SEC Commissioner Hester Peirce has come out against a California law meant to add women to corporate boards.
"California: It is a place that provides fertile ground for innovation, imagination, celebration, and -- to be frank -- legislation," said Peirce, a Republican appointed to the SEC last year by President Donald Trump in a speech last week. She didn't mean it as a compliment.
Peirce's speech attacked a bill passed recently by the heavily Democratic California Legislature that would require companies based in the state to have at least one woman on their boards of directors by 2019. Governor Jerry Brown, who has yet to indicate his stance on the bill publicly, has until the end of the month to sign the measure into law.
"The California legislation effectively forces corporations, including non-California corporations, to consider all women as stakeholders," Peirce said in the Sept. 21 speech at a conference hosted by the Center for Corporate Reporting & Governance at California State University, Fullerton. "Opening such a wide door introduces uncertainty and political influence into corporate operations." A transcript of the remarks were distributed by the SEC on Monday.
Peirce's remarks are significant because she's among the first federal officials to comment on the California measure. Opponents including the California Chamber of Commerce have already blasted the measure as unconstitutional. While corporate law is typically governed by states, many companies based in California are incorporated in Delaware, setting up a ready-made venue for potential court challenges -- or federal intervention.
"This issue is not going to go away," said Jim Park, a law professor who specializes in securities law and federal regulation of corporate governance at the University of California, Los Angeles.
If signed into law, the state initiative could have broad implications for investors everywhere because California is home one out of five companies on the New York Stock Exchange and the Nasdaq. And underscoring the fears of the bill's critics, there's a possibility that the effort could spread to other states -- similar to the way California has led the U.S. in environmental regulation.
"As they say, nothing that happens in California stays in California," Peirce said in the speech.
The SEC regulates disclosures by publicly traded companies -- in the name of protecting investors -- and thus has been on the front lines of implementing U.S. laws on corporate-governance issues such as compensation. In 2011, it fell to the SEC to implement the controversial "say-on-pay" measure in the U.S. Dodd-Frank Act, which required companies to allow shareholders to vote on executive-compensation plans.
Under the California bill, the minimum for female directors increases in 2021 to two women on five-person boards, or three women on boards with six or more directors. Companies that fail to meet the requirements would be fined $100,000 for the year in which they commit their first infraction. Fines increase to $300,000 for every year with a subsequent violation.
The California Chamber of Commerce says the bill violates the U.S. Constitution, California's constitution and civil rights law generally.
The bill comes as a growing number of investors and corporate-governance experts say an absence of women on boards can be a detriment to shareholder returns. The trend has gained added momentum following last year's #metoo movement, which stemmed from widespread revelations of sexual harassment by corporate executives, politicians and Hollywood producers.
Under the glare of pressure, publicly-traded companies including the big U.S. banks Wells Fargo & Co. (WFC) , Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) have added more female directors. The thesis that a higher percentage of female directors can improve corporate performance is supported by an organization called the 30% Club, where the CEOs of the giant money managers BlackRock Inc. (BLK) and closely-held Vanguard Group are members.
Institutional Shareholder Services, a top adviser to investors on corporate elections, is discussing whether to recommend "no" votes against directors of companies without any women on their boards, The Deal, a sister publication of TheStreet, reported last week.
There are 485 all-male boards in the Russell 3000 Index, according to the Wall Street Journal, citing research firm Equilar. California is home to 86 of those companies, including shoemaker Skechers USA Inc. (SKX) and Stamps.com Inc. (STMP)
Peirce, in her speech, noted that researchers are split on whether putting more women on corporate boards improves shareholder returns. She's one of three Trump appointees to the SEC, led by Chairman Jay Clayton.
"Counting the number of female directors may tell you something about how well a company is run," she said. "Or it may simply tell you that the company has more female directors. There are studies going both ways."