Report: California Sees Significant Increase in Female Directors After SB 826, but More Needed

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Morgan LewisA new report shows that the number of women on California corporate boards has increased 66.5% since 2018 after the state required corporations to have at least one to three female directors by 2021. Despite the significant progress, the total representation of women on California corporate boards remains at a minimal 24%. The report highlights that California-based companies have a lot of work to do in the next 14 months to comply with the law: 72% of them must add at least one female director, and many will need to add more than one.

The California Partners Project (CPP) issued its first Progress Report on Women’s Representation on corporate boards. The report analyzes the gender breakdown of the corporate boards of all 650 public companies headquartered in California since 2018. In 2018, then Governor Jerry Brown signed Senate Bill 826 (SB 826), which required publicly traded corporations with principal executive offices in California to have one to three female directors depending on the size of their boards by the end of 2021. This report provides a window into the changing composition of California boards and representation of women on corporate boards thus far. It also demonstrates that many companies have work to do to achieve compliance with SB 826 by the end of 2021 and continue efforts to enhance the diversity of their corporate leadership.

THE REPORT – DETAILS ON GENDER DIVERSITY IN CALIFORNIA-BASED CORPORATE BOARDS

The report was issued by a nonprofit organization founded by Jennifer Siebel Newsom, a filmmaker and the current First Partner of California, and Olivia Morgan, who has directed and led a series of innovative programs such as Common Sense Media’s “Gender Equity is Common Sense initiative.” The organization’s board of directors and related “Women on Boards Advisory Council” hosts an impressive roster of corporate executives, public policy experts, and academics.

The report, issued this month, contains a summary of data analyzed from 650 publicly held companies headquartered in California whose securities are traded on the New York Stock Exchange or Nasdaq. It includes data as of June 30, 2020 for companies in FTE Russell’s Russell 3000 Index, a financial index that tracks the performance of the largest 3,000 publicly traded US firms, weighted by market capitalization. It also includes data as of July and August 2020 from 192 other publicly traded California-based companies not included in the Russell 3000 Index (i.e., companies with relatively smaller market capitalization). Notably, the identities of the companies are not included in the report; neither is the size of the companies’ boards of directors nor whether those boards have increased in size to accommodate the new law.

In addition to its board composition analysis, the report highlights several studies supporting the conclusion that increased women’s representation on boards results in enhanced financial performance, stronger corporate governance, and increased innovation and sustainability. The report also notes how increasing board diversity is a priority for investors – highlighting Blackrock’s recommendation of at least two female directors and Goldman Sachs’ commitment to board diversity.

The report notes that future progress reports will “analyze other aspects of board diversity, including the racial and ethnic diversity of the increasing number of women serving in these critical business roles.” This comment comes alongside a surge in derivative suits regarding director diversity and the recently signed California law, AB 979, which requires California-headquartered public companies to have at least one director from underrepresented communities by the end of 2021 and up to three directors from underrepresented communicates (depending on the size of the board) by the end of 2022.

THE REPORT’S FINDINGS: INCREASES IN WOMEN’S REPRESENTATION ON BOARDS, YET A LONG WAY TO GO

The report’s findings show that between 2018 and the Summer of 2020 there was a significant increase in the number of corporate boards with at least one female director. Specifically, in 2018, nearly one-third (29%) of the 650 California companies’ corporate boards had no female directors. Within a little over two years, that figure is now down to 2.3% - only 15 out of the 650 companies still lack any female directors.

The total number of women on California corporate boards has increased from 776 to 1,275 – a 66.5% increase. In 2019 alone, 349 women were added to California corporate boards and in the first half of 2020, companies added 147 women as board members.

Despite the significant progress made, companies have work to do to be in compliance with SB 826’s requirements by the end of 2021. The report notes that if the number of board seats per company remains constant, the 66.5% increase in women on boards to date is not enough. In fact, the number of women will need to increase by another 55.2% or 1,940 new female directors by the end of 2021. This increase will need to come from 468 companies, as only 28% of California companies are already in compliance with SB 826’s female director minimum requirements. Accordingly, nearly three-fourths (72%) of California-based public companies must add at least one female director within the next 14 months – and many will need to add more than one.

Setting aside compliance with SB 826, at a higher level, the report demonstrates women’s representation on boards in total is still at a minimal 24% - even though women make up 50% of California’s population. This shows that corporate boards have a long way to go to ensure the boardroom is reflective of society.

ONGOING LITIGATION MAY IMPACT THE LAW

The report discusses SB 826’s effects and the success of the law, but the constitutionality of SB 826 is still being challenged in two lawsuits. The first case, Meland v. Padilla (E.D. Cal. No. 2:19-cv-02288) in federal court, was dismissed at the trial court level and is currently on appeal before the US Court of Appeals for the Ninth Circuit. That case involves a shareholder’s claim that the law’s requirement violated his right to vote for a board member of his choice and thus violates the Fourteenth Amendment. The second case is Crest v. Padilla (Sup. Ct. No. 19STCV27561) in Los Angeles Superior Court; it is headed for trial in 2021. That case involves a claim by taxpayers that the law’s female directors requirement constitutes an unconstitutional quota.

SB 826 has not been ruled unconstitutional yet and the State of California will likely be able to enforce the law’s minimum female director requirements at the end of 2021.

TAKEAWAYS

  • SB 826 appears to have had a positive effect on increasing gender diversity in the boardroom without much controversy – aside from the two aforementioned lawsuits. Due to the law’s perceived success, it is conceivable that other state legislatures may consider adopting similar laws. Going forward, it is important to monitor these developments of state law.
  • Odds are if you are reading this, there is a three in four chance that your company does not currently meet the board requirements laid out in SB 826. Therefore, it is imperative to consult California counsel to (a) understand whether your company is subject to SB 826 and (b) if so, make a plan to attain compliance by the end of 2021. Violations of SB 826 can lead to $100,000 fines for a company’s first violation and may be viewed unfavorably by investors.
  • California boards remain male-dominated. The increases in women’s representation on California-company boards should be celebrated. Nonetheless, it remains a remarkable fact that in a state where women make up 50% of the population, they hold less than 25% of director positions.
  • CPP’s inaugural report contains very helpful information, but more data would be useful to understand the professional, educational, and ethnic backgrounds of women who have been appointed to boards in the last several years. It would also be helpful to understand what roles and responsibilities female board members have taken to better understand the power that women have in the boardroom.
  • As indicated in the report, future reports will likely detail the racial and ethnic diversity changes made since the signing of AB 979 (a law mandating that publicly-traded corporations have underrepresented minorities on their boards), and companies should evaluate how they are taking steps to comply with that law as well.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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