In 2018, California passed a law mandating gender diversity on the boards of directors of companies headquartered in California. The legislation known as SB 826 served as the model for the separate board racial diversity legislation that California Governor Gavin Newsom signed into law at the end of September. The California Partners Project, a group co-founded by California First Lady Jennifer Siebel Newsom, recently published its first progress report on the growth in women’s representation on corporate boards for publicly traded companies headquartered in California since the enactment of SB 826. As the report shows, there has been a significant increase in the number of women on the boards of California headquartered companies. A copy of the report can be found here. An October 15, 2020 post on the Cooley law firm’s PubCo blog about the report can be found here.
When SB 826 went into law, California became, as the recently published report states, “the first state to legally compel public companies to add women directors.” SB 826 requires that companies listed on major stock exchanges whose principal executive offices are located in California – regardless of the corporation’s place of incorporation – must include numbers of women specified in the statute on the their boards of directors, and according to the statute’s timetable.
By the end of 2019, each public company was to have a minimum of one director on its board. By December 31, 2021, the minimum number increases to two, if the corporation has five directors, and to three if the corporation has six or more. The law also requires California’s Secretary of State to publish reports showing the rate of compliance with the statute’s provisions, as well as to report on the number of companies moving into or out of the state and the number of companies going private.
The information detailed in the report shows that since SB 826 has gone into effect, there has been significant progress on the addition of women to the boards of publicly traded companies headquartered in California. The report is based on data relating to companies in the Russell 3000 companies based on information filed with the SEC as of June 30, 2020. The data for microcap and other companies not included in the Russell 300 was collected from SEC filings and information on company websites during July and August 2020.
According to the report, there are 650 public companies headquartered in California and subject to the requirements of SB 826. Before the bill was enacted, 29% of public companies (183 companies) headquartered in California had no female board members. By 2020, that number has dropped to 2.3% (15 companies).
The report drills down further on the details about the number of seats on the boards of California headquartered companies held by women. In 2018, 766 California public company board seats were held by women. By 2020, there are 1,115 individual women serving of California public company boards, holding 1,275 board seats (there are 137 women – about one in ten – serving on more than one California public company board).
The report notes that (assuming the total number of California public company board seats remains unchanged in the interim) at least 1,940 board seats will need to be filled by women by the end of 2021 in order for SB 826’s requirements to be met. 28% of companies (183 companies) already meet the gender requirement that will go into effect on December 21, 2021, while 72% (467 companies) will need to add one or more women to meet the gender diversity requirements of the statute. Interestingly, there are two companies – the GAP and e.l.f Beauty – that have five or more women on their boards.
The report anticipates the likely question of why all of this matters. The report cites extensive research showing that board gender diversity produces “financial benefit and enhanced innovation.” For example, a Credit Suisse report showed that large cap companies with women directors on their boards “outperformed shares of comparable businesses with all-male boards by 26%.” A McKinsey study the that the report cites noted that companies where women are most strongly represented in senior level positions “are also the companies that perform the best in profitability, productivity, and workforce engagement.”
Board gender diversity has also become a priority issue for investors, as investors, according to the report, “see the link between board diversity and better corporate performance.” For example, BlackRock recently adopted a recommendation that at least two women directors serve on boards of companies in which it invests. Both CalSTRS and CalPERS “have led efforts to diversity board leadership because the research shows the financial imperative to do so.”
It is not a point of emphasis in the report, but it is worth noting that SB 826 does also provide for fines for non-compliant companies. The legislation 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. Failure to timely file board member information with the Secretary of State is also subject to a fine of $100,000. However, rules implementing the administration of fines have not yet been put in place.
SB 826 has been the subject of litigation challenging its constitutionality. Among other things, questions have been raised about whether the statute’s mandates can be applied legitimately against companies incorporated outside of California. Others have questioned whether the statute’s gender mandates violate the equal protection of the laws provision of the California and U.S. constitutions. Separate lawsuits ultimately were filed in both state and federal courts. The federal court action was dismissed on standing ground; the dismissal is on appeal to the Ninth Circuit. The separate state court action, brought by California taxpayers relying on taxpayer standing available under California law, remains pending.
How the pending legal challenges may fare remains to be seen. However, based on the data in the recently field report, it does kind of seem that the train has left the station.
California-based companies clearly are not waiting around to see how the litigation plays out. They are going ahead and putting the statute’s requirements into effect. The fact that has been so much progress, as the report suggests, is interesting because there were commentators at the time the statute went to effect who questioned whether the statute would have any effect or make any difference in the number of women on the boards of California based companies.
The state of play on the California board gender diversity bill is interesting in and of itself but also because of the light it may shed on what the impact of the recently enacted California board racial diversity bill might be. Undoubtedly, there will be many other details to this story as it plays out over the coming months and years. However, the current state of play is interesting. Whether these types of legislative mandates are desirable or appropriate is of course a matter that may be the subject of extensive debates. However, whatever else may be said, the progress report does show that the mandates produce change.
I personally think it is a very good thing for the number of women on corporate boards to be increased. Just the same, I am also uncomfortable with mandates. Who decides what can be mandated? Over the past couple of years, I have sat on panels where other panelists argued vehemently that there should be mandates that corporate boards should include persons literate on climate change. I have sat on other panels where panelists argued that there should be legal provisions requiring the inclusion on corporate boards of persons with cybersecurity expertise. I sat in the audience at another conference where a representative of the national financial regulator said from the podium that corporations in that country must have directors fully informed about supply chain pitfalls, including dangers associated with child labor and human trafficking. There are already requirements mandating the inclusion on corporate boards of financially literate persons, and other requirements concerning the inclusion on corporate boards of independent directors.
The proliferation of actual and proposed mandates could create an environment where it could become difficult to give the appropriate priority to the inclusion on a company’s board of persons who actually understand the company’s industry and know its business. In my view, there needs to be a healthy debate on questions surrounding how much the make-up of corporate boards must carry the weight of a broad diversity of social and political issues. It is fine to talk about how the ideal board composition but in the end the boardroom must also be the place where the supervision and stewardship of companies take place.
I am much more comfortable with investors taking action to try to bring about desired change than with legislative or regulatory mandates. The investors have to take their investment interests into account. If the case for changes in board composition is compelling, the investors will be motivated to see that the changes take place. Legislators and regulators may have different motivations that may or may not always serve the best overall interests of the company, the economy, or even of society in mind.