California Board Members: More Power to Women

By Rubeena Sachdev

Governor Jerry Brown signed into law that all public companies headquartered in California must have at least one female board member by the end of 2019. Larger boards will need to appoint more women by 2021. Companies that do not comply with SB 826 will receive a penalty of up to $300,000. Despite the challenges of compliance, this new regulation delivers benefits. Studies show that having more women on the board is good for business.

Which Companies Must Comply with SB 826

The law is applicable to any public company headquartered in California, regardless of where it is incorporated.

California-based start-ups should begin compliance planning if they anticipate they will become publicly-traded to raise additional funding.

When Compliance is Required for SB 826

In addition to the 2019 deadline for all public companies, larger boards will face more requirements by 2021. By the end of 2021, companies with five directors will need to have at least two women directors on the board. Companies with six or more directors will need to have three or more women directors on the board.

2021: How Many Women Must Be on the Board?

Board Size: Number of Directors

Minimum Number of Women Directors Required

Four or fewer

One woman

Five

Two women

Six or more

Three women

Rather than replace a male director with a female one, some companies may opt to hire additional female board directors by the end of 2019. However, hiring an additional female board member can create additional compliance issues for smaller boards.

For example, if a board of four men hires one additional female board director, the board would grow to a size of five members. By 2021, they would then be required to have two female board directors. If they continued to hire additional female board members rather than replace male ones, the board would expand to a size of six and require three women directors. Companies with smaller boards should take this into consideration when planning how to comply with SB 826.

More Women Mean Stronger Financial Outcomes

Studies show that companies with more women on their boards tend to perform better in key financial measures, like return on sales. Additionally, research has shown that women directors handle risk more effectively, and place stronger emphasis on long-term priorities rather than short-term ones.

As companies grow, it is in their best overall interest to diversify and improve representation at all levels. By implementing SB 826, California has paved the way to enhance gender diversity on public company boards.

Conclusion

California is the first state in the country to impose a rule requiring a minimum number of women on corporate boards for public companies.

Companies can begin using the reasoning behind SB 826 to prepare for an Initial Public Offering (IPO), or simply to reap the benefits a diversified board can bring them.

For help assembling an SB 826-compliant board or other corporate compliance questions, please contact your trusted Chugh, LLP attorney.

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