Board diversity is not a new topic for investors and governance professionals; it is a topic resonating with a new audience: state legislators.
The California State Teachers’ Retirement System (CalSTRS), with a member base that’s 74 percent women, has long focused on the lack of women on corporate boards. While we know—and empirical evidence confirms—that companies with women in the boardroom are more successful; our vision of a diverse board includes race, ethnicity, background, skill-sets, age, and gender. Still the large gap between female representation in society (51 percent) and in the boardroom (17.7 percent) remains and is not to be ignored.
The drive to diversify the make-up of corporate boardrooms is not about political correctness. It is about the long-term financial success of companies, which translates to the long-term success of CalSTRS’ portfolio and our ability to pay the pension benefits of nearly 950,000 California educators and their beneficiaries. In simpler terms—it’s all about the bottom line.
Engagement work—to increase the number of women on corporate boards—done by CalSTRS alone and in collaboration with organizations like Thirty Percent Coalition, in addition to our own efforts conducted via the power of the proxy vote and shareholder proposals, has changed the look of Russell 3000 company boards more than two percent: 15.1 percent in 2016 to 17.7 percent in 2018.
The California Initiative, a collaborative engagement effort with partners including, Los Angeles County Employees Retirement Association and the Office of the Chief Investment Officer of the Regents, University of California, in the past two years, has successfully influenced the appointment of 20 new female directors at 18 companies in our own backyard.
CalSTRS and other institutional investors, believed that if corporations couldn’t see the value in board diversity, we would be the drivers for change. In the United States, we did not believe that regulators or legislators would be crusaders for corporate change.
Then in 2018, California Senator Hannah-Beth Jackson introduced legislation—that for the first time in the history of the United States—requires quotas on corporate boards. The bill is now law. To comply with the law, by December 31, 2021, several hundred public companies headquartered in California will have to fill 1,060 board seats with female directors. The secretary of state of California will publish the information and has the option to impose fines if companies are non-compliant.
Other states have passed non-binding resolutions. Illinois passed a resolution stating that by 2018 every publicly held corporation in Illinois with nine or more seats on its board of directors have a minimum of three women on its board. A similar resolution was passed in Massachusetts in 2015.
But only California’s law poses a financial risk to companies, thus speeding up the need for change. CalSTRS is not waiting for the change to happen—increasing the number of women on boards by two percent every two years isn’t fast enough. We need to drive faster than the speed limit.