The federal government allowed technology companies to grow unchecked into dominant forces for the past decade. This year, amid a public backlash against Silicon Valley, politicians from both sides of the aisle have been attacking tech giants and their executives in congressional hearings and in the media, while proposing no solutions.
California has jumped into that void with its own attempts to address three obvious issues with a tech industry that is largely powered from within its borders: Data privacy, equal access to the internet and gender imbalance at the director level. But the bills recently signed in the last legislative session under Democratic Gov. Jerry Brown, serving out his unprecedented fourth term decades after his first, are unlikely to actually be implemented without some legal challenges.
The rebel state is no stranger to these fights with the feds, after passing sanctuary laws to protect undocumented immigrants, making efforts to fight climate change and legalizing recreational marijuana. New laws that seek to enforce net neutrality, GDPR-style privacy regulations and female representation on boards will again boil down to one of the most fundamental questions in U.S. law: What are states allowed to regulate, even when the federal government largely refuses to do so?
That is never a simple question. For example, take California’s new law that requires multiple women on corporate boards at public companies that have their headquarters in the state.
Brown signed the first law of its kind to mandate that companies headquartered in California appoint a minimum of two women to their boards, with the numbers increasing based on the size of a company’s board of directors. The law seeks to address a big gender disparity problem noted in studies that show many large industries in California — technology and health-care prominent among them — still have many companies with no female directors.
There is growing evidence that having women on a corporate board brings new perspectives, more questions and has positive effects on a company. It also encourages more turnover on a board, and a study by MSCI Inc. published in December 2016 noted that companies with three women on their boards see better returns than companies without such leadership, although a causal link was not established. One year later, another study showed that among sectors, information technology had the highest percentage of companies with all-male boards and had among the lowest percentage of companies with three or more female directors.
The information technology sector has a low percentage of companies with three or more women directors.
California’s effort, though, has a big legal flaw. Even companies based in California are likely chartered in the state of Delaware, because it is friendly to corporate interests.
California “cannot require that corporations headquartered in California but chartered in Delaware have a minimum number of women directors while Delaware simultaneously permits its chartered corporations to have any number of women directors that is consistent with the board’s business judgement,” Joseph Grundfest, director of the Rock Center for Corporate Governance at Stanford University, wrote in a paper on the bill when it was awaiting Brown’s signature.
Grundfest, who did not respond to a request for comment, wrote that the law is unconstitutional as applied to all but 72 publicly traded companies headquartered in California.
“A cure can be worse than the disease and SB 826 is, unfortunately, a case in point,” he wrote.
Betsy Berkhemer-Credaire, chief executive of a national awareness campaign called 2020 Women on Boards, is aware that the Delaware law issue is a legal loophole, but she doubts that any company would challenge it. California corporations that do not comply with the new law in 2019 will be subject to a $100,000 fine for the first violation and a $300,000 fine for further violations.
“They will be too embarrassed. No company wants to put their name on this issue, they will be branded as anti-women,” she said, while acknowledging that the law passed by Brown rankles the old-boy network of corporate executives who serve on corporate boards, many of whom make a living in retirement serving on several boards at once.
“We are working against the entrenched men who feel that this is part of their entitlement and they shouldn’t be questioned,” said Berkhemer-Credaire, author of “The Board Game: How Smart Women Become Corporate Directors.” “Why should they give up their seats? We say you don’t have to give up your seats, we just suggest that you add a seat to add a woman.”
If anyone opposes the law, it might be a lobbying entity, such as the California Chamber of Commerce, which came out against the bill, saying it focused on only one element of diversity, and arguing that the law would be unconstitutional.
Brown even wrote in a statement when he signed it into law that the bill has potential flaws which may prove fatal to its implementation, but said “recent events in Washington D.C. — and beyond — make it crystal clear that many are not getting the message.”
“Given all the special privileges that corporations have enjoyed for so long, It’s high time corporate board include the people who constitute more than half the ‘persons’ in America,” Brown wrote.
California’s “messages” are likely to be met with legal paperwork across the board. Swiftly after Brown signed a bill that restored net neutrality in California, the U.S. Department of Justice filed a lawsuit against Brown and the state. The law is largely similar to the Obama-era regulations adopted by the Federal Communications Commission in 2015, which were overturned this year under the Trump administration with the 2018 Restoring Internet Freedom Order, which basically lets service providers do whatever they want as long as they disclose their practices to consumers.
“While not surprising, California’s net neutrality effort reaffirms its leaders’ total lack of understanding of how technology or our economy actually works, particularly its ban on paid prioritization,” the FCC said in a snarky recent statement.
The feds are also likely keeping an eye on California’s incomplete data-privacy law, one of many such laws passed in states after Congress failed to act in the wake of the Equifax Inc. EFX, +0.04% data breach last year and Facebook Inc.’s FB, -0.14% Cambridge Analytica scandal. Tech companies are already trying to recast the state’s proposed data-privacy law, set to go into effect in 2020 but with many blank spots that need to be completed.
Once that law is actually written in the coming year, expect another lawsuit. And on and on, for while tech companies continue to act as they wish no matter the consequences, politicians will continue to either fail to regulate them or be stymied in their attempts to do so.
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