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Monday, Sep 26, 2022
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Wanted: Women To Join Boards

Public companies in the San Fernando Valley region fall short when it comes to a new law requiring more women on their boards of directors.

Of the 10 largest public companies in the region, only three – Walt Disney Co., Amgen Inc. and PS Business Parks – already meet the criteria set out in Senate Bill 826 signed late last month by Gov. Jerry Brown. (See accompanying table.)

The law requires that a public company based in the state have at least one woman on its board by the end of 2019. By the end of 2021, two women are required to serve on five-member boards, and three women must be on boards of six or more.

The California Secretary of State can impose a $100,000 penalty for the first violation and $300,000 for subsequent ones.

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The measure was meant to address a lack of female representation on public company boards, but opponents contend that setting quotas is a bad thing in that it can lead to unqualified female members. A legal challenge to the law is a possibility.

Sen. Hannah Beth Jackson, D-Santa Barbara, who sponsored the bill on behalf of National Association of Women Business Owners, California, said that by signing the bill into law, a glass ceiling is shattered.

“With numerous independent studies showing that corporations with women on their boards are more profitable, SB 826 is a giant step forward for women, our businesses and our economy,” Jackson said in a statement.

But the National Association of Corporate Directors, a Washington, D.C.-based trade group representing more than 19,000 board members, while supporting the goal of California’s law doesn’t believe in prescribing the approach boards take to achieve gender diversity.

“We have always believed that these things should not happen through regulation or legislation,” said Erin Essenmacher, chief programming officer for the association.

While most of the companies from the Valley area have at least one woman serving on their boards, there are others, such as B. Riley Financial Inc. in Woodland Hills, Salem Media Group in Camarillo, and Tejon Ranch Co. in Lebec that have none. Many others will have to add women members to reach the 2021 requirement.

According to Board Governance Research LLC, there are 28 companies based in the San Fernando, Conejo, and Santa Clarita valleys on the Russell 3000 Index as of June 30. Out of those companies, 25 percent do not have any women board members. Thirty-two percent have a single woman board member and 29 percent have two women members.

The Business Journal contacted 15 companies for this story but only one, Tejon Ranch, responded.

Barry Zoeller, a spokesman for Tejon Ranch, said that the company’s seven-member board had taken up the diversity issue before knowing that the state legislature was addressing it.

The nominating and governance committee of the board had already identified it as a top priority so when the next position became available it would go to a top female candidate, Zoeller said.

“That will certainly happen by the end of next year,” he added.

The Tejon Ranch board had a female director from 2006 to 2012 until she resigned due to increased business commitments on her part, Zoeller said.

Law’s history

California first became involved in the gender diversity of corporate boards in 2013 when the legislature passed a resolution seeking public companies to add one to three women board members depending on their size within three years. It was a non-binding resolution that only 20 percent of the state’s public companies complied with, according to a 2017 report by Board Governance Research.

Annalisa Barrett, founder and chief executive of Board Governance Research, said that other states followed California’s lead and passed similar resolutions, but none have gone as far as California.

“None of them have taken the next step to make it mandatory,” said Barrett, who is also a lecturer at the University of San Diego School of Business and was the subject matter expert for Jackson on the California bill.

Prior to California passing its law, some public companies had been looking at increasing gender diversity on their boards. One of the reasons is pressure from large institutional investors.

“They are hearing it from their investors pretty actively,” Barrett said. “I have heard that from a lot of companies that I have spoken to over the past year.”

A study done by Barrett released last year looked at board diversity based on industry and geographic location of 445 California companies on the Russell Index. Health care ranked the lowest with 12.8 percent of boardrooms with women members.

“These low numbers are driven by the fact that 40 percent of biotechnology companies – which comprise half of the California health care companies – have no female directors,” the study found.

There are examples from the Valley region that support that conclusion.

Biotech companies like MannKind Corp. in Westlake Village, and Simulations Plus Inc. in Lancaster lack a single women director. Sienna Biopharmaceuticals in Westlake Village has one woman on its seven-member board. Only Amgen satisfies the state law with three women on its 13-member board.

When it came to geography, it was assumed that Silicon Valley would be an area that would stand out for a lack of diversity in director positions, Barrett said.

“It turns out that Southern California is actually much worse,” she added. “San Diego and Los Angeles are among the worst counties when it comes to having diversity in the boardroom.”

Of 49 Russell Index companies in San Diego County, nearly 41 percent lacked at least one woman director. Orange County lacked female board representation on 32 percent of its public companies and Los Angeles County had no women board members on 31 percent of its public companies, according to Barrett’s study.

In comparison, the County of Santa Clara, which includes Silicon Valley, had no female director at 24 percent of its 100 Russell Index companies.

Constitutional question

Business groups led by the California Chamber of Commerce were opposed to legislation on board diversity. Among those backing the state chamber were the Simi Valley Chamber of Commerce and Camarillo Chamber of Commerce.

The Valley Industry & Commerce Association, the largest business advocacy group in the Valley, did not take a position on the bill.

Essenmacher, of the corporate directors association, said her group did not actively oppose the bill because of its belief in board diversity. How California is going about bringing diversity is what the association balked at.

“The thing that will really move the needle and change things for the long term is to change the way that boards think about who should be sitting around the table because of the value it brings to the organization,” Essenmacher said. “That is much more effective and much longer-lasting than creating a regulation where you feel that you have to check a box.”

Joseph Grundfest, professor of law and business at Stanford Law School and co-director of the Rock Center on Corporate Governance at Stanford University, concluded in a working paper from last month that the new law would be a failure.

“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 paper’s introduction said.

Grundfest – and the California chamber coalition – claims that the law conflicts with the internal affairs doctrine, a law rule that states the internal working of a corporation are subject to the laws of the state in which it is incorporated and not where it is headquartered. Many of the largest corporations are incorporated in Delaware.

The paper by Grundfest said that this doctrine will apply the new law to only 72 corporations chartered in California, or less than 2 percent of all publicly traded companies. The law will increase the number of women holding board seats “by trivial amounts, if at all,” the paper said.

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