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 as of that date. According to the "methodology," this data was based on information available for the 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. My own extremely brief spotcheck, however, revealed that these lists are not exactly, um, accurate.
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 imposition of fines for violations of the new law in the amounts of $100,000 for the first violation, and $300,000 for each subsequent violation. The Secretary may also adopt regs imposing a penalty for failure to timely file board member information with the Secretary of State with a fine of $100,000. 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 annual Publicly Traded Corporate Disclosure Statement (Form SI-PT) filed annually in California. However, my spotcheck, based on a review of a few SEC filings, revealed very well known companies located in California with one or more women directors that were not identified on either list or that were identified on the list as subject to SB 826 but not identified as compliant. 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.
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.
It is not clear whether the Secretary intends to gather compliance information solely from the California Statement or will also be looking to SEC filings and other publicly available information. As noted above, the California Statement is not due until 150 days after FYE, so 2019 information on that Statement will not be available for the 2020 report for companies with calendar-year FYEs among others. Likewise, calendar year non-accelerated filers, which have until 90 days after FYE to file their 10-Ks, will also likely not have filed before the March 1 deadline. Moreover, most companies incorporate their Part III information regarding directors from their proxy statements provided that they are filed within 120 days after FYE. As a result, for many companies, the information regarding 2019 directors will not be readily available from 10-Ks for the March 1, 2020 report—all of which may well consign the Secretary to scouring Forms 8-K to come up with an accurate compliance count for the 2020 report.
In a conversation with the staff at the office of the California Secretary of State, I was advised that, as of now, there is no intention to develop a new separate filing for purposes of soliciting the relevant information on board gender diversity. However, the Secretary's office does contemplate revisions to the California Publicly Traded Corporate Disclosure Statement, currently expected to be in place by the beginning of 2020.
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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