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Last updateMon, 24 Aug 2020 12pm

For 46 publicly held companies in California with all-male boards, the clock is ticking.

The corporations—including pharmaceutical, financial and software companies that tend to be on the smaller, younger side—have only until revelers ring in 2020 to name a woman to their boards of directors, or face a $100,000 penalty.

A bill signed into law by former Gov. Jerry Brown in September 2018 required public companies with headquarters in California to name at least one female director by the end of 2019. The law further mandates that companies with five-member boards have at least two female directors by the end of 2021; corporations with six or more directors need at least three women. The penalties for failing to comply rise accordingly.

The Golden State became the first in the nation to legislate the requirement for female board members, inspiring lawmakers in Massachusetts and New Jersey to introduce similar proposals. Illinois enacted a pale version of the California law, requiring publicly traded companies to report each year their boards’ demographics and plans to promote diversity.

Researchers tracking the situation in California say the new law appears to be having the intended effect, with more than 90 percent of publicly traded companies based in the state now in compliance—and with women added to at least two-dozen all-male boards just since July. But the measure has also drawn legal challenges, as many observers predicted.

In acknowledging “serious legal objections” to the law, Brown said when he signed that it was nonetheless important to send a message to the male-dominated business world. That message has resulted in at least two lawsuits. One was filed in November by the libertarian Pacific Legal Foundation, a public-interest law firm, on behalf of a shareholder of OSI Systems Inc., a manufacturer of airport security, medical and other equipment based in Hawthorne.

In that suit, filed in U.S. District Court in Sacramento, Creighton Meland Jr., a retired corporate attorney, maintains that the “woman quota” would force him to discriminate when voting for OSI board members. Instead of voting for the best candidate, he said, he would have to consider the person’s sex as well. OSI, which did not respond to multiple requests for comment, has a seven-member board that includes founder and chief executive Deepak Chopra (not the internationally famed holistic medicine proponent). 

“We’re not claiming that the injury to him is having a woman on the board per se,” said Anastasia Boden, a senior attorney with the Pacific Legal Foundation who is handling the Meland case. “The injury is forcing people to make decisions based on sex.”

That would violate the equal protection clause of the U.S. Constitution, which was meant to create a sex- and race-blind society, she said, adding: “This law … just reduces people back down to their immutable traits.”

An earlier challenge was filed in August by Judicial Watch, a conservative group based in Washington, D.C., on behalf of three California taxpayers. That suit argues that spending taxpayer money to enforce the law would violate the state’s Constitution. Jill Farrell, a Judicial Watch spokeswoman, said the case was scheduled to be heard March 9 in Los Angeles County Superior Court.

Both suits name Secretary of State Alex Padilla, whose office handles corporate filings and processes the records of entities that conduct business in California. Padilla has asked a judge to throw out the Judicial Watch lawsuit, saying taxpayers have not been harmed and thus have no standing to sue. Paula Valle, a spokeswoman for the secretary of state, said his office would review the Pacific Legal Foundation suit and “respond in court.”

Although the number of women in boardrooms is rising, sexual parity remains a distant prospect in California and globally. According to the accounting giant Deloitte’s most recent report on the issue, released in October, women hold just 16.9 percent of board seats worldwide, a 1.9-point increase from 2017. Norway, with 41 percent of board seats held by women, the highest percentage in the world, was the first country to enact legislation requiring female representation, in 2005.

In California, women now hold 21.2 percent of the board seats at the state’s 444 largest corporations, according to 2020 Women on Boards, an education and advocacy organization based in Los Angeles. In the boardrooms of the 414 companies on the Russell 3000 lists in both 2018 and 2019, female corporate directors gained 183 seats between July 2018 and June 2019. Still, 36 of the Russell 3000 companies in California had no women on their boards as of June. The Russell 3000 tracks the performance of the 3,000 largest U.S.-traded stocks.

State Sen. Hannah-Beth Jackson—the Santa Barbara Democrat who wrote the legislation, Senate Bill 826—noted when the measure became law that a quarter of California’s publicly traded companies did not have a woman on their boards.

This was despite the fact that women made more than 70 percent of buying decisions, she said, making their input “critical to discussions and decisions that affect corporate culture, actions and profitability.”

Of the legal challenges, Jackson said recently in a statement: “I certainly respect the constitutional right of anyone to challenge the law in our courts. However, I strongly believe that this measure meets constitutional requirements and will be held up in court. Significant research has shown the importance of adding women to boards to improve profitability and add to the economic well-being of the state, as well the interest of the state to advance gender equality.”

