International Women’s Day on March 8 is traditionally a day where the representation of women in leadership positions, including board seats, is highlighted in the news. In this blog post, we zoom in on some of the laws and rules that were introduced to improve diversity, equity, and inclusion (DEI) in the boardroom and how they progressed in the last few years.
The numbers are up.
Since the implementation of California's Senate Bill 826 (SB 826) in 2018, which mandated female representation on corporate boards, there has been a significant increase in women's presence in boardrooms. The law required at least one woman on the board of publicly traded companies with HQ in California by 2019, increasing that number to 40-50% of female-held board positions by mid-2021. Fines were put in place for non-compliance, ranging from $100,000 to $300,000, and companies failing to adhere to the law would be publicly listed as non-compliant. The result was swiftly noticeable: The number of women in the boardroom more than doubled, from 15.5% in 2018 to over 33.33% by September 2022. In addition to SB 826, California also passed Assembly Bill 979 (AB 979) in 2020, aiming to increase board diversity by requiring a certain number of directors from underrepresented communities.
Legal challenges
However, SB 826 and AB 979 were both challenged and ultimately struck down in 2022 due to violations of the equal protection clause of the California constitution. The courts concluded that these laws resulted in discriminatory treatment and failed to meet strict scrutiny standards. Following the legal challenge of SB 826 in 2022, the representation of women on corporate boards in the state began to decline slightly, dropping to 32.75% by September 2023.
Despite these setbacks, California Secretary of State Shirley N. Weber has appealed both cases, indicating ongoing efforts to promote board diversity through legislative means. The progress in board diversity since 2018 is undeniable as a consequence of SB 826. California’s female representation on boards remains higher than elsewhere in the country, in part because companies have noticed the benefits of diversity in the higher echelons of leadership. Putting quotas in place by law was effective, but the backlash and legal hurdles have proven that it may not be the best strategy to increase diversity long-term.
Comply or disclose
Nasdaq followed a different approach when it introduced Rules 5605 and 5606 in 2021, requiring companies to disclose board diversity metrics annually and eventually have at least two diverse board members or provide an explanation for non-compliance. The "comply or disclose" model adopted by Nasdaq is gaining traction. The United Kingdom installed a similar rule for its boardrooms. While less forceful than California’s diversity Bills, Nasdaq’s rules also face criticism for potentially encouraging discrimination and were challenged for stigmatizing certain demographics as well as shaming the companies that don’t agree with Nasdaq’s views. One can expect that, in the future, this model won’t be immune to legal challenges in the United States either, even though it has held up in court so far.
Paving the road
The Securities and Exchange Commission (SEC) supported Nasdaq's rules, emphasizing the importance of diversity and transparency for investors and the economy but acknowledged that it might not be the final solution. Meanwhile, institutional investors, including The Big Three, and proxy advisory firms, have increasingly prioritized diversity, particularly racial and ethnic diversity, in their own policies, reflecting evolving societal expectations.
Despite initial progress in increasing board diversity in California, legal challenges have hindered the enforcement of diversity quotas. However, efforts to promote board diversity persist through alternative models such as the "comply or explain" approach, championed by Nasdaq and SEC, and supported by institutional investors and proxy advisory firms, reflecting the recognition of the importance of diversity in corporate governance.
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