States Take Stands Like Brands

 

We are witnessing a new development in the Brands Taking Stands movement. States, led by California, are beginning to define themselves as “brands” by adopting definitive positions on social and political issues that are intertwined with business issues such as corporate governance.

Pioneering this new territory is California, which has just signed into law legislation that requires publicly traded companies headquartered in the state to have at least one woman on the boards by the end of next year. By 2021, companies with at least five directors would need to have two or three female directors, depending on the size of the board. Financial penalties would be assessed for non-compliance. Some 86 Californian companies in the Russell 3000 Index don’t have any women on their boards, such as Skechers, TiVo, and Stamps.com. Hundreds of other companies could be affected.

The new law lands on the female-deficient leadership of some big players in the state’s tech industry. Companies like Facebook and Alphabet/Google, will be required to add women directors to their boards. (On the other hand, some tech companies have taken a pro-active stance. Hewlett Packard, Apple, Cisco, Apple, Symantec, and Oracle have been called out for their leadership on board diversity.)

California’s law is being launched amid two strong, conflicting, socio-political currents: the deregulation policies of the current administration (the Department of Justice has said it will file suit against the new California law) and the national trend toward addressing gender inequality in many areas of civic society.

The legislation also comes at a time when market forces are pushing the issue. Influential investors such as BlackRock and State Street Global Advisors are threatening to withhold votes for companies with all male boards unless they diversify by adding female directors.

 

The question open for debate is, does this law mark a major correction in the historic gender imbalance on business boards or an unprecedented interference in the governance of corporations by a state government? A few other states—Illinois, Pennsylvania, Colorado, and Cailfornia’s East Coast progressive “twin,” Massachusetts—have issued non-binding resolutions to encourage companies to increase female representation on their boards, but California is alone in making law that sets a numerical formula for women board members.

Some opponents argue that the legislation is flawed because it claims to apply to companies based in the state, but perhaps chartered in another state such as Delaware, where many companies choose to incorporate due to its stringent privacy protections.

But values are driving changes in that state’s engagement with business, too. The Delaware Voluntary Sustainable Certification act, passed this summer, provides state governed entities “a platform for demonstrating their commitment to corporate and social gender diversity in the boardroom.” Unlike California’s law, the Delaware legislation calls for voluntary compliance. One large corporation cites a market-driven reason to sign up: DSM, the $10 billion Dutch multinational active in the fields of health, nutrition, and materials, describes the certification as “not just a point of differentiation, but genuine competitive advantage.” With thousands of companies chartered in Delaware, business as usual will be changing in that state, too.

Stay tuned for more states to engage with business on the gender equity-governance issue, whether by legislation, voluntary buy-in, or overt persuasion.

 

Editor's Note: the Delaware Certification’s effect will be discussed at 3BL Forum later this month.