Dive Brief:

• More than one-fifth of California public companies evaluated by researchers at Clemson University and the University of Arizona must add a woman to their boards of directors to achieve compliance with state law, according to an academic paper shared with HR Dive.
• Under the law, signed last year, all publicly held domestic or foreign corporations with "principal executive offices" in California must have at least one female director on their boards by the end of calendar year 2019. According to the paper, co-authored by Clemson University researchers Daniel Greene and Vince Intintoli, as well as University of Arizona researcher Kathleen Kahle, 28% of the 602 firms surveyed need at least one female director by the end of the year, and 88% needed to add one or more women by the end of 2021, when the law increases the minimum requirement for companies with boards of at least five directors. Researchers said the bill increased the number of board seats held by female directors by 23% after enactment.
• The study also analyzed stock market reactions to 2018 news that S.B. 826 passed, finding that stocks recorded negative average returns of -1.2% following the news. But researchers didn't find evidence that this reaction was caused by the initial minimum requirement of one female board member, Greene told HR Dive in a statement via email: "Instead, the negative effect is driven by the more onerous requirements that firms add up to three female directors by 2021."

Dive Insight:

When California advanced S.B. 826 last year, they did so in the vein of governments in Europe, including Norway and Germany. The governments in those countries require 40% and 30% female representation on company boards, respectively.

California's law sparked interest at other U.S. state houses in similar laws, but none have formalized a quota like California's. Illinois Gov. J.B. Pritzker signed a law in August requiring corporations based in that state to begin annually reporting their female and minority board membership, however. New Jersey state senators introduced a bill that would require public companies in their state to have a minimum of one female director by the end of 2019, but the bill has not progressed to a vote. A similar bill was introduced in the Washington state senate.

These actions are part of a larger trend among state and local governments to enact laws that benefit the employment prospects, career growth and compensation of underrepresented groups, including women and people of color. California lawmakers said explicitly that they were seeking to "improve opportunities for women in the workplace" and to help achieve gender parity.

Some believe this approach has its flaws, including commentator Andrew Ross Sorkin of The New York Times, who questioned whether it might do more harm than good. Others, like Jessica Levinson, a professor at Loyola Marymount University's Loyola Law School, speculated the law would face legal challenges if passed.

Greene said overall negative stock price reaction to the law did not mean that the law destroys company value, but that this reaction could be interpreted as the law putting a "constrained optimization" on board composition. "We find that firms which can more easily adjust board structure, such as firms in industries with a greater supply of female candidates and firms that can more easily replace existing directors or more easily attract female directors, are less negatively affected by the mandate," Greene said.

He added that while the costs of board expansion were negligible for larger companies in the study, these costs were "substantial" for the smallest firms. "For many firms, the costs of expansion outweigh the 2019 penalties for non-compliance," Greene said.

The law arrived against a backdrop of increased female presence on U.S. company boards. A report in September found that at least 20% of board members at Russell 3000 index companies are women, while women were appointed to 40% of board seats at Fortune 500 companies in 2018. This year marked the end of all-male boards among firms in the S&P 500 after Copart Inc. announced in July the appointment of Diane Morefield, chief financial officer at CyrusOne Inc., to its board.