Editorial: California law forcing companies to put women on corporate boards is coercion. But it’s working

We were never fans of SB 826, the law that went into effect last week requiring publicly traded companies based in California to add women to their corporate boards or face heavy fines. Diversity on corporate boards and in C-suites is extremely important, but the idea of a government-set quota was troubling from the start — and legally questionable as well.

Passed by the California Legislature in 2018 (and signed by then-Gov. Jerry Brown even as he questioned its legality), SB 826 required that every public company headquartered in the state must have at least one woman director on its board by Jan. 1, 2020, and as many as three by 2021, depending on the size of the board. Failure to comply is costly: a $100,000 fine may be levied for failing the first step; the fine for failing to meet the 2021 requirement could cost $300,000 per woman not added to a board.

It’s not a good way to accomplish societal goal. Nevertheless, it is resulting in an awful lot of women being added to all-male boards, according to recent reports. In large part, companies appear to be complying with the law either by filling an empty seat with a woman or by adding a seat and giving it to a woman.

As many as one-quarter of the 761 public companies based in California had all-male boards at the time the law was passed. But we won’t know for months exactly how many of them met the Dec. 31 deadline. That’s because the disclosure documents on which companies report their compliance (or non-compliance, as the case may be) don’t have to be turned until 150 days after the end of a company’s fiscal year.

However, researchers who follow publicly traded companies report that most appear to be complying with the law. The advocacy group 2020 Women on Boards tracks the so-called Russell 3000 — the nation’s 3,000 largest publicly held companies — and found that as of the end of the 2019 fiscal year, 183 new women-held seats had been reported by California companies and that only 36 of the 445 Russell 3000 companies in California had not yet complied with the law. Since then, some of those 36 companies have publicly announced their compliance, but others may be saving disclosure for official business filings next year. And researchers at Clemson University who were looking at the effects of SB 826 reported in October that 86% of all public companies in California (not just the Russell 3000) had complied by July.

Meanwhile, two legal challenges to the law have been filed. They are still in their early, pretrial stages.

One, filed by the conservative group Judicial Watch on behalf of three California taxpayers, claims that the law is unconstitutional because it violates the equal protection clause of the Constitution, and therefore that the money the state spends to monitor and enforce the law is an illegal expenditure of public funds. And in November, the Pacific Legal Foundation, a libertarian law firm, sued on behalf of a shareholder of Hawthorne-based OSI Systems Inc. saying the law robs him of the right to vote for the board director of his choice. That lawsuit also claims the law violates the equal protection clause.

(Interestingly, no companies sued directly, perhaps wary of appearing anti-woman. Indeed, OSI complied with the first phase of the law in December, and because of the size of its board, will be required to add two more women by the end of 2020.)

We’re pleased, of course, to see more women on corporate boards, where they belong. We hope their skills and perspectives will help make boards more sophisticated and more responsive to shareholders and ultimately make those companies more profitable. Of course it would be easier to celebrate this milestone if it had not been forced on companies but had occurred naturally because corporate leaders finally reached the sensible conclusion that a diverse board of directors is good for business.