The law itself does appear to have spurred some companies to add women to their boards. Skechers, Stamps.com and TiVo, for instance, all named women to previously all-male boards after SB 826’s passage; they and several other companies contacted for this story did not respond or issued a “no comment” to requests for interviews. 

“We knew that someone would sue,” said Betsy Berkhemer-Credaire, a Los Angeles executive recruiter and board member of the California chapter of the National Association of Women Business Owners, which lobbied extensively for the measure. She said she doubted that the cases would get far. 

“I don’t expect it to be much beyond a kerfuffle,” said Berkhemer-Credaire, who is also chief executive of 2020 Women on Boards. “The reason I sound so cavalier about it is that we’ve already won the hearts and minds of corporations and good-governance leaders throughout the country. We’ve already won the public-awareness campaign.”

Institutional investors have helped to spark public awareness about the relative lack of diversity in the boardroom. TIAA’s “Women on Boards” initiative, which began in 2018, targeted about 470 mid- and small-cap companies, asking that each company either add a female director or adopt a formal policy to emphasize diversity. More than one-third of the companies had added a female director by the end of the 2019 proxy season. Companies that did not cooperate faced TIAA opposition via proxy votes.

The long-running failure of some technology companies to include women on their boards helped to fuel support for the mandate. Twitter, the social-networking entity founded in San Francisco in 2006, tweeted the naming of its first female director in November 2013, days after becoming a public company. Diversity proponents had disparaged the company for having a board consisting only of white men, including three directors named Peter.

One company that determinedly maintained an all-male board, until recently, was Skechers. The nearly three-decade-old footwear brand, based in Manhattan Beach, would seem to be the sort of fashion and fitness entity that would benefit from female feedback in the boardroom. In 2014, CtW Investment Group, which was working with union pension funds investing in Skechers, pushed other shareholders to urge Skechers to freshen its largely insider board by adding diversity of “gender, race and experience.” Only last May did the company name Katherine Blair, a partner with Manatt, Phelps and Phillips, as its first female director.

Blair said by email that she was too busy to speak. The company did not respond to requests for comment, but Robert Greenberg, the chief executive and board chair, said in the statement naming Blair that her background “expands the diverse viewpoints of our board.” Her appointment brought the nine-member board to 10.

Two other companies that named women to their boards after the law went into effect would not weigh in on the topic.

Eric Nash, a spokesman for El Segundo-based Stamps.com, a provider of online postage and shipping software, said the company had no comment beyond its April announcement of entrepreneur Kate Ann May’s appointment to the board. May did not respond to a request for comment.

TiVo Corp., the San Jose-based company whose device became the generic name for digital video recorders, did not respond to emails and calls seeking comment about its appointment of two women to its board in April. Loria Yeadon, chief executive of the YMCA of Greater Seattle, declined to speak. Laura Durr, a former technology executive, could not be reached.

A study by Daniel Greene and Vincent Intintoli, Clemson University assistant finance professors, and Kathleen Kahle, a University of Arizona finance professor, showed that, as of July, 70 of the 602 publicly traded companies with headquarters in California were not in compliance with the new law. Since then, the number has dropped to 46 (about 8 percent), said Clemson’s Greene. The three did not name the companies.

The initial study showed that the costs of board expansion were negligible for the largest firms but substantial for the smallest. For many firms, the study showed, the cost of expanding a board to accommodate a woman could outweigh the financial penalty for failing to comply by the 2019 deadline.

Companies that continue to fail to satisfy the law face fines of $300,000 for a second or subsequent violation.

SeaSpine Holdings Corp., a medical device company based in Carlsbad that was spun off from its parent in 2015, recently named two women to its board who brought expertise in marketing and finance. But they were not the first females in the company’s boardroom. Another woman, who had been on the board since before SB 826, resigned after a work-related move to Boston.

SeaSpine President and Chief Executive Keith Valentine said he applauded the new law’s goal of moving more women into boardrooms.

“From our perspective, I think this is appropriate, progressive movement forward,” he said. “There are going to be folks who want to argue it. … We have very talented people now on our board, and we’re a better company for it.”

Kimberly Commins-Tzoumakas, a seasoned CEO and one of the two women SeaSpine appointed, said board seats have typically been filled through historical relationships. “I do not believe that every all-male board is in place for discriminatory reasons,” she said. “I do, however, commend California for taking a stand of inclusion and opening doors for equality on boards.”

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Local Issues

When California passed the nation’s first law to give consumers control over their personal data last year, legislators built in an unusual buffer—an extra year to change the law before it takes effect in 2020.

