With the passage of SB 826 in 2018, California became the first state to mandate board gender diversity (see this PubCo post). The California Partners Project, which was founded by California's current First Lady, has just released a new progress report on women's representation on boards of California public companies, tracking the changes in gender diversity on California boards since enactment of the law. According to the report, "[r]esearch has shown us that companies with women on the board of directors outperform those without them. Women directors are more effective at managing risk, better able to balance long-term priorities, and have a keen sense of what customers, shareholders, and employees need to thrive." The report observes that, if "all of the companies in the Russell 3000 followed California's lead, over 3,500 women's voices would be added to corporate governance."
SB 826 requires that public companies (defined as corporations listed on major U.S. stock exchanges) that have their principal executive offices located in California, no matter where they are incorporated, include specified numbers of women on their boards of directors. Under the law, each public company 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. The law also requires reports to be published on the website of the California Secretary of State reflecting the level of compliance with these provisions, along with the number of corporations moving in or out of the state and the number going private. (Note that, although fines are authorized under SB 826 for violations of the law, no regulations have yet been adopted to implement fines.)
Notably, California Governor Gavin Newsom has just signed into law AB 979, designed to do for "underrepresented communities" on boards of directors what SB 826 did for board gender diversity. (See this PubCo post.) Like SB 826, this new law will require, no later than the close of 2021, that a "publicly held corporation" (that is, a corporation with outstanding shares listed on a major U.S. stock exchange) with principal executive offices (according to its Form 10-K) located 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. As with board gender diversity, the bill will likely have the effect of compelling companies to look outside their traditional channels to find new directors from underrepresented communities.
This study, conducted with consultant Equilar, looked at board gender diversity at the 650 public companies with principal executive offices in California (as reported on their Forms 10-K as of June 30, 2020) that are traded on the NYSE or Nasdaq and subject to SB 826. The data includes companies in the Russell 3000 as well as 192 other publicly traded companies headquartered in California.
Without doubt, there has been substantial progress. The report tells us that, in 2018, nearly 30% of boards of public companies with principal executive offices in California (183 companies) were all male, while currently there are fewer than 15 of these companies with all-male boards (3%). Of the 5,225 board seats at these California companies, 766 were held by women in 2018, while 1,275 were held by women in June 2020—and increase of 66.5%. The vast majority of women that have been added to these boards sit on only one corporate board in California, 119 serve on two and 18 serve on three or more boards in California. (Only two California companies have five or more women serving on their boards, the study indicates.) That means that only one in ten of these women directors serve on more than one board in California. Accordingly, the study calculates that it includes 1,115 female directors.
Drilling down, the study found that in 2016, only 87 women were added to boards of public companies with principal executive offices in California, 121 women were added in 2017 and 176 in 2018. But almost twice that number—346—were added in 2019, after SB 826 was signed into law. Interestingly, in 2020 (through June 30), only 147 women have been added. In total, from 2018 to June 30, 2020, women have been added to fill 669 board seats of these public companies.
Assuming the same number of board seats at each company headquartered in California, to comply with the December 31, 2021 mandate of SB 826, companies will need to fill a total of at least 1,940 board seats with women directors, representing an increase of 52.2%. According to the study, 183 companies (28.2%) already satisfy the 2021 mandate, while 467 companies (71.8%) still need to name one or more women to their boards to meet the 2021 mandate, amounting to at least 665 women.
Why does board gender diversity matter? The report cites substantial research showing that gender diversity on boards and in management leads to "financial benefit and enhanced innovation":
- "Credit Suisse conducted a six-year global research study showing that women on boards improve business performance for key metrics, including stock performance; the shares of large-cap companies with women directors on their boards outperformed shares of comparable businesses with all-male boards by 26%.
- A 2016 McKinsey & Company study showed nationwide that companies where women are most strongly represented at board or top-management levels are also the companies that perform the best in profitability, productivity, and workforce engagement.
- A 2012 University of California, Berkeley study found that companies with women on their boards are more likely to 'create a sustainable future' by, among other things, instituting strong governance structures with a high level of transparency."
In addition, the report observes that investors recognize that corporate performance is tied to board diversity and "are increasingly insisting that companies add diverse directors." The report cites as an example the expectations of asset manager BlackRock that "[i]n addition to other elements of diversity, we would normally expect to see at least two women directors on every board." (See this PubCo post.) Similarly, the CEO of Goldman Sachs CEO has said that, in the U.S. and Europe, Goldman will take companies public only if there is "at least one diverse board candidate, with a focus on women.... And we're going to move towards 2021 requesting two." (See this PubCo post.)
The report also notes that Gen Z and millennials, who "dominate our workforce," are deeply concerned about diversity of leadership in the workplace. In addition, the report contends that a diverse board "helps companies better understand and meet the expectations of their customers in a world where customers increasingly 'shop their values.' Building diversity at the board level grows competitiveness for companies in our state."
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