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'The Legislation Worked': California Law Mandating Women On Boards Yields 97.7% Compliance As Additional Requirements Near

Companies around the country have taken notice of the importance of gender and ethnic diversity, but certain enterprises and governments are doing more than others to mandate inclusion.

In September 2018, California passed legislation requiring every publicly held company with headquarters in the state to have at least one woman on its board of directors by the end of 2019. The mandate has high compliance so far, and additional benchmarks are coming up at the end of this year. 

The push to add women to boards has not only increased the number of female board members but has also potentially created a path for more and broader diversity on boards of directors, experts say. 

Before the bill was enacted, 29% of public companies headquartered in California had zero female corporate board directors.

Before the bill was enacted, 29% of public companies headquartered in California had zero female corporate board directors, a KPMG report found. By the end of 2019, about 96% were in compliance with the mandate, according to KPMG. An analysis by the California Partners Project found that noncompliance dropped to 2.3% as of June 2020. 

The next step is that boards with five members must have at least two female members by the end of 2021, and boards with six or more members will need to have three female board members by then. Companies that fail to report board member information are subject to a $100K fine for a first offense and $300K fines for subsequent missed filings.

The progress made on this front has not surprised KPMG Board Leadership Center senior adviser Annalisa Barrett, who researches and tracks the progress on this as part of her role.  

“Beyond there being a law in place, the pressure for companies to consider increasing the gender diversity of their boards has been building momentum over the past decades and certainly within the last decade,” Barrett said.

Some of that pressure comes from institutional investors, many of which have campaigned in recent years to diversify boards. Early last year, Goldman Sachs said it would not take a company public unless its board had at least one director who was not a White man. The bank said it would focus especially on adding women, starting last summer. 

The state law has moved the needle for adding women to boards, but the commercial real estate industry overall remains male-dominated. According to a 2020 report from CREW Network, women occupy 36.7% of the commercial real estate industry nationwide. This percentage has remained between 35% and 37% over the last 15 years.

In addition to the state's official numbers, anecdotal evidence shows the California law was impactful.

“We did more board search in 2019 and 2020 combined than we had in the 10 years prior, all for female executives,” said Robin Toft, an executive search veteran formerly of The Toft Group and currently running the women on boards initiative at ZRG Partners. 

Barrett says she has seen boards making a lot of additions, and not just women but members of other groups that are underrepresented on boards, especially people who are Black and Latinx. A California law passed in 2020 mandates ethnic and racial diversity on California-headquartered boards as well. 

“It’s great to see that people are starting to listen to the studies that say that people who come from different backgrounds perform better and perform stronger,” Ambiculture Real Estate Advisors Managing Principal Jennifer Taylor said. 

The benefits of having a board that includes women, people of color and members of other diverse groups are quantifiable. Companies with boards that reflect society’s diverse makeup are 43% more likely to score higher profits, according to a 2018 McKinsey & Co. report. A 2020 report from The Carlyle Group found that portfolio companies with two or more diverse board members averaged earnings growth over a three-year period that was nearly 12% greater than companies without. Carlyle has also reported that companies with diverse boards generated earnings growth that was “five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth.”  

Traditionally, corporate real estate boards wanted CEOs on their boards, and until recently, many women have not been CEOs, one expert said.

With the success of California's initiative, the pool of possible directors has been expanded, and boards now know how to cast a wider net in their search, knowledge that could prove beneficial not just to women but to members of other groups that are vastly underrepresented on boards. 

A big element of the California law was that it changed the way board searches were traditionally conducted, with sitting board members looking at their personal Rolodexes and throwing names out from their networks. It was easier, cheaper and seemingly safer to select someone from within a small and often exclusive circle.

Toft estimates that for many years, 70% of searches didn't involve the hiring of an outside firm. Toft estimates that has flipped and 70% of boards now ask for outside help. 

“Traditionally, especially in the real estate business, corporate boards wanted chief executive officers on their boards, and many women have not been CEOs until recently,” 50/50 Women on Boards CEO Betsy Berkhemer-Credaire told Bisnow in 2018. 

Given that leadership of REITs, finance giants and brokerages remain largely male and White, it follows that the traditional pool would be too. 

For Taylor, the fact that getting women on boards was not a priority until a few years ago means that there is still a lot of work to do to get women and members of other underrepresented groups on a path that can lead to board seats and other opportunities to advance.

“I want to see changes where you’re giving opportunities, and it’s got to start from the bottom," Taylor said. 

For many qualified candidates who are members of groups that are underrepresented, the sudden demand for their presence on boards can be bittersweet. 

“I say to people all the time, ‘Don’t be upset that they’re calling you because of that. The playing field just got evened. You have the opportunity to play,” Toft said. “You have to be every bit as good as anyone else to get the job, but the fact that you’re getting the call means the legislation worked.”

While it is impossible to predict whether companies that need to will hit the next mandated benchmark, Barrett was optimistic that boards would continue to steadily diversify their makeup. 

“One of the things that happened in 2019 was that there were many, many companies that added women in the last few months of the year,” Barrett said. “I think that boards are acknowledging and working through the fact that it does take quite some time to identify the best skills match and the best demographic match for the gaps that their board has.”

California was the first state to have this requirement, and despite its success, the law has faced challenges to its constitutionality. One lawsuit brought by a shareholder of a California-based company is set to go before the 9th Circuit Court of Appeals after a previous court determined that only the company, not its shareholders, had standing to challenge the law. The shareholder’s suit argues that his rights to equal protection under the law were infringed by having to consider gender in his decisions about who becomes a member of the board for the company he owns shares in. 

“There is no evidence that California needs to force companies to take actions that they are largely voluntarily doing anyway,” said Pacific Legal Foundation’s Daniel Ortner, who is one of the attorneys representing the shareholder. “They should instead trust that companies are diversifying and want to diversify. There are private forces pushing them to do so.”