New California Law Tells CEOs: Put Women on Boards

new law requires many California companies to have a woman on their board by December 31st 2019. Now, we just need to make sure it is implemented without negative spillovers. In this article, I will discuss tips to efficiently increase diversity on your board.

The new law requires publicly traded California companies, as well as foreign companies with California headquarters, to have at least one woman on their board by December 31, 2019. By December 31, 2021, boards with 5+ members will need two women and 6+ member boards will need three.

That means if your board currently consists of five all-male members, you have two choices: Add three women to your board by 12/31/21, or replace one or more sitting board members. Don’t forget: If you choose to increase the number of seats on your board, your bylaws will need updating.

Paula Loop, leader of PwC's U.S. Governance Insights Center, says many board members are feeling ‘fatigue’ about diversity and political correctness.

I’d like to offer a few tips to help turn that fatigue into positive change:

Innovation

Regardless of the industry, there are talented, executive women with experience to benefit your board. For example, the chemical industry has similar numbers of executive women on boards (18.6%) and in executive ranks (13.7%) to that of the technology industry. I am continually, refreshingly inspired by companies in unpredictable locations that are innovators in gender parity. For example, Kraton Corporation, a chemical company in Houston, was on the target list of one of my board candidates. During my research, I found the company to be exceptional. It has a 10-member board including four women. When I mentioned California’s new law in a conversation with Kevin Fogarty, president and CEO at Kraton, and asked him about gender parity on his leadership team and board, he said, “I try.”

Your can-do attitude and innovation in recruiting will allow for a smoother transition in onboarding new members, thereby establishing and maintaining an effective board that reflects your company’s culture and benefits the shareholders.

In a Forbes article (6/9/17), OpenView Venture Capital Founder and Managing Partner Scott Maxwell points out that CEOs never say, "I can't get it done" when faced with a critical business issue - getting more customers, increasing market size and so on. CEOs who approach recruiting women to their boards with the same commitment and creativity as other critical business matters will get it done.

Planning, Process & Onboarding

In this New York Times article, author Andrew Ross Sorkin argues that sudden changes on a board can affect a company’s operating performance. He cites Norway as an example; that country enacted a 2006 quota requiring 40 percent of board seats to be filled by women. A follow-up survey in 2010 by the University of Michigan showed company "performance suffered because of the abrupt change in the composition of the boards."

Abrupt change can be mitigated by planning and the right process. Ideally, a board grows or changes organically; a mandate or quota is inorganic. When the composition of a board must change due to a skills need, growth or its succession plan, companies would benefit from using a beefed up version of the Rooney Rule, which the NFL uses to require teams to interview at least one minority candidate for head coaching and senior operation positions. Interviewing only one diverse candidate seems like using a plastic knife to chop down a forest, but striving for a candidate pool of 50/50 gender parity seems reasonable and do-able.  

Whether organic or inorganic, you will want a process for changing the composition of your board. If it is done too quickly it will backfire - not because a woman was added, but because a mismatch was hastily made. Many aspects of adding diverse members to a board have a positive impact, but the process is critical. As Priya Huskins notes in her D&O Notebook post, "Women on the Board: California’s New Gender Diversity Law – Unconstitutional or Not, Boards Get Ready," (10/17/18), "Any board looking to add new female board members will still want to engage in its normal board evaluation process to understand what skills and competencies a new board member should have."

Getting replaced by a woman may rankle some sitting board members, and that thought takes us back to arguments against affirmative action. My grandfather had such an argument in his diary where he reacted to an article, ”'As the Whites See the Blacks” by writing that it was “a civil service story about how the whites were pushed out of their jobs several years ahead of normal retirement time, to make way for the black movement."  

I understand my grandfather’s feelings, and affirmative action is a complicated issue. I don’t want to see qualified people pushed out of their jobs before their time. I also acknowledge that SB-826 is not perfect, which both Governor Brown and the author of the bill, Senator Hannah-Beth Jackson, also admit. But I also support the bill’s intentions, and I do think companies benefit tremendously from diversity. I am urging CEOs and directors: Instead of focusing on the bill’s flaws, I encourage you to think of it like a Sherpa, guiding you to a rewarding summit - you may eventually get there on your own, but you will likely get there faster and more directly with the help of SB-826. 

You will also want to define and cultivate the culture of your board. A culture that invites questions will align with the board’s main focus: corporate governance. New board members will learn about the company and its culture via a formal orientation, ideally with the CEO, Board Chair and Governance Committee Chair. Some companies opt for an independent facilitator. 

If you don’t currently have term limits, now is the time to implement them. Term limits are a simple, organic way of refreshing your board, bringing new ideas, strategies and growth for increased profitability.  

Finally, you may want to consider a secure board communication platform such as NASDAQ or Diligent, which include board evaluations, governance services and directors’ and officers’ (D&O) questionnaires.  

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