Phone: 619-238-4900

California takes aim at diversifying board rooms

In a move aimed at pressuring public companies to diversify their leadership, Governor Jerry Brown has signed a law requiring all publicly-traded companies with headquarters in California to feature at least one woman on their board of directors.

The move is intended to stir up the mostly homogeneous makeup of leadership teams across industries, but it’s not without controversy.

Recognizing merit

The law forces public companies to have at least one woman on a leadership board by the end of the year 2019. It raises the minimum requirements to up to three women by 2021. Those companies who fail to comply will face fines of $100,000 for their first violation and $300,000 for a second.

The law has raised concerns around merit-based promotions. Opponents of the law predict companies will be unable to reward “deserving” candidates because they have to adhere to these requirements. They also argue that women who are in leadership roles will have their qualifications questioned.

Businesses will be hamstrung, opponents argue, and potentially suited candidates passed over to comply with this mandate.

Are there benefits to diverse boards?

As discussed in Forbes, some companies question whether a diverse leadership group is even an asset to begin with. They cite higher communication barriers and reduced efficiency when it comes to diverse boards. It can be more difficult to communicate with people who do not look or think alike, and companies claim this can slow down business operations.

Proponents of the law point to studies that show that groups of more diverse people participate in more engaged debates. Groupthink can be drastically reduced by making it harder for everyone to feel like they’re part of the same group.

This ability to argue within a group means that companies can have ideas challenged, and the status quo disrupted.

The legal challenges of this law

Many who oppose this law feel it unfairly stifles a company’s ability to freely evolve and grow. They argue companies should be able to elect whoever they choose, based on their own set of criteria. A gender-based law unfairly props up one group of people and puts the focus squarely on something that should never matter regarding promotions.

The law is being scrutinized for being unconstitutional, and infringing on a company’s right to operate. Less restrictive measures, like giving tax breaks or incentive programs to companies who do feature women in leadership roles, may have been more readily received.

As it stands, California company boards and leadership positions will be more diverse by the end of 2019. It remains to be seen if it will last long enough to be enforced, or if companies will try to fight this law.