Mandating Gender Diversity in the Corporate Boardroom: The Inevitable Failure of California’s SB 826.

26 Pages Posted: 13 Sep 2018 Last revised: 14 Nov 2018

Date Written: September 12, 2018

Abstract

America's corporate boards are insufficiently diverse. Too few women and ethnic minorities are at the table. California's SB 826 seeks to remedy this situation by imposing penalties on publicly traded corporations with headquarters in California, regardless of where they are chartered, if their boards have fewer than a legislatively mandated number of self-identified women directors. While well intentioned, this legislation will not achieve its intended effect because it is unconstitutional as applied to the vast majority, if not all, of publicly held corporations headquartered in California. The internal affairs doctrine will limit the law’s application to only 72 corporations headquartered and chartered in California, or 1.59 percent of all publicly traded corporations. The bill will increase the number of board seats occupied by women by trivial amounts, if at all. These trivial changes will, however, come at great risk to the evolution of affirmative action jurisprudence. California's own legislative analysis concludes that "the use of a quota-like system, as proposed by this bill … may be difficult to defend." A successful equal rights challenge means that SB 826 will have no effect at all. The legislation thus offers a poor bargain for diversity advocates: gain a trivial number of board seats, if any, but increase the risk of judicial rulings inimical to broader affirmative action initiatives. There is a better way. California can use its significant capital market influence to induce major institutional investors to mount more aggressive activist campaigns that can rapidly and materially increase boardroom diversity. These campaigns have a demonstrated history of success. They will not generate years of litigation, will not be limited to California-chartered corporations, and will pose no risk to affirmative action jurisprudence. Properly structured shareholder activism is the better, smarter way to proceed.

Keywords: boards, boardroom, directors, corporations, gender, diversity, affirmative action, equal protection, quota, SB 826, internal affairs, unconstitutional, shareholder activism, institutional investors, headquarters, state of incorporation

JEL Classification: G3, H2, H7, J7, K2

Suggested Citation

Grundfest, Joseph A., Mandating Gender Diversity in the Corporate Boardroom: The Inevitable Failure of California’s SB 826. (September 12, 2018). Rock Center for Corporate Governance at Stanford University Working Paper No. 232; Stanford Public Law Working Paper. Available at SSRN: https://ssrn.com/abstract=3248791 or http://dx.doi.org/10.2139/ssrn.3248791

Joseph A. Grundfest (Contact Author)

Stanford University Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0458 (Phone)
650-723-8229 (Fax)

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