California’s Diversity Law: The Nudge Boards Needed

The state’s new mandate for female representation leaves boards little choice but to form strong succession plans far in advance.

As California goes, to borrow a political world adage, so goes corporate America?

It’s been about a month since California became the first state to legally mandate female representation on the boards of publicly traded companies based there, and the ripple effects are starting to surface. The law, the first of its kind in the United States, has caught the attention of board chairs and nominating and governance committees who want to make sure their organizations are prepared if a similar law is passed in their states. “Everyone recognizes the spotlight on this,” says Jane Stevenson, vice chair of Board and CEO Services at Korn Ferry.

While SB-826, as the California law is officially called, is a milestone event for corporate boards, it is also a logical extension of the transparency around diversity and inclusion now demanded by consumers, employees, investors, and other stakeholders. It states that each publicly traded corporation headquartered in California must include at least one woman on its board by the end of 2019. By the middle of 2021, a minimum of two women must sit on boards with five members, and there must be at least three women on boards with six or more members. Companies that fail to comply face fines between $100,000 and $300,000.

Though the law as it is currently written features ambiguities that could hinder enforcement, it sends an important message to boards that they can’t ignore the pressure anymore. “It reinforces the need for real, thoughtful, ongoing, and objective succession work,” says Tierney Remick, vice chair of Korn Ferry’s Board and CEO Services practice.

The 2021 target data gives boards ample time to put a plan in place and align the criteria for new board directors with the strategic needs of the company. Put another way, rather than simply replacing retiring male directors or open seats with females to satisfy the law, boards can form a succession plan to address a gap in skills or subject matter expertise and gender diversity in parallel. “A thoughtful, three- to five-year succession plan for the board looking at all the key factors through the diversity lens will optimize opportunities and yield outstanding results,” says Caroline Nahas, vice chair of Korn Ferry’s Board and CEO Services practice and a director on the board of a publicly traded California-based company.

It does, however, put the onus on corporate leadership teams to develop stronger female leadership talent pipelines. Nearly 18% of the Russell 3000 group of large publicly traded organizations have all-male boards, according to data research firm Equilar, for instance. And, from a legal perspective, the US is already behind several other countries in mandating gender diversity on boards. A law similar to the one California passed has been on the books in Norway since 2003, while Spain, the Netherlands, France, Italy, and Germany also have laws demanding female representation on corporate boards. From a sheer numbers perspective, those laws have worked—female representation on boards in those countries has risen considerably since enactment. As of 2017, women had close to 22% of EU corporate board seats, while in the US it was closer to 20%.

With demand rising, Stevenson says it is even more important than ever from a business and cultural perspective for organizations to increase the supply of female leadership talent by making sure they get experience running P&L and other critical responsibilities more often held by men. As it ultimately relates to more gender diversity on boards, Stevenson likens building out a female leadership talent pipeline to “growing crops now, to ensure they can be harvested in the future.”