2 years ago
When Clean Energy Fuels Corp. asked Lizabeth Ardisana to be on its corporate board, “they were like, ‘We should have asked you sooner; you’d be perfect,’” she said.
It was just before the deadline set by SB 826, a 2018 California law that was the first in the country to require companies with their principal executive offices in the state — 717 publicly held companies, as of March 2021 — to include at least one woman on their boards by the end of 2019. Adding Ardisana, a Hispanic business owner who has extensive experience in alternative fuels, fulfilled that mandate. In response to Clean Energy admitting her appointment was overdue, “I said, ‘You’re absolutely right,’” she told me.
The company has since added two other women to its board. Ardisana has “mixed feelings” about California’s law. Women are “capable, and we bring unique perspectives, and we do a good job, so in that sense, we don’t need a mandate,” she said. But she thinks she probably benefited from it in this case, especially since boardrooms are often about candidates fulfilling a nebulous “fit” — which can lead the white men who are already there to pick people who look like them and have similar backgrounds — and less about specific skillsets. “In many cases, [the mandate] is a nudge,” she said.
Four years ago, California embarked on an ambitious experiment to enforce a long-held goal of many business leaders and women's advocates: Get more women on corporate boards. In a world where many developed countries have neared gender parity in the boardroom, including France, Norway, and Sweden, the United States has remained stubbornly behind, with women holding only about a quarter of board seats. As a result, high-powered women miss out on the high compensation, experience and networks these boards provide.
Male executives and shareholders have long protested that they can’t possibly find enough qualified women to diversify their boards. Now, four years later, California’s experiment has quietly proved them wrong: They can, and in fact will, find qualified women if given a strong nudge. Contrary to the concerns of many executives before the law went into effect, the California law shows that they will find women who are just as qualified as men, suggesting that the real hurdle to gender diversity came down, at least in many cases, to a lack of effort. And once those women arrive, they make finding more women easier — which, studies show, will bring their firms higher productivity and performance thanks to the robust debate and fresh ideas coming from their boards.
In terms of its stated goal of increasing gender diversity in the boardroom, the law has been an unqualified success. By the end of 2019, when all public companies with executive offices in California had to have at least one woman on their boards per the law, virtually all of them had complied: 99.3 percent met the deadline. That’s “basically universal,” said Daniel Greene, assistant professor of finance at Clemson University who has analyzed the data. Before the mandate, 29 percent of public companies in the state had all-male boards; by the end of 2019, just five companies did. And California firms acted quickly, given that the law had passed just a year earlier.
The share of female board directors in California grew from 14.6 percent in 2018 to 32.1 percent by the end of last year. In the United States as a whole during the same period, on the other hand, the share of women on boards at companies in the Russell 3000, which tracks the 3,000 largest public companies, moved from 17.7 percent to 25.6 percent. “California started at less than the average and now they’re way more,” Greene noted.
Beyond more diversity at the top, what else happens at companies when there is more gender parity in the boardroom? That’s the interesting part, and the part that California is just starting to find out.
The law “caused these companies to fundamentally change their approach to governance at a pace that we’ve not seen in the U.S.,” said Aaron Dhir, associate professor at Osgoode Hall Law School and author of Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity. “You had a very settled, male-dominated equilibrium before the law came into effect, and that equilibrium has now been unsettled.”
From a longshot to a state law
In 2012, Betsy Berkhemer-Credaire, the current CEO of the nonprofit 50/50 Women on Boards, had an idea: What if California enacted a gender quota for corporate boards like the ones already in place in France and Norway? She saw board searches up close through the executive search firm she co-owns. “I knew how difficult it was for women to be considered as potential candidates,” she said. “Oftentimes they aren’t selected because the particular men know their friends better. … If they [aren’t] encouraged to or required to put women on the boards, frankly, I don’t think they would.”
With the backing of National Association of Women Business Owners California, the organization she helmed at the time, California first passed a resolution in 2013 encouraging, but not requiring, all public companies to have at least one woman on their boards, with more for larger companies, by the end of 2016. “The needle never moved, because there was no penalty,” Berkhemer-Credaire said. There were no material incentives, either. Women still held just 15.6 percent of California board seats by 2017, according to her organization.
So Berkhemer-Credaire and then-State Senator Hannah-Beth Jackson crafted a new law that would mandate at least one woman on each board by the end of 2019, and more, depending on firm size, by the end of 2021. Firms that didn’t comply would face a fine of $100,000 for the first violation and $300,000 for subsequent ones. The law passed in August 2018.
