Court grants summary judgment to plaintiffs challenging California’s board diversity statute for “underrepresented communities”
As you may recall, SB 826, the California board gender diversity statute, is not the only California board diversity statute facing legal challenges. In 2020, AB 979, California’s board diversity statute for “underrepresented communities,” patterned after the board gender diversity statute, was signed into law, and it too has been facing legal challenges—in fact litigation brought by the same plaintiffs on the same legal basis. (See this PubCo post.) Framed as a “taxpayer suit” much like Crest v. Padilla I, the sequel, Crest v. Padilla II, sought to enjoin Alex Padilla, the then-California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law and a judgment declaring the diversity mandate to be unlawful in violation of the California constitution. As Crest v. Padilla I is awaiting a court decision following a bench trial (see this PubCo post), what’s happening in the sequel? After a hearing on motions by both parties for summary judgment in March, the Los Angeles Superior Court took the matter under submission and, on April Fool’s Day, the Court issued its order. But it was no joke—the Court granted plaintiff’s motion for summary judgment. The state has not yet indicated whether it will appeal the decision. In a statement, the president of Judicial Watch, which represented the plaintiffs, said that “[t]his historic California court decision declared unconstitutional one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination.”
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?
In his last letter to boards as CEO of State Street Global Advisors, Cyrus Taraporevala (who has announced his planned retirement this year) writes that we are at a “moment of significant transition,” facing many challenges, including a pandemic, climate change and gender, racial and ethnic inequities, that have led to economic disruption and even political instability. How should companies address these challenges? SSGA expects its portfolio companies to manage “these threats and opportunities by transitioning their strategies and operations—enhancing efforts to decarbonize and embracing new ways of recruiting and retaining talent—as the world moves toward a low-carbon and more diverse and inclusive future.” Accordingly, SSGA’s “main focus in 2022 will be to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.”
The SEC’s new Fall reg-flex agenda is posted and, no surprise, it’s packed. Here is the short-term agenda and here is the long-term version. And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement. The agenda is laden with major proposals that were on the Spring agenda, but didn’t quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of “holders of record.” Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the “final rule stage” have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
This week, ISS issued its benchmark policy updates for 2022. The policy changes will apply to shareholder meetings held on or after February 1, 2022. The key changes for U.S. companies relate to say-on-climate proposals, board diversity, board accountability for climate disclosure by high GHG emitters, board accountability for unequal voting rights and shareholder proposals for racial equity audits, as well as the decidedly less buzzy topics of capital stock authorizations and burn rate methodology in compensation plans.
Yesterday, yet another complaint was filed in federal district court charging that California’s board diversity statutes, SB 826 and AB 979, are unconstitutional under the equal protection provisions of the 14th Amendment. This complaint was filed by The National Center for Public Policy Research, which, you may recall, has also filed a petition challenging the Nasdaq board diversity rule (see this PubCo post and this PubCo post). The NCPPR describes itself as “a non-profit 501(c)(3) organization that supports free market solutions to social problems and opposes corporate and shareholder social activism that detracts from the goal of maximizing shareholder returns.” The case is National Center for Public Policy Research v. Weber, and the initial scheduling conference for this case isn’t set to occur until March of next year.
Last week, ISS released for public comment its proposed benchmark policy changes for 2022. If adopted, the proposed policy changes would apply to shareholder meetings held on or after February 1, 2022. The proposed changes for U.S. companies relate to board diversity, board accountability for unequal voting rights, board accountability for climate disclosure by high GHG emitters and say-on-climate proposals.
On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9th Circuit. What did the hearing reveal?
The Conference Board has just released a new report, Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: 2021 Edition, a primary focus of which is board diversity. According to the press release, the study is the “most current and comprehensive review of board composition, director demographics, and governance practices at US public companies.” Key to the study is that more companies are now actually disclosing the racial and ethnic composition of their boards (based on self-reporting by directors): companies providing data are up from 24% of the S&P 500 in 2020 to 59% in 2021, and from 7.7% of the Russell 3000 in 2020 to 26.9% in 2021. With regard to progress in board diversity, the data shows that women have made significant advances—on the Russell 3000 this year, women represented about 38% of this year’s newly elected class of directors, bringing total representation of women on Russell 3000 boards to 24.4%, up from 21.9% in 2020. However, boards have significant catching up to do when it comes to racial and ethnic diversity. Based on self-reported data, “boards remain overwhelmingly white,” and, for 2021, the class of new directors was 78.3% white, with only 11.5% African-American, 6.5% Latinx/Hispanic and 3.1% Asian, Hawaiian or Pacific Islander.
You might remember that the first legal challenge to California’s board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought to enjoin Alex Padilla, the then-California Secretary of State (now U.S. Senator), from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, SB 826, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. The court in that case has just denied each side’s motion for summary judgment after concluding that there were triable issues of material fact. The case will now be going to trial, which was initially set for October 25. However, on the court’s own motion, the trial was “trailed” to December 1. Stay tuned.