Lawmakers and lobbyists are now making use of that time, submitting at least 20 bills in recent weeks that would adjust, tweak or perhaps ultimately gut California’s unique privacy protections.

Privacy advocates are fighting to make the law even broader, while businesses and tech companies want to see it narrowed. The dynamic could force lawmakers to choose between constituents who overwhelmingly feel they have lost control of how their personal information is collected and used, and businesses (including many campaign donors) who argue that broad privacy protections could fundamentally damage the internet economy.

The issue landed in the Capitol with huge urgency because of a San Francisco real estate developer named Alastair Mactaggart. Last yearhaunted, he has said, by a dinner-party chat with a Google engineer who told him Americans would be stunned to know what the tech giant knew about themhe spent $3.2 million to put a data-privacy law on the ballot. Tech companies poured $1 million into a campaign to fight it, then decided they’d rather seek a compromise in the Legislature. Lawmakers rushed to pass a privacy law last summer, and Mactaggart pulled his measure off the ballot.

“I was aware when I withdrew the initiative that that would open us up to the possibility of change, both bad and good,” Mactaggart said to a panel of lawmakers this month. “I believe you guys are going to do a great job defending this bill, and making sure that when it goes into effect next year, it’s a great bill for California and for the world.”

The law requires that companies tell customers what information it collects about them and to whom they sell the data. It also requires that companies give customers an easy way to opt out of having their data sold, and limits how much more they can charge those who do.

It’s too soon to say exactly how or whether lawmakers will wind up changing the privacy law. Many of the bills that have been introduced are mere placeholders, and it’s still early in the legislative year. A lot can change before lawmakers cast their final votes in September.

But a few general themes have already emerged. Here’s what to watch as California’s privacy battle unfolds:

Teeth are a big fight: A key aspect of last year’s compromise between tech companies and privacy advocates was minimizing the opportunity for lawsuits. Under the deal they reached, the law only allows lawsuits over data breaches. But that’s now up for debate, with new bills giving Californians the right to sue companies that break other aspects of the privacy law, such as if they don’t give customers the opportunity to opt out of having their data sold or don’t delete data upon customers’ requests.

“In order to make sure they comply with the law, we need to make sure people can exercise their rights,” said Democratic Sen. Hannah-Beth Jackson, of Santa Barbara, who is carrying a bill that would expand the ability to sue under the privacy law. “If you don’t violate the law, you are not going to get sued.”

Big business is likely to push back hard.

California Chamber of Commerce lobbyist Sarah Boot said changing the privacy law to allow for more lawsuits would trigger “a class-action bonanza.”

“Frankly, our court system can’t handle that. California businesses can’t handle it. And the California economy can’t handle that,” Boot said in a hearing before Jackson’s bill was introduced.

Another flashpoint is a change the tech industry wants—limiting which bits of information consumers can opt out of having sold. Tech companies argue that the law should be narrowed so they can still exchange non-identifiable information with advertisers about, for instance, users’ devices and operating systems.

“Treating this as the sale of personal information jeopardizes the underpinnings of the internet,” said Internet Association lobbyist Kevin McKinley.

Privacy advocates caution that some changes that seem small may actually weaken the law.

“Powerful tech companies and their clever lobbyists know how complex privacy policies are, and what they may present as a small tweak here and there can fundamentally change the entire law and completely obliterate the rights people have,” said a statement from Jim Steyer, CEO of Common Sense Media, a nonprofit that is part of a coalition of privacy advocates.

Politics aren’t on usual lines: Lawmakers passed the privacy bill last year with a sweeping bipartisan vote, and the issue continues to resonate across the political spectrum.

Republicans—trying to make themselves relevant in a Legislature where Democrats have an enormous majority—have introduced a package of privacy bills, including one that would require social-media companies to permanently delete data when people delete their account, and another that would prohibit companies from saving the voice commands people give smart speakers such as Amazon’s Alexa.

GOP Assemblyman Jordan Cunningham said he’s gotten some blowback from business lobbyists who are used to having Republicans on their side.

“Some people are like, ‘What are you guys doing?’” said Cunningham, of San Luis Obispo. “Privacy is a nonpartisan issue to me. It’s a nonpartisan issue to my constituents. When I talk to people in my district, they uniformly want this stuff. They know their data is being used in ways they’re not aware of.”

Democrats control the legislative process, so one political question to watch is whether they allow Republican privacy bills to advance, or quietly kill them. The other political question is whether Democrats themselves will split over any of the proposals, as happens on many fights in the Capitol that impact big business.

“I think there will be a real battle between the pragmatists and the idealists,” said Steve Maviglio, a Democratic political consultant who worked on the tech companies’ brief campaign against the privacy ballot measure. “That’s where it’s going to lie.”

