By: Jeremy Miller and Ryan Udell
A little more than one year ago, Taking Care of Business wrote about California’s adoption of a law, Senate Bill No. 826 (the California Statute), requiring gender-based diversity in the board room. A year later, the California Statute has been met with both enthusiasm and some criticism, including other states taking steps to enact, as well as enacting, similar laws and at least two lawsuits being filed in California opposing the California Statute.
The California Statute requires all publicly-held domestic corporations and publicly-held foreign corporations headquartered within California to comply with certain minimum gender-based requirements related to the composition of their board of directors, including having at least one female director by the end of 2019; The California Statute also mandates additional requirements by the end of 2021.
On July 1, 2019, the Secretary of State of California Alex Padilla published a report required by the California Statute detailing the businesses required to comply with the California Statute. This report indicated that 537 businesses are subject to the California Statute and, as of the date of the report, 184 have at least one female director. For a variety of reasons, including annual SEC reporting timing, the report may exclude certain corporations that should be subject to the California Statute and fail to include some corporations that are compliant. However, the Secretary of State is required to publish an updated report on March 1, 2020, which should provide a more accurate picture of the compliance landscape.
Other States and Critics
Illinois and New York, among others, have examined the California Statute over the last year and have started to take action to implement their own gender-based board diversity corporate laws. On August 27, 2019, the Governor of Illinois signed into law a requirement for public companies with their principal place of business in Illinois to include detailed information in their annual reports regarding gender and race or ethnicity of each of their board members, as well as their processes for evaluating nominees to serve on the board. While the Illinois law does not mandate a specific number of female directors (i.e., a quota) that must serve on the board, it does seek to achieve the same result as the California Statute – diversity in the board room.
New York has taken the first step towards adopting its own gender-based board diversity law, as well. The New York legislature passed a bill mandating that the New York’s state agencies study the board composition of businesses authorized to conduct business in New York, which was signed into law by Governor Andrew Cuomo on December 30, 2019. The study, also known as the “Women on Corporate Boards Study,” will survey “the number of women directors and the total number of directors that constitute the board of each corporation; an analysis of the change in number of women directors from previous years; and the aggregate percentage of women directors on all such boards of directors.” As part of this study, each of these corporations would be required to include on their biennial statement the number of directors serving on the board, which would include a gender classification.
In promoting the New York legislation, Rebecca Seawright, a co-sponsor of the bill, noted that “New York State is one of the largest economies in the world and as such, sets a global example for corporate responsibility. In taking a proactive approach, corporations will identify where they are lacking in diversity. This is a major step forward to ensuring that women have a voice in the discussions and decisions that will affect corporate actions and profitability.” New York is required to issue its first report on the findings of the study by February 1, 2022. Thereafter, New York is required to publish a report every four years. However, New York may decide in early 2022 whether or not it will move forward in enacting legislation similar to the California Statute or the Illinois law.
Those opposed to the California Statute argue that public corporations have been taking the initiative on their own to have greater female representation on the board without the need for governmental intervention; others have argued that the California Statute has and will continue to increase costs to applicable corporations, resulting in varying levels of consequences to shareholder value. In order to maintain experience and expertise, critics say corporations will expand their boards rather than replacing directors, which will inevitably result in additional funds being spent on Board compensation and travel.
While this will impact all companies subject to the California Statute, the most significant impact will be on smaller, growing companies as they may struggle to financially comply with the California Statute. A new study from Clemson University and the University of Arizona has been used to support this position. The study found that the stock value of those companies subject to the California Statute initially fell by 1.2% due the implementation of the California Statute. The study also concluded that in order for all applicable corporations to comply with the California Statute by 2021, they will need to hire over 1,000 women to serve on boards.
There have also been at least two lawsuits filed in California challenging the constitutionality of the California Statute. The first was filed on August 6, 2019 in California state court. Three individual taxpayers sued Secretary Padilla, seeking a declaratory judgment and injunctive relief. The plaintiffs, all of whom are individual California taxpayers, argued that the California Statute requires the unlawful use of taxpayer funds on constitutional grounds. The plaintiffs argued further that the California Statute’s “quota system” for gender-based board representation is unconstitutional because the state does not have a narrowly tailored compelling governmental interest to justify the use of a quota. The second lawsuit was recently filed in federal court by the Pacific Legal Foundation alleging that the use of a quota in the California Statute is a violation of the equal protection clause of the Fourteenth Amendment to the U.S. Constitution because the California Statute discriminates on the basis of sex. It is too soon to tell whether these challenges will succeed.
While the California Statute has its critics, the lack of gender diversity in the boardroom is real. Believing that this representation deficit will not resolve organically, California has taken action to require gender diversity; Illinois and New York are attempting to achieve the same result. It is clear that a variety of viewpoints are an important component of corporate governance, but the debate continues as to how to best achieve that variety. We will continue to follow this dynamic and important issue and provide updates as they continue to develop.
If you have questions or would like further information, please contact Jeremy Miller (email@example.com; 212.631.4414), Ryan Udell (firstname.lastname@example.org; 215.864.7152) or another member of the Corporate and Securities Group.