California is the first state to codify boardroom gender diversity requirements. On September 30, 2018, California Governor Jerry Brown signed into law Senate Bill 826, which requires publicly traded companies that were incorporated in California or have principal executive offices located in California to include females on their boards of directors. The new law requires any such publicly traded company to include at least one woman on its board by the end of 2019. For boards that have at least five directors, at least two are required to be women by the end of July 2021, and for boards that have at least six directors, at least three are required to be women by the end of July 2021. The new law permits companies to expand the size of their boards to meet the new requirements. For purposes of the new statute females are defined as individuals who self-identify as a woman, without regard to the individual’s designated sex at birth.
California’s actions are likely driven in part by the increased focus on boardroom diversity from institutional investors. For example, Vanguard has noted that board diversity has been shown to have positive effects on shareholder value and has joined the 30% Club, an advocacy group seeking to achieve the goal of having at least 30% women on all boards of directors. Other prominent voices have expressed similar viewpoints regarding the impact of diversity in the boardroom on shareholder value, including BlackRock, State Street and proxy advisors such as ISS and Glass Lewis. Additionally, the New York City Comptroller, which oversees New York City’s pension funds, has spearheaded other notable campaigns advocating for board diversity, including the “Boardroom Accountability Project” (launched in November 2014) and the “Boardroom Accountability Project 2.0” (launched in September 2017).
If a company subject to the new rules does not comply with the new law, then the California Secretary of State may impose a fine of $100,000 for the first violation and $300,000 for any violation thereafter. The Secretary of State will also publish annual reports of companies that have (and have not) complied with the new law for the preceding calendar year, the number of public companies that moved their principal executive offices into or out of California during the preceding calendar year and the number of companies that were subject to the new law during the preceding calendar year but are no longer publicly traded.
Given that the new law expressly uses gender categories and would therefore likely trigger increased judicial scrutiny, many expect that a constitutional challenge under the equal protection clause will materialize both at the federal and state levels. Additionally, because the new law would affect companies that were not incorporated in California but that have principal executive offices in California, a challenge under the “internal affairs” doctrine—which generally states that only one state has the authority to regulate a corporation’s internal affairs—is also possible. However, regardless of whether the new law survives such challenges, affected companies should start preparing for compliance to avoid the negative financial, reputational and potential business impacts of non-compliance.