A libertarian group is suing California for alleged discrimination — against men.
The Pacific Legal Foundation filed a lawsuit Wednesday challenging a new state law that requires California companies to have at least one woman on their board of directors by the end of 2019. The largest California companies will need a total of three female directors by 2022.
In September, California became the first US state to mandate board room gender diversity. About a quarter of the state’s companies don’t have any female directors, and the rest have very few. The law is part of a growing movement to get more women into lucrative positions that have long been held by men.
But attorneys for the legal group argue that the so-called “woman quota” is unlawful and that it violates the Constitution’s equal protection clause, according to the lawsuit filed in Sacramento federal court. Their plaintiff, Creighton Meland, is a retired Chicago attorney who owns stock in a California-based company that has no women in its boardroom.
Meland believes that the new rules will force shareholders to “discriminate on the basis of sex” when they vote for potential board members. In other words, Meland seems worried that the law discriminates against men. But his attorneys also insist that the rule is bad for women.
“This law is built on the condescending belief that women aren’t capable of getting into the boardroom unless the government opens the door for them,” said his attorney, Anastasia Boden, in a statement Wednesday.
The legal challenge is the latest “reverse discrimination” claim related to policies and legislation that aim to level the playing field for historically underrepresented groups. It’s particularly interesting that the Pacific Legal Foundation considers the law discriminatory and “condescending” when it was intended to counteract the pervasive gender bias that has long kept women out of corner offices and boardrooms. It also overlooks a company’s best financial interests: Research shows that having more women on corporate boards is good for a company’s bottom line.
The US could do better
The United States lags other developed countries when it comes to gender diversity in the boardroom. In 18 countries, including Austria, Poland, and South Africa, all large companies have at least one female director. The United States has not yet made that list. In fact, the global research firm Egon Zehnder said progress for women has slowed in the US since 2012.
Silicon Valley, in particular, has been long criticized for its lack of representation. Last year, the majority of tech startups (63 percent) had no female board members. But among publicly traded companies in the state, the tech industry is not even the worst offender. Health care and biotech companies in California are the least likely to hire women to serve on boards.
Only 12.8 percent of the board seats at these companies are held by women. And about one-third (33.9 percent) have no women at all. In fact, California companies have fewer female directors than the nationwide average.
That’s not a great look for the state. California has one of the largest economies in the world, so any progress that happens there has global impact. Without a mandate, California companies likely wouldn’t change a thing.
The new law, SB-826, explained
By the end of this year, every publicly traded company based in California is supposed to have at least one woman on its board of directors. By 2022, that number will increase depending on a company’s size. For example, a corporation with five directors must have a minimum of two female directors and a company with six or more directors must have at least three female directors.
That means Google’s parent company, Alphabet, would need to give another board seat to a woman within the next two years. Right now, the company has 10 seats and only two female directors. Any company that doesn’t meet the quota would be fined $100,000 for the first violation and $300,000 for any following violations.
The seeds for the law were planted in 2013 when the state Senate passed a resolution that set a target for companies. The plan was that, by 2017, each public company in California would have at least one woman on its board, and up to three, depending on the size.
California was the first state in the US to adopt this type of resolution, and five other states have since passed similar measures. The problem is that it didn’t work because it wasn’t legally binding. By 2017, fewer than 20 percent of the 3,000 largest US companies based in California had met the target.
Lawmakers decided that a mandate was the only way for things to change. It’s not such a wild idea. Several European countries have mandated gender diversity on corporate boards. In 2003, Norway was the first to require that 40 percent of board seats be held by women, followed by France and Belgium. In 2015, Germany mandated that 30 percent of corporate board seats be held by women.
The lawsuit is about a problem that doesn’t exist
The new California law seems like a reasonable policy. But the Pacific Legal Foundation thinks it’s an egregious abuse of individual rights. More specifically, the group argues that it’s infringing on the rights of men.
The plaintiff, Meland, is a shareholder in OSI, a medical and security device manufacturer based in Hawthorne, California. Men hold each of the company’s seven board seats, but the company will need to give three of those seats to women by 2022.
“The Woman Quota imposes a sex-based quota directly on shareholders, and seeks to force shareholders to perpetuate sex-based discrimination,” Meland’s attorney claims, according to the court filing.
In other words, Meland is arguing that the law discriminates against men and infringes on his rights as a shareholder to vote for whomever he wants on the board. What he fails to note is that gender bias is what has kept so many women off of US boards.
That’s because directors usually recommend CEOs and other corporate executives to serve on their boards. “Relying on current directors’ recommendations will generally produce candidates much like those directors,” say Deloitte researchers in the company’s 2017 board diversity survey.
The low percentage of women candidates (16 percent) is striking, as is that of racial minorities (19 percent). However, that may be a logical outcome of a process favoring selecting candidates with board experience — who historically have tended to be white and male.
Women hold less than a third of executive positions in corporate America. White men hold 63 percent. Research shows that men have more opportunities to network, and that is often more important to career advancement than performance. Gender stereotypes, like the idea that women are not primary breadwinners, still hold back women from climbing the corporate ladder.
But here’s the thing: research also shows that companies with more female directors perform better.
Diversity in the board room pays off
Studies have shown that companies with higher levels of gender diversity have stronger financial performance and a more engaged workforce.
In particular, a growing body of research shows that having three women on a corporate board represents a “tipping point” in impacting a firm’s financial performance, according to a 2016 study by the research firm MSCI ERG.
The firm analyzed financing results for US companies over a five-year period, from 2011 to 2016. Those that started with at least three women on the board saw gains in equity returns of about 10 percentage points and a 37 percent increase in earnings per share. In contrast, companies that began the period with no female directors experienced negative results (-1 percent and -8 percent, respectively).
Credit Suisse conducted a six-year global research study from 2006 to 2012 with more than 2,000 companies worldwide, showing that having women in the board room is correlated with higher performance. For companies with a market capitalization of more than $10 billion, stocks for companies with female directors outperformed those with all-male boards by 26 percent.
Requiring companies to diversify their board rooms seems hardly controversial. Yet in 2019, some men still think that women’s advancement is a direct threat.