This post updates an earlier post on this topic to reflect information from a conversation with a knowledgeable representative of the California Secretary of State's office. He was able to provide some insight about their process and clarify why some apparent inconsistencies were not really inconsistent.
As reported on thecorporatecounsel.net blog, the California Secretary of State has published on its website two spreadsheets, dated July 1, 2019, which apparently together constitute its mandated "report" under SB 826, California's new board gender diversity mandate. The first spreadsheet identifies 537 companies that the Secretary's office views as subject to SB 826. The next spreadsheet identifies 184 companies that were apparently in compliance with the board gender diversity mandate as of that date. According to the "methodology," this data was based on information available for the review period from January 1 to June 30, 2019 in California and SEC filings, as well as information from the NYSE, Nasdaq and miscellaneous other online resources. An updated report will be published on March 1, 2020.
As you may recall, on September 30, 2018, former California Governor Jerry Brown signed into law a bill addressing board gender diversity. The legislation requires that public companies (defined as corporations listed on major U.S. stock exchanges) that have principal executive offices located in California, no matter where they are incorporated, include, as Brown phrased it, a "representative number" of women on their boards of directors. Under the new law, each public company will be 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. (See this PubCo post.) New Section 301.3(c) of the California Corporations Code requires the Secretary's office to publish on its website, no later than 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." Subsection (d) requires that another report be posted on March 1, 2020 and annually thereafter, which updates that information and also reports 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 Secretary to adopt regulations imposing fines for violations of the new law in the amounts of $100,000 for the first violation, and $300,000 for each subsequent violation, as well as a fine of $100,000 for failure to timely file board member information with the Secretary of State with. 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."
According to the "methodology," the data used in the 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 filed annually in California. However, my spot check, based on a review of a few SEC filings, revealed some curious omissions from one or both of these lists. And, as noted in The Corporate Counsel post, some of the companies on the compliant list are not even on the list of companies subject to the statute—nor are they in fact required to be listed there.
But here's the explanation for many of those omissions and discrepancies. First, in the methodology, the Secretary acknowledges that there are gaps in available data because of the various filing deadlines: 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. Accordingly, in some cases, the representative indicated, companies that may have their principal executive offices in California may not have filed their 10-Ks or California Statements during the designated review period and, as a result, their data was not included. (But there still appeared to be some unexplained omissions from the lists.)
Second, according to the representative, because of the language in the statute defining "female" as "an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth," the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement. Rather, the Secretary is determining compliance based only on the California Statement, which, since March, has included a specific inquiry regarding the number of "female" directors.
Third, the California Statement is required to be filed by both foreign and domestic corporations and, if a company replied to the question regarding the number of female directors, even if it indicated that its principal executive offices were not located in California, the Secretary included that company on the compliant list; i.e., foreign corporations were not screened out. For the March update, the Secretary plans to provide a separate list of companies that report compliance but do not have principal executive offices located in California.
We should expect that some timing issues will continue to affect the March 1, 2020 update report. Notably, given the process the Secretary is following, current information from the California Statement regarding compliance for 2019 may not be available for the 2020 update report for companies with calendar-year FYEs, among others. For example, companies with calendar-year FYEs will have filed their California Statements in the first half of 2019, but if they do not add a female director and become compliant until, say, the third 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 file early). As of now, the Secretary does not intend to develop a new separate filing for purposes of soliciting the relevant information on board gender diversity on a more timely basis, but it can't be ruled out. However, the Secretary does contemplate some revisions to the California Statement, currently expected to be in place by the beginning of 2020. Keep in mind also, that, no fines should be imposed until the Secretary adopts appropriate regulations, and my understanding is that the process of developing regulations has not yet begun.
SideBar
In a recent speech, SEC Commissioner Hester Peirce took aim at efforts like SB 826 that are intended to increase board gender diversity. In what may strike some as an improbable allusion, Peirce proffers the oft-seen "baby on board" sign as a metaphor for the growing call to increase the proportion of women on corporate boards of directors—what she terms "the recent 'Lady on Board' trend: "'Baby on Board' signs draw our attention to people in need of special care. Babies, of course, cannot fend for themselves, and we treat them accordingly. Whatever its proponents' intentions, the 'Lady on Board' movement may be perceived to serve a similar purpose." In essence, she contends that conscious efforts to improve board gender diversity, such as California's new board gender diversity mandate, have the effect of demeaning the subjects of those efforts: "In the process, the movement could undermine the respect accorded to women who are in boardrooms. If women are presumed to be in the room simply to get the company credit, will their male colleagues listen to them? If the criterion is only that the director be a woman, will companies simply pick the same handful of women over and over again?" Of course, depending on your point of view, you might take issue with—or even umbrage at—her metaphor and question whether her presumptions are justified: is anyone really contending that being a woman should be the only criterion for selection as a director or that any board seats should be filled by incompetent unqualified women?
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