The Influence of EU Competition Law Beyond the EU: Insights from Japan, the UK, Brazil, and the USA.

Date22 March 2022
AuthorTaylor, Celia

Synopsis

On October 4, 2021, a conference at the University of Naples in Italy hosted a roundtable discussion of the Brussels Effect. In this publication you will find two authored works. First, Professor Celia Taylor reviews how California's regulations are driving change throughout the United States. Second, Professor Amedeo Arena provides a written commentary on the remarks of the roundtable participants.

The California Effect Revisited

This conference is focused on the Brussels Effect, with panelists considering the premise that the European Union has unilateral power to regulate global markets by promulgating regulations that shape the global business environment. (1) In a similar vein, I will review how California's regulations are driving change throughout the United States, with particular reference to the regulation of corporate governance. Specifically, I will look at legislation requiring certain gender and racial representation on the boards of directors for companies headquartered in California.

Unlike many jurisdictions, corporate law in the United States is primarily created at the state level, (2) with each state responsible for crafting its own regulatory scheme. Just as regulations promulged by the European Union can influence non-EU members, so too can laws passed by one state have influence in other states and on other bodies that regulate corporate behavior.

The idea that California can influence other jurisdictions in the regulatory arena is not new. The term "California Effect" was coined in 1975 by David Vogel, who examined the spread of strict environmental regulations from California to other states. (3) Generally, the California effect incapsulates the idea that "economic integration may lead to the ratcheting upwards of regulatory standards towards levels found in higher-regulating jurisdictions...." (4) In addition to environmental regulations, California has also taken the lead in many other areas, including but not limited to, data protection, (5) marijuana legalization, (6) and chemical warning labeling. (7) The California Effect is real and demonstrable in many areas.

While it is commonly accepted that the California Effect is strong in certain regulatory areas, it is somewhat surprising that California is now having a similar impact on issues of corporate governance, an area typically thought to be dominated by the laws of Delaware. According to the Delaware Department of Corporations, "[m]ore than 1,000,000 business entities have made Delaware their legal home. More than 66% of the Fortune 500 have chosen Delaware as their legal home." (8) Companies choosing to incorporate in Delaware include, among others, Walmart, Amazon, Google, and Coca-Cola.

The reasons for Delaware's prominence in the corporate arena are myriad. They include the fact that Delaware's laws tend to be pro-management, that Delaware's Court of Chancery is well-versed and well-respected in corporate law matters, and that Delaware General Corporation Law is one of the most advanced and comprehensive corporation statutes in the nation. (9)

Having noted the prominence of Delaware in the corporate realm, it may seem surprising that California is leading the way in certain areas of corporate governance regulation. One might expect that Delaware would have the strongest influence on corporate governance regulation. The argument that the California Effect shows California leading the way in this area, depends, of course, on how we define "leading," and opens the doors to the perpetual "race to the bottom" versus "race to the top" debate concerning the regulatory nature of corporate law.

The idea that differing state regulations could influence corporate behavior stems from the late 1800s and early 1900s, with states competing for corporations to incorporate in their jurisdictions. Depending on one's point of view, this regulatory competition was either a "race to the bottom" or a race to efficiency and hence a "race to the top." The origin of the belief that corporations will flock to "states where the cost was lowest and the laws least restrictive" leading to a race "not of diligence but of laxity" is frequently attributed to United States Supreme Court Justice Louis Brandeis. (10) The idea of a "race to the bottom" was stated forcefully by William Cary in 1974 when he claimed that Delaware's legislature and courts were complicit in shrinking the concept of fiduciary responsibility and fairness and "water[ing] the rights of shareholders vis-a-vis management down to 'a thin gruel.'" (11)

On the other side of the debate, scholars argue that a "far more likely explanation [for Delaware's prominence] is that Delaware has achieved its prominent position because its permissive corporate laws maximizes, rather than minimizes, shareholders' welfare. Delaware's preeminence, in short, is in all probability attributable to success in a "climb to the top" rather than to victory in a "race to the bottom." (12) There is a wealth of scholarship on each side of the debate, but for the purpose of this piece, I take the position that mandating gender and racial representation of corporate boards of directors is a positive development, and that by doing so, California is "leading" a race to the top in the area of diversity. To be sure, some may (and do) argue the contrary, but there are sound reasons for concluding that adding gender and racial diversity to corporate boards has an overall net positive effect. There is also strong evidence that, absent a mandate, the progress in this area is woefully slow.

The Need for Increasing Diversity Equity on Corporate Boards of Directors

Human Rights Perspective

A strong argument for increasing gender equity on corporate boards is found in the United Nations Social Development Goals (UNSDG). (13) These goals, adopted by all United Nations member states in 2015, are the heart of the 2030 Agenda for Sustainable Development (2030 Agenda). (14) The 2030 Agenda "is a plan of action for people, planet and prosperity. It also seeks to strengthen universal peace in larger freedom." (15) The UNSDG aims "to realize the human rights of all and to achieve gender equality and the empowerment of all women and girls. They are integrated and indivisible and balance the three dimensions of sustainable development: the economic, social and environmental." (16)

With specific reference to the empowerment of women, UNSDG 5 states in its entirety the goal to "[a]chieve gender equality and empower all women and girls." (17) Although the articulation of the goal is brief, the importance of it should not be underestimated. The text accompanying UNSDG 5 states "[w]omen and girls, everywhere, must have equal rights and opportunity, and be able to live free of violence and discrimination. Women's equality and empowerment is one of the 17 Sustainable Development Goals (SDGs), but also integral to all dimensions of inclusive and sustainable development. In short, all the SDGs depend on the achievement of Goal 5." (18) It further notes "[w]hile more women have entered political positions in recent years, including through the use of special quotas, they still hold a mere 23.7 per cent of parliamentary seats, far short of parity. The situation is not much better in the private sector, where women globally occupy less than a third of senior and middle management positions." (19)

While UNSDG 5 clearly has broad goals, it includes the idea that women need better representation in the corporate world. Gender equality must be obtained both in public and private arenas if UNSDG 5 is to be met. Therefore, California's mandate of greater gender equity on corporate board of directors is squarely in keeping with the goals of the UNSDG.

The Business Case Perspective

There are numerous studies supporting the business case argument for mandating greater gender equity on corporate boards. The business case argument holds that greater gender equity will enhance the bottom line of the corporation and, therefore, corporations should embrace it not only as a moral good but as an economic one. The argument holds that diversity is necessary to ensure that boards can perform their obligations effectively in today's competitive business landscape.

One study supporting the business case argument found that "going from having no women in corporate leadership (the CEO, the board, and other C-suite positions) to a 30% female share is associated with a one-percentage-point increase in net margin--which translates to a 15% increase in profitability for a typical firm." (20)

Another study set out to test the premise that "female representation in top management brings informational and social diversity benefits to the top management team, enriches the behaviors exhibited by managers throughout the firm, and motivates women in middle management." (21) It found that "female representation in top management improves firm performance but only to the extent that a firm's strategy is focused on innovation, in which context the informational and social benefits of gender diversity and the behaviors associated with women in management are likely to be especially important for managerial task performance." (22)

It must be noted, however, that for every study supporting the belief that greater diversity on corporate boards improves company performance, there is a study suggesting that it makes no difference. A recent article examines the results of two meta-analyses that summarized the numerous studies on the issue of board gender diversity. It concludes that:

The results of these two meta-analyses, summarizing numerous rigorous, original peer-reviewed studies, suggest that the relationship between board gender diversity and company performance is either nonexist (effectively zero) or very weakly positive. Further, there is no evidence available to suggest that the addition, or presence, of women on the board actually causes a change in company...

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