As of Sunday, California became the first state to mandate that publicly held companies within its borders to have at least two to three women on their boards of directors.
Gov. Jerry Brown signed the bill mandating all publicly traded companies with headquarters in the state to have at least one woman on their boards by the end of next year. Additionally, by 2021, companies with at least five directors will have to have two or three women on their boards. If companies fail to comply, they will face financial penalties.
According to the Wall Street Journal, that even though this law would only affect a limited number of businesses, at the moment, it sends a message to bastions of male dominance like Silicon Valley that it’s time to start moving toward a better balanced boardroom.
“It’s high time corporate boards include the people who constitute more than half the ‘persons’ in America,” Brown said in a letter to the California state senate announcing his decision.
To be sure, this new law raises all kinds of questions about constitutionality both at the state and local levels.
According to the Wall Street Journal, Stanford University law professor and former commissioner of the Securities and Exchange Commission Joseph Grundfest said that while he believes in the mission of the new law, he also believes it is unconstitutional and would only affect a handful of companies if challenged on jurisdictional grounds.
The law, he says, will run into trouble because it attempts to place a mandate on all publicly traded companies within its borders, regardless of where the company is chartered.
According to Grundfest, the Supreme Court has previously ruled that a corporation’s internal affairs, like choosing its board, are governed by the statutes of the state in which it is chartered. Most publicly traded companies are not chartered in California, opting instead for more business friendly states like Delaware to call home. The minute California attempts to apply its new statutes to the companies headquartered there and chartered elsewhere, the legal fights will begin, he explained.
Because of this, Grundfest is worried that the law will only lead to minor gains in diversity and, if litigated, could create some risky precedents for other affirmative-action efforts.
“It is an example of where the cure could be worse than the disease,” he said.
In his letter to the state senate, Brown said he recognized the legal challenges to the application of this new law, but that sending the message was worth the risk of failure in light of recent events in Washington, D.C.
