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 2020 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.
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.
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.