Corporate Boards Must Meet Diversity Requirements Amid Developing Legal Challenges

• Published date: 29 December 2021
• Subject Matter: Corporate/Commercial Law, Compliance, Shareholders, Diversity, Equity & Inclusion
• Law Firm: Ropes & Gray LLP
• Author: Mr Rocky Tsai and Christa Millard

As a practical matter, investors and other corporate stakeholders value the ability to compare diversity data across companies' boards of directors (Boards), and to aggregate such data for various evaluation purposes. This Alert discusses recent laws and regulations addressing Board diversity requirements and disclosure guidelines, as well as the multiple legal challenges they now face in pending court proceedings.

In 2018, California Governor Jerry Brown signed SB 826 into law, which is now codified as California Corporations Code Section 301.3(a). Section 301.3 mandates gender diversity minimum requirements for the board of directors of any "publicly held domestic or foreign corporation whose principal executive offices, according to the corporation's [Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC)], are located in California."

Since Section 301.3 has been in effect since 2019, the statute already requires a corporation located in California to have a minimum of one female director serving on its board of directors. Because Section 301.3 sets forth a staggered compliance schedule, several defined benchmarks are coming due on December 31, 2021'specifically:

1. If its number of directors is six or more, the corporation shall have a minimum of three female directors.
2. If its number of directors is five, the corporation shall have a minimum of two female directors.
3. If its number of directors is four or fewer, the corporation shall have a minimum of one female director.

Section 301.3(e) authorizes the California Secretary of State to impose fines to enforce compliance, including a $100,000 fine for "failure to timely file board member information with the Secretary of State"; a $100,000 fine for a first violation, defined as "each director seat required by this section to be held by a female, which is not held by a female during at least a portion of a calendar year"; and a $300,000 fine for subsequent violations. To date, the Secretary of State has not issued any fines pursuant to Section 301.3(e).¹

Nevertheless, many corporations have already responded to Section 301.3's enforcement framework and demonstrated compliance with its statutory requirements. For example, a Progress Report by the California Partners Project reported that the number of publicly traded companies without female board membership dropped from 30 percent in 2018 to 2.3 percent by late 2020.

According to the California Secretary of State's March 2020 annual "Women on Boards" report, out of the publicly held corporations listing a California principal executive office on their 2019 Form 10-K filing (a total of 625 impacted corporations), 282'that is, 45%'reported compliance with Section 301.3(a)'s gender diversity requirements. In the March 2021 annual "Women on Boards" report, the percentage of impacted corporations that reported...