On March 1, the new California Secretary of State, Dr. Shirley N. Weber (who replaced Alex Padilla, newly appointed Senator) issued the Secretary's 2021  report required by SB 826, California's board gender diversity law, on the status of compliance with the law.  The report counts 647 publicly held corporations that identified principal executive offices in California in their 2020 10-Ks, and indicates that 318 of these "impacted corporations" had filed a 2020 California Publicly Traded Corporate Disclosure Statement, which would reflect their compliance with the board gender diversity requirement (slightly fewer than the 330 filed last year). Of the 318 companies that had filed, 311 reported that they were in compliance with the board gender diversity mandate, slightly more than the 282 reported last year, but still less than half of the companies subject to the law. (See  this PubCo post.) But is that data from the report really meaningful?

As you may recall, California's board gender diversity legislation requires that publicly held companies (defined as corporations listed on major U.S. stock exchanges) with principal executive offices located in California, no matter where they are incorporated, include minimum numbers of women on their boards of directors. Under the law, each of these publicly held companies was required to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors. Notably, the statute provides that a "female director having held a seat for at least a portion of the year shall not be a violation." (See  this PubCo post.) The Secretary's office is required to publish the report on its website annually.  The legislation also authorizes the imposition of fines for violations of the law in the amounts of $100,000 for the first violation, and $300,000 for each subsequent violation. The Secretary may also adopt regs imposing a penalty for failure to timely file board member information with the Secretary of State with a fine of $100,000. We have been advised, however, that no fines would be imposed until the Secretary adopts appropriate regulations and that, as of August 2020 at least, no regulations have been drafted or proposed.

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The law continues to be subject to challenge in both state and federal court. Most recently, in  Meland v. Padilla, a conservative legal organization filed suit in federal district court on behalf of a shareholder of a publicly traded company seeking a declaratory judgment that SB 826 was unconstitutional under the equal protection provisions of the 14th Amendment.  A federal judge dismissed that legal challenge on the basis of lack of standing, but the case was appealed to the 9th Circuit. (See  this PubCo post.)  According to  this article in Law.com, at a hearing Wednesday before a federal appeals court panel, the appellant "faced tough questioning. as they pressed an inquiry into how he was specifically injured by the law." The article reports that one of the judges asked how he was specifically injured by the law: how was he coerced by the state to vote a specific way? The complaint did not allege that he had to change his vote. His attorney explained that the injury was being pressured by the state to vote a certain way.  The California Deputy AG contended that he could vote however he wanted and that, if there were an injury from the law, the injury was to the company.  Another judge asked whether the threat of a fine would be an injury?  The Deputy AG characterized that threat as "highly speculative" and contended that "any harm of noncompliance would not affect Meland's shares."

The numbers in the Secretary's 2021 report are somewhat disappointing, but how close are they to reflecting reality? As noted above, almost all the companies that filed 2020 Disclosure Statements reported being in compliance-that is, having at least one woman on the board by the end of 2019.  But what about the companies that were reported as not having filed Disclosure Statements-about half of the "impacted corporations"? (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; when the law was passed, the preexisting form was modified to add language designed to elicit information about board gender diversity in compliance with SB 826.) Should we assume that companies that did not file are not in compliance?  I looked at the proxy statements for a number of the companies identified as "impacted corporations" that nevertheless were not reported as having filed Disclosure Statements-selected at random, unscientifically and completely arbitrarily-all of them had at least one woman on the board and often two or more. So, I would guess that the number of women on boards is probably much greater than the report indicates.

Unfortunately, however, to compile the report, the Secretary can't simply look at companies' proxy statements as I did. That's because the language in the statute defines "female" as "an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth." As a result, the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement, but is instead determining compliance based only on the California Statement, which includes a specific inquiry regarding the number of "female" directors. 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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Even though the data in the 2021 report does not seem to reflect it, there has, without doubt, been substantial progress in board gender diversity. The California Partners Project, which was founded by California's current First Lady, released a progress report in October 2020 on women's representation on boards of California public companies, tracking the changes in gender diversity on California boards since enactment of the law. The report tells us that, in 2018, nearly 30% of boards of public companies with principal executive offices in California (183 companies) were all male, while in late 2020 there were fewer than 15 of these companies with all-male boards (3%). Of the 5,225 board seats at these California companies, 766 were held by women in 2018, while 1,275 were held by women in June 2020-and increase of 66.5%. The vast majority of women that have been added to these boards sit on only one corporate board in California, 119 serve on two and 18 serve on three or more boards in California. (Only two California companies have five or more women serving on their boards, the study indicates.)  That means that only one in ten of these women directors serve on more than one board in California. Accordingly, the study calculates that it includes 1,115 female directors.