When the law passed, California companies experienced a cumulative 1.2 percent dip in their stock values, indicating that investors were initially anxious about the impact on companies’ financials. But when it came time to actually add more women, companies did not suffer. Greene, Vincent Intintoli, associate professor of finance at Clemson, and Kathleen M. Kahle, professor of finance at the University of Arizona, found that the stock market reaction was statistically indistinguishable after companies announced female and male directors — meaning that the market didn’t see the women as a negative.
The SB 826 question: Are mandates even necessary?
One big question observers had about California’s law was whether it would work even with the penalty, or if some companies would just prefer to pay the fine rather than add women to their boards. The answer to that question has been that overwhelmingly, companies will choose women if they are financially penalized for not doing so.
The kind of sudden increase in gender diversity that California saw in the wake of SB 826 has so far not been achieved with voluntary measures. Nearly three-quarters of companies in countries with mandates had boards that were at least 30 percent female in 2019, compared to about 20 percent in those without. A 2010 Securities and Exchange Commission requirement that U.S. companies disclose whether and how they consider diversity when picking board members has had virtually no impact. Hard mandates with fines “are more effective in increasing female board representation than soft ones,” said Monash University assistant professor of finance Marina Gertsberg, who has studied the impact of the law in California. “It seems to be the case that it needs to be mandated by the law in order to be effective.”
When the companies were actually mandated to end all-male boards, what did they do differently? Much of it came down to networking and new hiring practices.
Boards are odd entities; board members don’t directly control companies the way C-suite executives do, but those executives report to their boards. They seek their advice and are subject to their firing authority. Board searches are often confidential, which means firms can’t just post an open position and encourage women to apply. They have to seek them out.
To meet California’s mandate, Berkhemer-Credaire’s organization found that in 2018 and 2019, companies first turned to other firms — law firms, accounting firms and banks — they worked with to find qualified women in those networks. “They either want to know those persons individually, or [have] a friend of theirs know the person individually,” she said. Another tactic, according to Gertsberg, was to use headhunter agencies. She found women were more likely to be recruited that way than through personal networks after the mandate.
Rather than firms simply tapping the few women that were already on boards, “the women who came on boards after the quota seem to be new, truly new, outside of existing networks,” Gertsberg said. “It suggests women were previously overlooked because they didn’t have the networks.” It also appears that, rather than kick men off their boards to add women, companies opted to simply increase the board’s size. The average board size rose from 7.8 to 8.4.
Before the mandate, executives frequently voiced concern that there just weren’t enough qualified female candidates, according to Intintoli. But he and his co-authors’ work found that the women added after the mandate were just as qualified as existing board members. “The pool of female director candidates is sufficiently deep,” Gertsberg said.
The surprise downstream effects
Many advocates pushed for SB 826 because it seemed to them the best, and perhaps only, way to increase gender diversity in a world that seemed resistant to it. But there is also a compelling business reason to add more women to boards. While a few studies have found downsides, such as one in 2010 that saw a decrease in stock and firm value after Norway’s quota went into effect, a number of studies have shown that having more women on corporate boards is correlated with better firm performance. Companies with women on their boards have been found to have less volatile stocks, make smarter mergers and acquisitions, have less long-term debt, are more innovative and are more socially responsible. In Norway, Dhir found that board members felt the increase in diversity improved their firm’s work and governance, such as better handling crises and coming up with improved strategies.
The new law could also make finding gender-diverse candidates easier in the future, because with more women on boards, their numbers are likely to multiply. “It’s the first one that’s the hardest to get on,” Berkhemer-Crediare said. But once there, women are likely to be recruited onto other boards — and bring their own networks to bear on future searches.
Kelli Bernard was brought on as the sole woman on the board of the electronic systems manufacturer OSI Systems Inc. in late 2019 — just ahead of the deadline — through a “rather informal” process, she said. She was referred by a friend who had early conversations about joining the board but had to bow out of the process.
At the beginning, Bernard wasn’t even aware SB 826 existed, but she eventually “realized that was part of it,” she said, referring to the company’s interest in her. She’s still the sole woman on the board of seven; Bernard, who is a graduate of the UCLA Luskin School of Public Affairs, serves alongside Meyer Luskin himself, for whom the school was named.
It’s Bernard’s first time serving on a corporate board after having served on a number of large nonprofits’ and business organizations’ boards. But it was something she became interested in after she left her role as deputy mayor of economic development for Los Angeles Mayor Eric Garcetti for the private sector. Being on a corporate board, “I can grow my expertise and be compensated for it,” she thought. Being the only woman and Black person on the board doesn’t faze her. “I’m comfortable being the only or breaking barriers,” Bernard said.
