California's "women quota" in boardrooms faces pushback

California’s unprecedented law requiring all public companies headquartered there to have at least one female board member by 2020 is drawing lawsuits.

Why it matters: Pressure to diversify corporate boards has historically come from shareholders and special interest groups. With California's law poised to take effect — and at least three states weighing similar legislation — critics are raising the question of government overreach.

Driving the news: The California law, signed last year by then-governor Jerry Brown, sets a penalty of $100K in fines for public companies that don't have at least one woman on their board by yearend 2019. The looming deadline has drawn two lawsuits.

• One, filed last week by an investor in a company that makes X-ray security scanners and other products, argues that the "women quota" law is "not only deeply patronizing to women" but also "plainly unconstitutional."
• The investor is represented by the Pacific Legal Foundation, a libertarian nonprofit.
• The other lawsuit was filed in August by Judicial Watch, a conservative activist group.
• It argues "that spending taxpayer money to enforce the law would violate the California Constitution," according to the AP.

Opponents are hoping to block the law before it gets stricter: By 2021, companies with five-person boards will have to have at least two women, while boards of six or more will have to have three.

• Companies that refuse to comply more than once will be fined $300,000 per seat that should be filled by a woman.
• A coalition led by the California Chamber of Commerce, said in a letter to lawmakers that by focusing "only on gender," the law "potentially elevates it as a priority over other aspects of diversity."
• In the Pacific Legal Foundation case, lead lawyer Anastasia Boden told AP: “The law mandates exactly what the equal protection clause forbids — taking into account things like sex or race“ in hiring.

The law may already be working: Corporate stragglers are racing to expand or switch up their boards.

• Skechers, the footwear company, has been pressured to add women to its board since at least 2014 — but didn't take action until seven months after the law was signed.
• OSI Systems, the manufacturer whose shareholder sued California last week, doesn't currently have any women on its board but will ask shareholders to vote to add one before this year's deadline.
• According to new data by the nonprofit 2020 Women on Boards, California saw the biggest annual increase of all U.S. states in companies with boards that are at least 20% female.

Yes, but: Most big companies subject to the law — like Google, Wells Fargo and Disney — have had women on their boards for years, prodded, in some cases, by backlash against all-male boardrooms.

• Facebook added Sheryl Sandberg to its previously all-male board in 2012, amid pressure from pension fund CalSTRS and others.

• But: Come 2021, Facebook six-person board will need to include one more woman to be in compliance.
• 70 of the 602 publicly traded companies headquartered in California were not in compliance as of July, according to research by Clemson University and University of Arizona.

The backdrop: Investors are getting louder about companies without diverse boards.

• BlackRock says it wants companies to have at least 2 women directors on every board.
• The last S&P 500 company without a female director appointed one this year.
• Other countries, like Norway and France, have laws similar to California's.

What they’re saying:

• The latest lawsuit strikes "at one of the principal areas of vulnerability that was identified when the law was passed,” Teresa Johnson, a partner at law firm Arnold Porter, tells Axios.
• “The state will also have to show that the quota solution under the law is the least restrictive way to remedy past discrimination.”
• When he signed the law, Brown said, "It's high time corporate boards include the people who constitute more than half the 'persons' in America."

What’s next: Lawmakers in other states, including Massachusetts, New Jersey, and Washington, hope to follow California's lead.

Editor’s note: This article has been updated to correct a statement that implied BlackRock could divest from companies that did not adhere to its board proxy voting guidelines.

Go deeper:

• The Milken Conference's diversity problem
• Corporate America's parochial morals
• Slow progress for women CEOs