Last September, then California Gov. Jerry Brown signed Senate Bill 826 (SB-826) into law. SB-826 will require every public company that has its principal executive office in California, as listed on its Form 10-K (“Covered Corporations”), to have at least one female director (i.e., an individual who self-identifies as a woman) on its board of directors. Covered Corporations will have until December 31, 2019, to comply with the section by either increasing the number of directors on its board and appointing a female director, or replacing an existing male director with a female director.
This requirement increases over time, so that by the end of 2021, Covered Corporations with boards comprised of five directors will be required to have at least two female directors, and Covered Corporations with boards comprised of six or more directors will be required to have at least three female directors. For initial and continued compliance purposes, a female director need not hold a seat for the entire calendar year. A portion of the year will suffice.
There are penalties for noncompliance with SB-826. Each director seat required under SB-826 that is not filled in accordance with the section will count as a separate and independent violation each calendar year of noncompliance. The first violation can carry a $100,000 penalty and a second or subsequent violation can carry a $300,000 penalty for each violation. Covered Corporations will be required to report board member information annually and can be subject to a $100,000 fine for failing to timely file. In addition to monetary penalties, noncompliant companies are expected to face pressure from investors as well as negative media scrutiny.
While the legality of SB-826 will be subject to constitutional challenges, the outcome of this litigation is impossible to predict and is likely to take several years. Therefore, we recommend that public companies and companies planning to go public that are headquartered in California begin taking action to comply with this new requirement. There is no exception for “emerging growth companies” or controlled corporations. For some Covered Corporations, a vote by shareholders may be required to change the size of the board if it is greater than what is permitted by its bylaws.
Gender diversity is a high-priority issue for institutional investors today. Many large investors like BlackRock, State Street Global Advisors, and the California Public Employees’ Retirement System (CalPERS) voted against or withheld their votes from directors in 2018 due to failure of companies to demonstrate progress on gender diversity on their board of directors. Additionally, under new proxy advisory firm voting policies adopted in 2018, Institutional Shareholder Services and Glass Lewis will begin recommending against the election of nominating committee chairs of Russell 3000 or S&P 1500 companies that have no female directors on their boards. Public companies that ignore gender diversity issues do so at their peril and are likely to be subject to significant scrutiny by investors and activists.