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, currently, no regulations have been drafted or proposed.
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.
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.
The report also indicates that six companies moved their headquarters from another state into California during 2020, 22 moved out of California and 28 are no longer publicly traded.