Bernard is certain that women will beget more women on boards. “As we expand the people who sit on these boards, the networks will absolutely expand,” she said. She doesn’t yet sit on OSI’s nominating committee that selects new board members — she hopes to by next year — but she’s already helped the company identify other potential female candidates. “Most people’s networks are pretty monolithic,” she noted. “I have a different network. That builds OSI’s network.”
Clean Energy wasn’t Ardisana’s first board experience. She serves on Huntington Bank’s board, which found her through a search firm about a decade ago. While she was at first the only woman, the board now has five others. “A board that has a mix of men and women and young and old and different perspectives, it really causes people to think about different issues, because you don’t just all agree and jump to a conclusion,” she said. “There’s nothing worse than going to a meeting of any kind where we all agree.”
Being the only woman on Clean Energy’s board at first didn’t bother Ardisana. But “I like having other women to interact with,” she said. She also noted that she can’t necessarily represent an entire gender all by herself. “I do think it helps to have more than one of anything.”
She’s probably right. Having more than one woman on a board is especially important for business benefits. Miriam Schwartz-Ziv, senior lecturer in the finance department at the Hebrew University of Jerusalem, found that in Israel, one of the first countries to impose a quota, boards with at least three directors of each gender were nearly twice as active, proposing new ideas or asking for more information. “If you’re the only woman, you’re the token. Your job is to represent that social group; you can’t really do much beyond that,” she said. “You need a critical mass of women to really see how women change the working of the board.”
That’s played out in California, too. In focus groups convened by California Partners Project, a gender equity advocacy group, women have said that when they were the only ones on the board “they felt like the token female, causing them to, sometimes unconsciously at the time, hold back,” said Leigha Weinberg, the organization’s program consultant. “We’ve also heard that women speak up more when there are more people who look like them in the room.”
The future of SB 826
The second phase of California’s mandate went into effect at the end of last year, requiring firms with six or more board members to have at least three women and those with five to have at least two. According to data analyzed by Intintoli and his team, the compliance with this phase was far less universal: About 70 percent of firms in California met the deadline, leaving 218 that didn’t fulfill their obligation, and are potentially subject to fines. One possibility their analysis can’t capture is that some of the 218 had enough women on their boards earlier in the year but had a woman depart by the time they reported these figures publicly, which would still mean they technically complied.
One reason companies might not be as motivated to meet the higher gender requirement is that the state has yet to fine a single company for noncompliance with either phase. Intintoli’s team found that, given how many companies didn’t meet December’s deadline, the state stands to collect nearly $22 million in fines. “My guess is we’re not going to see a whole lot of increase [in compliance] in the coming months without the state actually starting to fine people,” Kahle said. There’s also the small issue of the pandemic, which may have sucked up more of companies’ attention. California’s secretary of state, which is charged with enforcing the law, declined to comment, citing pending cases.
The fate of California’s law is also unclear, pending the resolution of a lawsuit brought by Creighton Meland Jr., an investor in OSI Systems, arguing the law isn’t constitutional. (“I don’t give it a lot of thought,” Bernard said when I asked her about the lawsuit. “I don’t feel like it was personal.”)
At the end of last year, U.S. District Judge John A. Mendez denied a preliminary injunction against the law, saying that doing so “may deny highly qualified women who are eager and seeking to join corporate boards the opportunities provided by SB 826.” He added, “The legislature determined that the law was necessary because the glass ceiling had been bolted shut with metal, shutting out thousands of qualified women.”
But the state is already aiming to replicate the success of SB 826 with other groups. Since the gender mandate went into effect, California has passed AB 979, which requires companies to have at least one underrepresented director, such as a person of color or someone from the LGBTQ community. Nearly 90 percent had met that requirement by the end of 2021.
Other states have taken note, too. In the wake of California’s mandate, both Washington and Illinois considered imposing similar requirements, but both states ended up allowing companies to explain why they haven’t increased diversity in order to comply. At least 11 other states have considered their own board diversity legislation, according to Bloomberg.
But even if other states don’t replicate California’s law, SB 826 is already full of lessons for American companies about what it takes to achieve more gender parity in the boardroom. Given California’s experience, “firms located in other states shouldn’t have much problem appointing at least one female director to the board,” Intintoli said. Just as long as they get creative and move outside of their comfort zones.
“People have an expectation that you’re going to be something else, whatever that is,” Ardisana said. “Once you get hired and then others get hired, then they’re like, ‘Yeah, you’re just the same as us.’”
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