Drilling down, the study found that in 2016, only 87 women were added to boards of public companies with principal executive offices in California, 121 women were added in 2017 and 176 in 2018.  But almost twice that number-346-were added in 2019, after SB 826 was signed into law.  Interestingly, in 2020 (through June 30), only 147 women have been added.  In total, from 2018 to June 30, 2020, women have been added to fill 669 board seats of these public companies.

The report indicates that it was created using publicly available information provided in annual California and annual federal filings by corporations, as well as information provided by the exchanges and other sources available on the internet, including company websites. The 2021 Report lists all publicly held corporations that identified a principal executive office in California in their Forms 10-K during the 2020 calendar year and identifies which of those publicly held corporations reported having at least one female director on their 2020 Publicly Traded Corporate Disclosure Statement filing with the Secretary of State. The data was generated by searching EDGAR and the annual Publicly Traded Corporate Disclosure Statements filed by under California law. The dates searched were January 1, 2020 through December 31, 2020.

It's also worth noting that there are timing issues in connection with these annual reports and statements, resulting in "some gaps in available data" in the 2021 Report, as the report points out. Forms 10-K are due, generally depending on the size of the company's public float, 60, 75 or 90 days after the end of the company's fiscal year, and the deadline for filing the California Statement is 150 days after the end of the company's fiscal year. 

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As reported in the  NYT, a 2020 analysis from ISS showed that, although underrepresented ethnic and racial groups make up 40% of the U.S. population, they represent only 12.5 % of the boards of the 3,000 largest public companies-up from 10%, but an increase of only 2.5 percentage points from 2015. In comparison, women, although still nowhere close to parity with men, "have made much bigger advances. They now make up 21 percent of directors, up from 13 percent in 2015."  It's hard to say definitively how much SB 826 accounts for the difference in the levels of advancement-pressure from institutional investors and others has certainly been instrumental as well-but, as illustrated by the data in the sidebar above, it certainly appears that the law has contributed to gender advances. Accordingly, last year, California adopted board requirements regarding underrepresented communities with a deadline set at the end of 2021. Patterned after SB 826, AB 979 requires, no later than the close of 2021, that a "publicly held corporation" (that is, a corporation with outstanding shares listed on a major U.S. stock exchange) with principal executive offices (according to its Form 10-K) located 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.  As with board gender diversity, the new law will likely have the effect of  compelling companies to look outside their traditional channels to find new directors from these communities. (See  this PubCo post.)  Time will tell whether this new law will have a similar positive impact on board representation of underrepresented communities.

The report also indicates that six companies moved their headquarter from another state into California during 2020, 22 moved out of California and 28 are no longer publicly traded.

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Although much of the focus on diversity has been at the board level, according to this article in  Reuters, some experts contend that "the real challenge. is to penetrate deeper into the employees of companies." The article reports on a webinar hosted by the Federal Reserve Bank of New York that emphasized the need to pay "special attention to the role of middle management and employees seen as having influence within their organizations." According to the article, although "clear communications from top executives over diversity and inclusion (D&I) policies are essential for employees to understand the objectives of a company's program, there also needs to be a focus on certain groups and individuals who can often serve as role models and leaders."  Even in corporations, there are "'influencers' within organizations who shape and define cultural norms." The trick is to identify who they are, "inform them" and "give them tools to be more inclusive leaders."  The article cites a new paper co-authored by former Delaware Chief Justice Leo Strine that argues "for reforms that target the entire workforce. '[V]irtually all of the major reforms thus far introduced, focus almost exclusively on boards. None target the diversity of senior and middle management-or the broader workforce as a whole..But, the bulk of opportunity that corporations provide for Americans to improve their lives, engage in fulfilling work, and interact with customers and communities, is at the other levels of the firm where line workers, middle managers, and contracted workers collaborate to serve the company's customers.'"

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