California Passes Laws on Board Diversity, Net Neutrality

by John Howell, Editorial Director & VP of Content, 3BL Media
Oct 5, 2018 8:45 AM ET

We are witnessing a new development in the Brands Taking Stands movement: States defining themselves as “brands” by adopting definitive positions on social and political issues that are intertwined with business.
Pioneering this new territory is California, which has just signed into law legislation that requires publicly traded companies headquartered in the state to have at least one woman on the boards by the end of next year. By 2021, companies with at least five directors would need to have two or three female directors, depending on the size of the board. Financial penalties would be assessed for non-compliance. Some 86 Californian companies in the Russell 3000 Index don’t have any women on their boards, such as Skechers, TiVo, and Hundreds of other companies could be affected.
The new law lands on the female-deficient leadership of some big players in the state’s tech industry. Companies like Facebook and Alphabet/Google, will be required to add women directors to their boards. (On the other hand, some tech companies have taken a pro-active stance. Hewlett Packard, Apple, Cisco, Apple, Symantec, and Oracle have been called out for their leadership on board diversity.)

California’s law is being launched amid two strong, conflicting, socio-political currents: the deregulation policies of the current administration (the Department of Justice has said it will file suit against the new California law) and the national trend toward addressing gender inequality in many areas of civic society. 

The legislation also comes at a time when market forces are pushing the issue. Influential investment entities such as BlackRock and State Street Global Advisors are threatening to withhold votes for companies with all male boards unless they diversify by adding female directors.

The question open for debate is, does this law mark a major correction in the historic gender imbalance on business boards or an unprecedented interference in the governance of corporations by a state government? A few other states—Illinois, Pennsylvania, Colorado, and Cailfornia’s East Coast progressive “twin,” Massachusetts—have issued non-binding resolutions to encourage companies to increase female representation on their boards, but California is alone in making law that sets a numerical formula for women board members.

Some opponents argue that the legislation is flawed because it claims to apply to companies based in the state, but perhaps chartered in another state such as Delaware, where many companies choose to incorporate due to its stringent privacy protections.

But values are driving changes in that state’s engagement with business, too. The Delaware Voluntary Sustainable Certification act, passed this summer, provides state governed entities “a platform for demonstrating their commitment to corporate and social gender diversity in the boardroom.” Unlike California’s law, the Delaware legislation calls for voluntary compliance. One large corporation cites a market-driven reason to sign up: DSM, the $10 billion Dutch multinational active in the fields of health, nutrition, and materials, describes the certification as “not just a point of differentiation, but genuine competitive advantage.” With thousands of companies chartered in Delaware, business as usual will be changing in that state, too.

Stay tuned for more states to engage with business on the gender equity-governance issue, whether by legislation, voluntary buy-in, or overt persuasion.

(Note: the Delaware Certification’s effect will be debated at the 3BL Forum later this month.)

California Takes a Stand, Part 2
While passing the above legislation, Governor Jerry Brown also signed into law net neutrality legislation which prohibits Internet service providers from blocking or specific types of content or applications, or charge apps or companies fees for faster access. This position was challenged by the Department of Justice claim that the California law is illegal and that the state is "attempting to subvert the Federal Government's deregulatory approach" to the Internet.

Business is split on the state’s stand on the issue. Major broadband companies including AT&T and Comcast lobbied heavily against the California bill. USTelecom, a trade group, spoke against it. On the other hand, the American Sustainable Business Council came out in favor. “ASBC and its members are pleased that Governor Brown has signed SB 822 into law,” CEO Hammad Atassi said in a statement.

“This law is a model for other states to follow since it will implement strong net neutrality protections in California. While we prefer a federal solution, we support individual states taking the lead when necessary. Our members know that net neutrality rules and strong enforcement are key to maintaining a fair and open Internet. An open internet is crucial for the exchange of ideas, job creation, and business growth.” 

It should be noted that California and the Trump administration are also at odds on other policies: Immigration laws, emissions standards, and the sale of federal lands--among others--in an ongoing war between a progressive state and a retrograde federal government.