A law mandating that every public company in the state should have a woman on the board by the end of the year has redefined the qualifications of a director.
In the early 1990s, Bill Entringer, then chief executive of Selective Insurance, decided he wanted Joan Lamm-Tennant — a tenured professor at Villanova University with a Ph.D. in finance — to join his board.
Lamm-Tennant had never served on a board before and certainly didn’t have the letters C.E.O. on her résumé.
Without that kind of background, a search firm “would have never called me,” Lamm-Tennant said. Entringer appointed her anyway — the company’s first and only female director.
In September 2018, California became the first state to legally compel corporate board diversity with a law mandating that every public company in the state have at least one female director by the end of 2019. The law set off a scramble to find hundreds of female directors, many of whom don’t fit the traditional mold.
If companies fail to comply with that mandate, they face a one-time fine of $100,000.
By the end of 2021, the law’s requirements ramp up, compelling companies with five board members to have at least two female directors and at least three on six-person boards. If companies continue to break the law, they face a steeper penalty of $300,000 for every seat that should be filled by a woman.
The text of the law, signed by former Gov. Jerry Brown, cites several studies that found an association between diverse boards and enhanced company performance, though researchers also emphasized that the link wasn’t evidence of cause and effect.
For years, governments across Europe have been pushing similar efforts, with Norway becoming the world’s first country to put in place a gender quota in 2008, and France, Germany, Spain and Italy following suit.
But the California mandate isn’t without controversy.
Two lawsuits filed this year argue that the law is unconstitutional because it “seeks to force shareholders to perpetuate sex-based discrimination,” according to one of the plaintiffs, Creighton Meland Jr., a shareholder in OSI Securities.
In the U.S., women hold about 20 percent of board seats at companies listed in the Russell 3000 stock index, up from 17 percent in 2018, according to the nonprofit 2020 Women on Boards. Of the more than 600 companies based in California that are listed on a major stock exchange, almost one-third had no women on the board when the law was passed.
As the Dec. 31 deadline creeps closer, 30 to 60 companies still haven’t added a woman to the board. Researchers who have been tracking the shift over the past year don’t agree on the final figure because of a flurry of recent activity, with some companies naming female directors in just the past few weeks. One firm, Clean Energy Fuel Corp., named a woman to its board last Tuesday and, two days later, OSI Securities named a female director.
The companies that have not yet added any women tend to be young firms in the high-tech or biotech industries with small boards to begin with and relatively smaller market capitalizations, explained Kathleen Kahle, a professor of finance at the University of Arizona who has been closely monitoring the change in California.
For these companies, adding an additional board member can be costly. The average director pay for all California firms hovers around $181,000 (nearly double the $100,000 fine), and there are additional costs of travel related to board meetings, Kahle added.
Another hindrance is the perceived lack of experience. Historically, boards sought candidates who had served as a public company chief executive. And because public companies, for decades, have largely been run by men, director candidates have typically been limited to, well, men.
“We’re trying to teach boards to let us introduce ‘board-ready’ women,” said Jeanne Branthover, a managing partner at the executive-level recruiting firm DHR International, referring to women with senior, C-Suite level experience who might have served on nonprofit boards or school boards or presented to their own boards. However, that doesn’t mean the quality of the female candidates dips, Branthover was quick to emphasize.
“They’re qualified and they’re ready,” Branthover said.
Other companies have put forward women within their own network, Kahle said. “In many cases, the woman that was added was someone who was already a company insider,” she added. “So maybe the legal adviser or, on the biotech companies, often some sort of doctor.
That shift has reimagined what each board member should bring to the table and thus widened the talent pool.
Board seats are being redefined as functional roles “instead of everybody being former C.E.O.s and C.F.O.s who don’t have deep knowledge of certain functions,” said Robin Toft, founder of the San Francisco-based Toft Group Executive Search, who specializes in placing women on boards. In the past year, her firm did more board searches than it had done in the past 10 years.
The California law has also had a ripple effect, as state lawmakers in New York and New Jersey consider similar mandates. Companies across the country, spurred on by activist investors, such as BlackRock, have been actively diversifying their boards.
“You know, there’s that old saying, ‘One woman is a presence, three is a voice,’” said Lamm-Tennant, who now serves on the boards of AXA Equitable Holdings, Element Financial Management Corp. and Ambac Financial Group.
By the time she left her position as director at Selective Insurance in 2015, she had helped get three other women onto the board there.