It's International Women's Day! On March 1, the California Secretary of State, Dr. Shirley N. Weber issued the Secretary's 2022 report required by SB 826, California's board gender diversity law, and by AB 979, California's law related to underrepresented communities on boards, on the status of compliance with these laws. The report counts 716 publicly held corporations listed on major exchanges that identified principal executive offices in California in their 2021 10-Ks, and indicates that 358 (compared to 318 last year) of these "impacted corporations" filed a 2021 California Publicly Traded Corporate Disclosure Statement reflecting their compliance (or lack thereof) with the board diversity requirements. Of the 358 companies that filed, only 186 reported that they were in compliance with the board gender diversity mandate, a significant decline from the 311 reported last year. Undoubtedly, the decline reflects the higher thresholds for compliance that applied at the end of 2021. The report also shows that 301 companies reported being in compliance with the phase-one requirements of the 2021 law related to underrepresented communities on boards. But is any of this data from the report really meaningful?
SB 826 requires that, by December 31, 2021, each "publicly held corporation," that is, a public company with outstanding shares listed on a major exchange, with principal executive offices (according to its Form 10-K) located in California, no matter where it is incorporated, include at least two women on their boards if the corporation has five directors, and three women directors if the corporation has six or more directors. A minimum of one woman director is required if the board has four or fewer directors. The statute also requires that the office of the California Secretary of State post on its website reports on the status of compliance with the law. Under the statute, the Secretary may impose fines for violations, ranging from $100,000 to $300,000 per violation. To date, the Secretary has neither proposed nor adopted regulations regarding fines or imposed fines for violations.
Patterned after SB 826, AB 979 requires, no later than the close of 2021, that each "publicly held corporation" headquartered in California, no matter where it is incorporated, have a minimum of one director from an underrepresented community. A director from an "underrepresented community" means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. A corporation may increase the number of directors on its board to comply with the new law. No later than the close of 2022, a corporation with more than four but fewer than nine directors will be required to have a minimum of two directors from underrepresented communities, and a corporation with nine or more directors will need to have a minimum of three directors from underrepresented communities.
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Both of these laws continue to be subject to challenge in both state and federal court. (See this PubCo post, this PubCo post, this PubCo post, this PubCo post and this PubCo post.) Most recently, closing arguments were heard in a bench trial in Los Angeles County Superior Court in Crest v. Alex Padilla, the first legal challenge to SB 826, filed in 2019 by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a "taxpayer suit," the litigation seeks a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds and taxpayer-financed resources for those purposes, alleging that the law's mandate is an unconstitutional gender-based quota and violates the California constitution. (See this PubCo post.)
The numbers for gender diversity in the Secretary's 2022 report are quite disappointing. As noted above, only slightly over half of the companies that made the required filings indicated that they were in compliance with the final gender diversity requirements, although compliance with the underrepresented communities regulations—which were just in phase one—was much higher. Why is this data so different from the more positive data reflected in other reports, such as the data disclosed in the most recent report from the California Partners Project. (See the SideBar below.)
The reason is probably related to the required methodology. The data used in the new report was generated for corporations that indicated on their 10-Ks that their principal executive offices were located in California and from information provided in the Publicly Traded Corporate Disclosure Statement (Form SI-PT), which is supposed to be filed annually in California. The dates searched were January 1, 2021 through December 31, 2021. But there are limitations. First, there may be gaps in the available data because of the various filing deadlines. Second, because of the language in the two statutes that require that individuals self-identify as "female" or as a member of an "underrepresented community," the Secretary does not review 10-Ks or proxy statements to determine whether a company is compliant with the board composition requirements. Rather, the Secretary determines compliance based only on the California Disclosure Statement. And, based on the report, only half of the impacted companies even filed California Disclosure Statements. (Note that the obligation to file California Publicly Traded Corporate Disclosure Statements predated SB 826 and applies to all publicly traded domestic as well as foreign corporations transacting intrastate business.)
But should we assume that companies that did not file are not in compliance? I looked at proxy statements for several of the companies identified as "impacted corporations" that nevertheless were not reported as having filed California Disclosure Statements—selected at random, unscientifically and completely arbitrarily—all but one had three women on their boards; one company did not meet the mandate because it had only two women directors. So just based on that unscientific effort, I would guess that the number of women on boards is probably much greater than the report indicates. And if half the companies subject to the law don't file, well, so much for the accuracy of the report.
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The most recent report from the California Partners Project, Mapping Inclusion: Women's Representation on California's Public Company Boards by Region and Industry, found "much to celebrate in the progress California has made. All-male boards are a thing of the past—from nearly a third of public company boards in 2018 to less than two percent now—and women hold a record number of California public company board seats." The report asserts that the "California experiment proves that where there's a will, there's a way. Concern that there were not enough qualified women to serve on boards is unfounded." Most revealing perhaps, the report tells us that, in 2021 "more women have joined California's public company boards than men, likely for the first time." But just barely—469 of the 930 directors that started in 2021, or 50.4%, were women. The report looked at a total of 752 public companies headquartered in California and found that 54.4% met the SB 826 mandate. According to the report, as of September 30, 2021, women held 1,844 board seats at California-headquartered companies, compared to only 766 in 2018—that's an increase from 15.5% of all public company board seats in California to 29.6%. That left 440 board seats to fill to comply with the mandate. According to this report, over half of the companies (54.4%) have already satisfied the California requirement; 33.4% need to add one women and 12.2% need to add two women. (See this PubCo post.)
The report also showed that, during 2021, 13 publicly held companies moved their headquarters from another state into California, 40 moved their headquarters out of California into another state and 30 publicly held companies that were listed on the March 2021 Report are no longer publicly traded.
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