Summary

On September 30, 2018, California Governor Jerry Brown signed into law legislation designed to require publicly held corporations whose principal executive offices are located in California to have one woman on their boards of directors by the end of 2019 and a representative number of women on their boards of directors by the end of 2021.

In Depth

On September 30, 2018, California Governor Jerry Brown signed a bill into law, making California the first state in the United States to require publicly held companies to put female directors on their boards by specified dates.

Applicability. This new law applies to any publicly held domestic or foreign corporation with its principal executive office located in California, as reported on the company’s Form 10-K filed with the Securities and Exchange Commission. For the purposes of the law, “publicly held corporation” means a corporation with outstanding shares listed on a major United States stock exchange, and “female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.

The Secretary of State will be required to publish reports on its website regarding publicly held companies that comply with the statute, have moved their headquarters either in or out of California in the preceding year and were subject to the statute in the preceding year but are no longer publicly traded. The Secretary of State may also adopt regulations to implement the new law.

Compliance. All companies meeting these criteria will be required to have a minimum of one female on its board of directors by the end of 2019. Further, by the end of 2021, each affected company must also comply with the following:

• If the company has 6 or more directors, at least 3 must be female
• If the company has 5 directors, at least 2 must be female

Noncompliance. A company is in violation of the law if a director seat that is required to be held by a female is not held by a female during at least a portion of the applicable calendar year. The Secretary of State may impose a $100,000 fine for the first violation and a $300,000 fine for each subsequent violation. It is uncertain whether the Secretary of State will adopt regulations with any additional penalties for noncompliance with the law.

Gender Diversity Linked to Better Performance. In connection with the adoption of the measure, the legislature cites several studies that have concluded that publicly held companies perform better when women serve on the boards of directors and the legislature took the position that if proactive measures are not taken, it could take as many as 40 to 50 years to achieve gender parity among directors. The legislature notes that other countries, including Germany and Norway, have already instituted legal mandates for female representation on boards of directors.

This new law also comes on the heels of guidelines made by BlackRock and other institutional shareholders and shareholder advocacy groups that have taken more expansive positions with regard to gender representation on public company boards, as covered in our prior quarterly update in April 2018. BlackRock and the New York State Common Retirement Fund have announced voting policies that support greater representation of women on public boards. In a letter to the California state senate regarding his signing the bill into law, Governor Brown stated that “Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America.”

Commentary. Governor Brown, however, also acknowledged that “serious legal concerns have been raised” regarding the bill and that its potential flaws “may prove fatal to its ultimate implementation.” Commentators contend that the law may violate the United States and California constitutions by creating an express gender classification and potentially putting companies in the position of displacing existing members of the board of directors solely on the basis of gender.

Implementation. As of June 2017, more than 25 percent of publicly held companies headquartered in California have no female directors serving on their boards, and only 12 percent had 3 or more females serving on their boards. Publicly held companies in California are advised to ensure compliance with the new law ahead of the 2019 and 2021 deadlines. The charters and bylaws of affected companies may need to be amended for compliance with regard to the election, removal and replacement of directors from their boards. Private companies are also advised to include females on their boards as part of any plans to go public.