Legislating is Hard When Up Against Reality

Lawmaking would be a lot easier if the real world didn’t intrude.

Take SB 826, a bill by Senator Jackson that would set a quota of women board members for publicly-traded corporations that are headquartered in California. Troubled that women amount to more than half the population, but only lightly populate corporate boards, her bill would fine these corporations if women did not comprise about half the board seats (depending on the size of the board) by 2021.

Here’s where the real world inconveniently steps in.

First, change is happening on corporate boards.

According to the Harvard Law School Corporate Governance Forum, the percentage of women currently holding Fortune 500 board seats has increased by 21.2 percent since 2012, and the number of Caucasian/White men has decreased by 6.4 percent. At the current rate of progress, the number of women and minorities may increase to 40 percent (a target percentage set by the Alliance for Board Diversity) by year 2026, assuming that the percentage of Caucasian/White men on boards continues to decrease by 0.9 percent per year. This trend is happening without government interference.

Second, where government has tried to mandate board diversity, the results haven’t been very impressive. Beginning with Norway a decade ago, several European nations implemented mandatory gender quotas for corporate boards. (The penalty was corporate dissolution, so compliance was high.) Yet, according to a survey of these mandates in the Economist, “the evidence so far also undermines the business case for quotas. Studies from at least six countries on companies’ performance, decision-making and stock market returns fail to show that quotas make a consistent difference, good or bad.”

Third, mandating gender quotas is probably unconstitutional. The equal protection clauses of both the United States and California constitutions prohibit job discrimination on the basis of, among other things, gender. In particular, the California Constitution states, “A person may not be disqualified from entering or pursuing a business, profession, vocation, or employment because of sex, race, creed, color, or national or ethnic origin.”

Fourth, the bill steps all over the modern, common law “internal affairs doctrine,” a tradition memorialized in a California statute that corporate governance is ruled by the law of the state of incorporation – to avoid multi-state companies having to reconcile conflicting laws in the states in which they do business.

Finally, the bill betrays a fundamental ignorance as to how corporate directors are selected. As one state senator remarked during a hearing on the bill, “We hold the power of government. When is it appropriate for government to make these decisions? Directors aren’t determined by corporations; they’re determined by shareholders.” No statute can force a shareholder to cast a particular vote.

Sadly, reality so far has not been an impediment to this bill, which has advanced through two policy committees and is awaiting its fate in the Senate’s fiscal committee.

Loren Kaye, President, California Foundation for Commerce and Education