Washington is a wildcard: While California is debating changes to its privacy law, federal lawmakers are also considering a nationwide version. At a pair of recent hearings in Washington, House Democrats vowed to get tough on tech companies, and Senate Republicans said they would like to pass a national privacy law that overrides California’s.

Internet companies would prefer a single national law over a patchwork of rules across the states. Privacy advocates, meanwhile, have argued that any nationwide privacy law should be structured to set a tough minimum baseline of privacy protections upon which state laws could build.

Built into the argument is the sense, on both sides, that California’s size and market influence will do for internet regulation what it did for rules around auto emissions—force the industry to essentially default to California’s regulations as the national standard.

There, too, California politics could be a factor.

Mactaggart said he thinks it’s unlikely that Congress will pass a law that would substantially weaken California’s, given the size of the state and the prominence Californians hold in the House—both the speaker, Democrat Nancy Pelosi, and the minority leader, Republican Kevin McCarthy, hail from the Golden State.

“It’s going to be hard for them to step in and gut a law that protects one in eight Americans,” Mactaggart said.

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics

California is moving toward becoming the first state to require publicly traded companies to have women on their boards—assuming the idea could survive a likely court challenge.

Sparked by debates around fair pay, sexual harassment and workplace culture, two female state senators are spearheading a bill to promote greater gender representation in corporate decision-making. Of the 445 publicly traded companies in California, a quarter of them lack a single woman in their boardrooms.

SB 826, which won Senate approval with only Democratic votes and has until the end of August to clear the Assembly, would require publicly held companies headquartered in California to have at least one woman on their boards of directors by end of next year. By 2021, companies with boards of five directors must have at least two women, and companies with six-member boards must have at least three women. Firms failing to comply would face a fine.

“Gender diversity brings a variety of perspectives to the table that can help foster new and innovative ideas,” said Democratic Sen. Hannah-Beth Jackson of Santa Barbara, who is sponsoring the bill with Senate President Pro Tem Toni Atkins of San Diego. “It’s not only the right thing to do; it’s good for a company’s bottom line.”

Yet critics of the bill say it violates the federal and state constitutions. Business associations say the rule would require companies to discriminate against men wanting to serve on boards, and conflict with corporate law that says the internal affairs of a corporation should be governed by the state law in which it is incorporated. This bill would apply to companies headquartered in California.

Jennifer Barrera, senior vice president of policy at the California Chamber of Commerce, argued against the bill and said it only focuses “on one aspect of diversity” by singling out gender.

“This bill basically mandates that we hire the woman above anybody else who we may be fulfilling for purposes of diversity,” she said at a hearing.

Similarly, a legislative analysis of the bill cautioned that it could get challenged on equal-protection grounds, and that it would be difficult to defend, requiring the state to prove a compelling government interest in such a quota system for a private corporation.

Five years ago, California was the first state to pass a resolution, authored by Jackson, calling on public companies to increase gender diversity. In response, about 20 percent of the companies headquartered in the state followed through with putting women on their boards, according to the research firm Board Governance Research. But the resolution was non-binding and expired in December 2016.

Other countries have been more proactive. Norway in 2007 was the first country to pass a law requiring that 40 percent of corporate board seats be held by women, and Germany set a 30 percent requirement in 2015. Spain, France and Italy have also set quotas for public firms.

In California, smaller companies have fewer female directors. Out of 50 companies with the lowest revenues, 48 percent have no female directors, according to Board Governance Research. Only 8 percent of their board seats are held by women.

The 2017 study said larger companies did a better job of appointing women, with all 50 of the highest-revenue companies having at least one female director, and 23 percent of board seats held by women.

“The main issue is still that a lot of companies headquartered here don’t have women on their boards,” said Annalisa Barrett, clinical professor of finance at the University of San Diego’s School of Business. “We quite often like to think of California as progressive and a leader on social issues, so that’s kind of disappointing.”

Barrett publishes an annual report of women on boards in California. Public companies are major employers in the state, and their financial performance has a big impact on public pension funds, mutual funds and investment portfolios. “Financial performance does really impact the broader community,” she said.

The National Association of Women Business Owners, a sponsor of the bill, says an economy as big as California’s ought to “set an example globally for enlightened business practice.” In a letter of support, the association cites studies that suggest corporations with female directors perform better than those with no women on their boards.

One University of California, Davis, study did find that companies with more women serving on their boards saw a higher return on assets and equity, but the author acknowledges this may not suggest a cause-and-effect.

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Local Issues