards—mirroring a resolution passed by the Pennsylvania legislature in 2017 that encouraged companies to reach “equitable and diverse gender representation on the boards” by 2020.

Laurent-Ottomane is optimistic in her belief that companies in those states may be genuinely trying to improve diversity, but lacking in the resources needed to accomplish their goals. When a board opening occurs, companies usually turn to executive search firms that sometimes lack the motivation or connections to find qualified female candidates. “They have to think outside the box and widen the net. It’s not true when organizations say that they can’t find qualified female candidates,” she said. “There is a significant candidate pool of senior women qualified for board positions, all of whom are far more qualified, I would guess, than some of the men already serving on boards.”

How likely women are to serve on boards may depend on the size of the company. Women hold 17.7% of board seats on the 2,835 companies tracked by the Russell 3000 index, but among the largest 1,000 companies on that list, that number rises to 25.3%. Of the smallest thousand, the number drops to 13%.

The numbers also get worse when looking at the representation of women of color. Women of color comprise 3.5% of the board seats for companies traded on the S&P 500, despite the fact that they makeup 19.5% of the U.S. population. That is a massive loss for companies, Laurent-Ottomane said. “If you don’t have women of color at the table, you’re not playing with a full deck,” she said. “You’re losing insight into a huge portion of the market.”

To encourage companies to bring more women, especially those of color, on board, Laurent-Ottomane’s Thirty Percent Coalition employs an interesting strategy. The Coalition has 90 member organizations, including institutional investors like the managers of pension funds or state treasurers. The group sends letters to companies in which they are invested asking them to make female representation a priority. Last year, 85 companies that the Coalition had reached out to appointed women to their boards for the first time, although the group doesn’t claim they were necessarily responsible for those decisions.

Still, those appointments were significantly more than the year before, and Laurent-Ottomane attributes the uptick to California companies seeking to diversify after the 2018 law.

As to whether California’s law will be effective in the long-run, Laurent-Ottomane isn’t so sure. Opponents have already challenged the law and others like it as unconstitutional, and even the Thirty Percent Coalition doesn’t endorse quotas. “California will be an interesting test case. We’ll have to see if companies are improving in a few years, and that will make it an easier proposition elsewhere,” Laurent-Ottomane said. “I’m not sure if what California is doing is the best solution for the country. But we’re not making any progress otherwise.”

Emma Coleman is the assistant editor for Route Fifty. 

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