California Dreaming?

Darren Rosenblum is professor at the Elisabeth Haub School of Law at Pace University. This post is based on his recent article, forthcoming in the Boston University Law Review.

In 2013, California followed the transnational trend and passed a voluntary quota for women on corporate boards. While many developed economies had already adopted hard quotas, California passed a much softer one. Over the following years, shocking tales of sex inequality and harassment surfaced in California’s marquee industries, Hollywood and Silicon Valley. As a result, the state hardened its quota in 2018. Affirmative action controversies dominated the debate over the quota. The low regard for California’s overall corporate law did not help inspire respect.

While firms consistently telegraph respect for inclusion, their actions convey another story: men hold approximately 80% of corporate board positions and 95% of CEO positions. More men named James hold CEO positions than all women combined.

What remains to be seen is whether, like Norway in Europe, California’s first mover status within the United States will inspire others, or is this just California dreaming? This article places the quota in context within the transnational movement. I argue ultimately that despite its many flaws, the quota may succeed in curbing male over-representation on corporate boards.

I. California’s Statute Set Against the International Quota Movement

On September 30, 2018, Governor Jerry Brown signed into law the mandate that any publicly traded firm with a principal office in California must include women on their boards, with one woman on each board by the end of 2019, and a much stronger requirement, almost parity, for the end of 2021.

The 2019 one-woman requirement mirrors what became a widespread norm in the middle of this decade, evidenced by the fact that 75% of California firms already comply. By contrast, the 2021 requirement places at least two women on boards of five and three women on boards of six or more; currently 79% of firms would be noncompliant. This near-parity requirement diminishes as boards grow larger. For example, a twelve-member board’s mandate is only one-quarter women.

The range of quota remedies include fixed and governmentally regulated measures such as the French and Norwegian mandates that impose draconian, even existential, penalties. Below sit firm quotas with minor impositions, such as India’s one woman rule or jurisdictions that impose financial penalties, such as California. Still softer public remedies follow, including the comply-or-explain model used in the common law jurisdictions, the United Kingdom and Canada, and the United States’ much-criticized optional reporting regime. At the bottom, private remedies seek to inspire rather than mandate progress.

In contrast to the other quotas, several elements stand out for California. First, its use of hard remedies seems an outlier among other common-law jurisdictions such as Canada and the United Kingdom, both of which have comply-or-explain models, which set softer targets. Second, the California quota seems like it mandates a critical mass (the percentage of a minority necessary for it to have a voice in governance), but it effectively decreases as boards get beyond six members. Typically, larger firms have larger boards, so in effect, California chose to hold smaller firms to stricter compliance. Fines may also prove more onerous for smaller firms. Third, California gives firms half the time to implement the quota than many other countries have. Last, California’s requirement is unusually sex-specific. The French and Norwegian quotas, and those that copy the model, set a goal of balance in which there’s a 40% floor for either sex.

II. Quota Critiques

Since late September (2018), the quota has garnered substantial opposition. Most critics admit the necessity of diversity but resist any state mandate. The broadest arguments assert that the quota fails constitutional equality norms and that it violates U.S. norms of autonomy and limited regulation of firms. Voluntary private sector efforts, as Sheryl Sandberg advocated in her Lean In manifesto, hardly incentivize male elites to yield their droit de seigneur over corporate leadership. Given how male elites captured firm leadership, it is clear that private sector commitments cannot on their own generate the structural transformation that the state can achieve.

III. Beyond Private Remedies: Toward a Public-Private Synergy

U.S. quota critics and advocates of state mandates seem to be at an impasse over equality remedies. In reality, as the extensive transnational experience with quotas demonstrates, effective change only comes through public and private efforts working in concert.

For public mandates to work, we must recognize the limited power of the law to engineer social change by fiat. The rule of law must hold enough sway over the private sector to inspire its compliance. Figure 2 reformulates Figure 1 by inserting the private sector and its interactions with the public.

When the state regulates, the private sector reacts by complying with state norms. The private sector can choose how to comply. When firms internalize the values of the mandate, efforts may succeed. Quota compliance suggests that market actors view the rule’s benefits as overshadowing its costs.

The European context proves quite instructive for us to understand how the public and private mix in the context of quotas. Public action can incentivize private action, as we saw in France. After Marie-Jo Zimmermann proposed the quota there, the “union of bosses,” the Mouvement des Entreprises de France (“MEDEF”), quickly prepared its own voluntary quota and presented it to Mme. Zimmermann, with a request that she delay or even forego legislation.

Fear of legislation may prove nearly as powerful as legislation itself. Credible public threats yield private action. This process of public-private interaction within France suggests that voluntary quotas may succeed if followed by mandatory quotas should compliance fail to materialize. Legislators might capitalize on the private sector’s aversion to legislation by allowing them to step up their inclusion efforts. Without public pressure of any sort it would be hard to imagine firms voluntarily stretching their inclusion efforts in this fashion.

Boards’ reactions to the exogenous pressure of a quota could take several forms, ranging from engaged compliance to the opposite response of changing domicile to avoid enforcement. Some firms will happily comply, following the progressive mandate as an important part of improving governance. Others may attempt to avoid the law by changing their listing or structure to avoid the mandate. While French firms generally refrained from such a response, it seems more likely in California, where firms already game their domicile to skirt regulation.

Beyond these two stories of virtuous compliance and outright avoidance sit several options to avoid full compliance. Boards may change their size, shrinking to get numbers in compliance. California’s quota incentivizes the opposite reaction: boards may decide to grow and not change the percentage of women on the board. Another route involves the less comfortable discussion of stacking boards with directors who add little to governance, referred to by some in France as “marionettes.”

In short, the French quota altered how market actors behave: it created a huge network that sprang to prepare women to join boards, to be placed on boards, and to serve successfully on boards. While this phenomenon has not yet surfaced in the U.S., the French experience demonstrates the potential for private action to match public norm setting.

Conclusion

It is true that in the United States today we are witnessing a substantial increase in participation of women and efforts toward inclusion. The limited nature of this progress exposes a pronounced need for public efforts. California’s statute may invite substantive criticism, but its passage, and hopefully its implementation, will show how public efforts may work in tandem with private efforts to advance inclusion.

The complete article is available here.

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