California’s women-on-boards quota worked — well, mostly

Silicon Valley benefits administrator WageWorks announced on April 9, 2019, that Carol Goode, a 35-year HR veteran, would join its all-male board of directors. Two days later, TiVo added tech finance executive Laura Durr and IP specialist Loria Yeadon to its board. Others followed with female board additions: gunshot-tracking company Shotspotter in late April, insurance software provider Guidewire in September and biopharmaceutical company Nektar Therapeutics in December, among others.

All told, 126 California public companies added 138 women to their previously all-male boards last year, ahead of a Dec. 31 deadline for a new law requiring companies headquartered in the state to have at least one woman director, according to an analysis released this week by KPMG. Companies who don't comply face a $100,000 fine for the first offense and $300,000 for further offenses. While there are some two dozen holdouts in California that haven't yet changed their board lineup, those who work on board diversity say that researchers, investors and policymakers in other states could soon force the issue at greater scale.

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"The legislation has clearly been a game-changer, not only in California, but in other states as well," said Shannon Gordon, CEO of theBoardlist, a board member matchmaking service. "What we're seeing right now is just a tipping point, frankly, of all these pressure points."

While research has accumulated on how diverse boards make better decisions, big-name investors like BlackRock and Goldman Sachs are moving from platitudes to more-concrete requirements. Starting July 1 in the U.S. and Europe, Goldman Sachs will no longer take a company public unless it has "at least one diverse board candidate, with a focus on women," CEO David Solomon told CNBC at this year's meeting of the World Economic Forum in Davos. The wording is less than precise, but Solomon said the push is driven by financial performance.

"Look, we might miss some business," Solomon said, "but in the long run, this, I think, is the best advice for companies that want to drive premium returns for their shareholders over time."

Then-Gov. Jerry Brown signed the California law, Senate Bill 826, in July 2018, requiring public companies to add at least one female board director (based on that person's self-identified gender) by the end of 2019. Larger boards must have up to three women by the end of 2021.

Some California companies, however, don't appear to be in a rush to comply: 27 companies had all-male boards at the end of 2019, KPMG found, representing about 4% of public companies headquartered in California. That's compared with the 29% that had all-male boards when SB 826 became law in mid-2018.

KPMG did not name the companies, citing neutrality rules for accounting firms, but the California secretary of state is expected to release its own report on board diversity next month. In the meantime, websites for companies including San Jose's A10 Networks and Fremont-based Enphase Energy still list all-male boards. Neither company responded to questions about their board lineups.

The KPMG report found that the health, pharmaceutical and biotech sectors are notable laggards, accounting for 37% of the companies that did not appear to have complied.

"Smaller companies tend to have smaller boards, and smaller boards have fewer women," said Annalisa Barrett, senior adviser to KPMG's Board Leadership Center, which authored the report. Scientific companies tend to have more industry-specific investors who may place less emphasis on diversity, Barrett said.

Carolyn Broughman, who heads the Boardroom Ready program at biotech industry group Women In Bio, said California's move to "the stick instead of the carrot approach" was a logical next step. The industry has been roiled by scandals in recent years, including a trade show party featuring scantily clad models, as well as other #MeToo horror stories, but lagged in adding female board members and executives.

"Of course everybody wishes this would happen organically," Broughman said. "It hasn't happened for 50 years."

At the Silicon Valley office of law firm Fenwick & West, partner David Bell has told clients not to wait around: "'You should plan on complying with this law,'" he said. That's in large part, Bell said, because of the blowback that could face a company sued over gender inequality.

"There is no board out there that wants to be the first defendant in this case," said Bell, who co-authors the firm's annual gender diversity survey. "There's lots of reasons why these laws may be subject to challenges, but nobody's going to challenge them."

Among the potential legal complications are the fate of companies headquartered in California but registered in Delaware, and the results of constitutional challenges that are regularly fought over other forms of affirmative action.

Unlikely to succeed, Bell said, are two lawsuits that have been filed against the state over SB 826 by tangentially related groups: a shareholder in a California company who lives in Illinois and a conservative activist group based in Washington, D.C. In the case of OSI Systems shareholder Creighton Meland, the industrial electronics company added a female board member in December even as the case winds through the court system.

Among companies that have gone on a board-recruiting binge after the new California law, Barrett found that 94% of women joined as outside directors, allaying concerns that boards would lose independence if companies hire from within their own ranks. The KPMG report also found that nearly half of new female board members currently hold a C-suite position, though companies are broadening their search to consider attorneys, investors, academics and others.

Though anecdotes abound about high-profile female executives being inundated with board offers as companies scramble to follow the law, Barrett found that "overboarding" concerns have been largely overblown, since 88% of new female directors serve on either one or two boards.

"This was one of the concerns that was continually cited as maybe an unintended consequence of the law," Barrett said. "To the extent that there weren't enough quote-unquote qualified women — which we knew wouldn't be true — would the same women be tapped?"

Many companies who are adding women, including bigger-name tech companies like TiVo, are opting to expand the size of their boards and create new seats for female members. Those who substitute a woman in place of a man often do so at a strategic time, like when an increasingly common board retirement age kicks in.

Europe has long led the way on gender diversity quotas, but a list of other U.S. states — some blue like California, others not — have passed their own rules for increased board disclosure, including New Jersey, New York, Maryland, Colorado, Ohio and Pennsylvania. Still, most states are steering toward corporate guidance policies, rather than requirements, said Gordon of theBoardlist. She's equally intrigued, she said, by ripple effects that happen in the wild.

"There's this halo effect there, where we're seeing increased activity within private companies," Gordon said. "My read of that is that this conversation is happening on a national level."