by Brooke Fox FT

California is due to become the first US state to impose a quota for the inclusion of women on the boards of public companies headquartered there.

A bill requiring at least one woman on every public company board by next year, and two women for every board of five members and three for boards of six by 2021, passed the California state assembly this week. The bill will now move to a vote by the California senate on Friday, which already approved an earlier version of the bill, and then on to the governor to sign into law.

“With women comprising over half the population and making over 70% of purchasing decisions, their insight is critical to discussions and decisions that affect corporate culture, actions and profitability. The time has come for California to bring gender equity to our corporate boards,” said state senator Hannah-Beth Jackson, who wrote the bill.

Women comprised 19.8 per cent of board seats on Fortune 1000 companies in the US last year, according to 2020 Women on Boards, a non-profit group. In California women comprise 20.8 per cent of directors of Fortune 1000 companies based there. The state ranks eighth overall among US states for the percentage of women on boards, although it still only has an average of 1.65 women per board, according to Equilar. The national average is 1.75 women per board.

“The quota system is one way to solve the problem, although it does raise serious legal challenges and I’m not sure if it will pass muster. However, the fact that Cal­i­for­nia is home to 86 com­pa­nies in the Rus­sell 3000 [index] that don’t have any women on their boards is more than a wake-up call that requires change,” said Evan Epstein, founder of the corporate governance consultancy Pacifica Global in Silicon Valley.

Although this would be the first government-mandated quota for women on company boards in the US, there is precedent for doing so in European countries. Norway, Iceland, Finland and Sweden all have government-mandated quotas for the number of women on boards. A 2016 study found that quotas are effective in increasing female representation on boards. The US ranked 17th globally for its percentage of women on boards in 2015, according to Credit Suisse.

The primary opponent of the bill is the California Chamber of Commerce, which argues that the quota would be insufficient in only addressing the gender aspect of diversity, and that it may be unconstitutional.

“Diversity needs to include not only gender, but ethnic, global, as well as digital and technology diversity. Boards are strongest when there is a range of perspectives, experiences and viewpoints,” said Betsy Atkins, chief executive of Baja Corporation and a board director at companies including Wynn Resorts, Schneider Electric and Volvo Cars.

Many index funds — including those run by State Street Global Advisors, BlackRock and Vanguard — have all committed to using their massive shareholder positions to vote against boards that lack diversity.

Ms Atkins said: “The marketplace is working, 38 per cent of incoming Fortune 500 directors are women as of 2017. The all-powerful index funds are mandating minimums on gender diversity.”

Ms Atkins is also concerned that the quota would have unintended negative consequences including a possible decline in initial public offerings or conflict between California law and the corporate framework in Delaware, where most companies are incorporated.

California is home to Silicon Valley and many influential tech companies. The technology sector ranks fourth from bottom for the number of female board members among various public companies, and has a reputation for its misogynistic treatment of women. For most companies in California, the most straightforward way to comply with the law would be to add a seat to their boards and fill them with a woman. In the second quarter of 2018, almost 35 per cent of new director seats went to women, according to Equilar.

The total percentage of women sitting on public company boards has been rising gradually in the US, but still remain far from equal representation with men. In the second quarter of this year, only 39 companies in the Russell 3000 had boards with an equal representation of men and women. The companies included Best Buy, Macy’s and Viacom.

It is becoming rarer to see all-male boards among public US companies. In the second quarter of this year, the proportion of Russell 3000 companies with no women on their board was 17.1 per cent, a drop from 19.5 per cent in the first quarter.