As required by SB 826, California's board gender diversity law, the California Secretary of State has posted its March 2020 report on the status of compliance with the new law. The report combines information gathered in the July 2019 report (see this PubCo post) with data for the additional six-month period of July 1, 2019 through December 31, 2019. The report counts 625 publicly held corporations that identified principal executive offices in California in their 2019 10-Ks, but indicates that only 330 of these "impacted corporations" had filed a 2019 California Publicly Traded Corporate Disclosure Statement, which would reflect their compliance with the board gender diversity requirement. Of the 330 companies that had filed, 282 reported that they were in compliance with the board gender diversity mandate.
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 new 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.)
Section 301.3(c) and (d) of the California Corporations Code required the Secretary's office to publish on its website by July 1, 2019, a report "documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation's SEC 10-K form, are located in California and who have at least one female director," with an updated report posted by March 1, 2020 and annually thereafter. The report is also required to provide the number of publicly held corporations that moved their U.S. headquarters to or from California during the last year and the number of publicly held corporations that were subject to the requirements during the preceding year, but were no longer publicly traded. The legislation also authorizes the imposition of fines for violations of the new 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.
Note that the mandate applies to "publicly held" corporations, which California defines as corporations with shares listed on the NYSE, Nasdaq and NYSEAMER (formerly AMEX), as distinct from "publicly traded" corporations, which California defines as corporations with securities listed on the NYSE, Nasdaq, NYSEAMER, the OTC Bulletin Board, or on the electronic service operated by OTC Markets Group Inc. See this letter from the California Secretary of State sent to various public companies regarding the need to use the most current form to file a California Corporate Disclosure Statement and related FAQs.
The report was created by searching manually through publicly available information provided in annual California Statements and 10-Ks filed by corporations with the SEC, as well as information provided by the NYSE, Nasdaq and NYSEAMER and other online sources, including company websites. The dates searched were January 1, 2019 through December 31, 2019. The report notes that, because the law did not go into effect until January 1, 2019, the Secretary of State's office had not previously collected data on publicly held corporations that would enable the office to report on a corporation's movement of headquarters or delisting of shares from a particular market or exchange. However, the office is currently collecting this data, and those metrics will be included in the 2021 report.
According to Bloomberg, "[m]ost companies lacking women on their boards went into recruiting mode after the law was enacted. Since then, women accounted for about 45% of new board seats among Russell 3000 companies based in California, compared with about 31% nationwide." As reported by the WSJ, when the law was signed on September 30, 2018, 93 California–based companies in the Russell 3000 had all-male boards; a little over a year later, only 17 had no women on their boards. Since the law went into effect, according to the WSJ, 244 California companies in the Russell 3000 have added at least one female director, and 41 companies added two. Even more surprising, over 90% of companies in the S&P 500 now include two or more women on their boards, compared to 86% in the prior year. The new law has meant that companies have needed to look outside of the usual channels—other boards and CEOs—to find female board candidates; the WSJ reports that over 60% of the women who joined the board of a California company in 2019 had never served on a public company board. And the non-profit 2020 Women on Boards has announced that it has met its goal of 20% of board seats of companies in the Russell 3000 held by women. Notably, for the second year in a row, California had the largest increase in companies with 20% or more of their board seats held by women, which, WOB observed, "may be a direct result of the historic legislation requiring companies in the state to diversify their boards." In California, 68 more companies met the 20% goal in 2019 than in 2018.
Perhaps in light of this success, several states appear to be following California's lead—including Hawaii, Massachusetts, Michigan, New Jersey and Washington. These states have legislation in the works that is largely patterned after California's, although the timing and diversity goals may vary. In some cases, however, the legislation may not even move out of committee. Several other states have taken a more measured approach. Instead of a board diversity mandate, they have started with requirements for disclosure in annual state filings of data regarding board composition, leading to aggregation of the data and studies of the issue. Illinois and New York have recently taken that approach. (See this PubCo post.)
It's worth noting that there are timing issues in connection with these annual reports and statements, resulting in some gaps in available data in the March 2020 Report. 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. (Corporations Code sections 1502.1 (domestic) and 2117.1 (foreign).) And it appears from the report that a significant number of companies either did not file their California Statements in time to be reflected in the report or, in some cases, may not have been able to include in their Statements the most current information regarding compliance for 2019. For example, companies with calendar-year FYEs will have filed their California Statements in the first half of 2019, but if they did not add a female director and become compliant until, say, the fourth quarter of 2019, they will not have reported that compliance on their California Statements in time for the March 1, 2020 update (unless they were to amend).
Also, the report may not show that particular companies are in compliance even though their proxy statements may show that they are. 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.
Even proponents of the California law recognized the possibility of legal challenges—when Governor Jerry Brown signed the bill into law, he acknowledged that "serious legal concerns" had been raised. (See this PubCo post.) And many expected a flood of legal challenges to frustrate efforts to implement the bill. Nevertheless, California's businesses appear to have accepted the requirements of the legal mandate—perhaps also feeling the pressure from large asset managers such as BlackRock and State Street—and have not filed suit. However, two conservative activist groups have mounted legal challenges. Crest v. Alex Padilla was filed in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a "taxpayer suit," the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law's mandate is an unconstitutional gender-based quota and violates the California constitution. Most recently, in Crest, it appears that a case management conference and a hearing on a demurrer to the complaint filed by the Secretary are scheduled for this month. (See this PubCo post.) Subsequently, in Creighton Meland v. Alex Padilla, Secretary of State of California, another conservative legal organization filed a complaint on behalf of a shareholder of a publicly held company that is incorporated in Delaware and headquartered in California. The case seeks a declaratory judgment that the statute is unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. (See this PubCo post.)
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