Report sheds little light on board gender diversity

The California secretary of state has published a midyear report on SB826, the groundbreaking law requiring publicly held companies headquartered in California to have at least one board member who identifies as a woman by the end of 2019 or face penalties. By the end of 2021, these companies must have at least two women on fivemember boards and at least three women on boards with six or more directors.

SB826 is the first law in the United States requiring female representation on corporate boards, and it has sparked nationwide praise and scorn. Women’s and other groups see it as a major success of the #MeToo movement. Business groups say it’s likely unconstitutional and favors one type of diversity (women) over others.

Unfortunately, the midyear report is confusing and provides no useful information other than the fact that 184 Californiabased companies have said they have a female director. It doesn’t say how many don’t have a female director, or even how many are subject to the law.

“There is a scene in Mel Brooks’ ‘Blazing Saddles’ celebrating ‘authentic frontier gibberish.’ This (report) is terrific authentic bureaucratic gibberish, spreadsheets and all,” Stanford Law School Professor Joseph Grundfest said in an email. In a paper criticizing the law last year, Grundfest said it is “unconstitutional as applied to the vast majority, if not all, of publicly held corporations headquartered in California” and will “increase the number of board seats occupied by women by trivial amounts, if at all.”

Keith Bishop, a partner at law firm Allen Matkins and a former California Commissioner of Corporations, also

had trouble understanding the report. “I didn’t feel like it was at all clear, but I’m also sympathetic,” he said.

The law itself, which took effect Jan. 1, deserves some of the blame. Although companies aren’t required to have a female director until the end of the year, the bill’s authors required the secretary of state to publish by July 1 a report online “documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10K form, are located in California and who have at least one female director.”

The report includes two spreadsheets. One is a list of 537 companies labeled “SB826 corporations by SEC data.” The second is a list of 184 companies labeled “Reporting in Compliance.” So we know those 184 companies have a female director.

What we don’t know is how many companies are subject to the law; it has to be more than 537 because that list excludes at least one wellknown name: Apple.

We also don’t know whether the 353 companies on the first list but not on the second have a female director or not. Facebook and Oracle are part of that group and have at least one female director.

Stripped of jargon, the report methodology basically says that its “information and statistics” were generated by searching for corporations listing a California address for the principal executive offices on the annual 10K report filed with the U.S. Securities and Exchange Commission. It also used information from the Corporate Disclosure Statement that some publicly traded companies file annually with the secretary of state. Not all of these companies are subject to the new law.

“The dates searched were January 1, 2019 June 30, 2019,” it says, adding that the deadlines for filing the SEC and state forms differ, “so there may be gaps in available data.” That implies that if a company didn’t file a 10K or California disclosure statement in that time period, it wasn’t included in the report. Apple filed its last 10K in November and has two female directors.

In January, the secretary of state added two questions to its disclosure statement asking if the company has its principal headquarters in California and, if so, whether it has a female director.

Upon request, the secretary of state’s office gave me a list of companies that, according to their disclosure statements, were not in compliance with the law. Initially, the list had 34 companies, but when I pointed out that many of them did not have their principal executive offices in California, it was whittled down to 22 companies. The 12 companies dropped from the list don’t trade on a major stock exchange, are not based in California, or both. Companies that trade on secondary markets, such as over the counter, don’t have to comply with SB826.

Of the 22 companies indicating noncompliance, seven are based in the Bay Area. One of them, ChemoCentryx of Mountain View, added a female director in March, according to its website.

Another, PDF Solutions, added Nancy Erba in June. The San Jose company had a female board member in the past, but she wasn’t on the board before Erba joined, a spokesman said.

“PDF Solutions believes that people with diverse backgrounds bring new perspectives to the company. Our most recently added board member, Nancy Erba, was selected because of her excellent credentials including her CFO experience. She would have been selected regardless of whether or not SB826 was signed into law,” the company’s CEO, John Kibarian, said in an email.

The other five Bay Area companies without a female board member are Energy Recovery of San Leandro, BioPharmX of San Jose, Avinger of Redwood City and Kezar Life Sciences and Sunesis, both of South San Francisco. None responded to a request for comment.

Researchers are eager to see how many California companies have female directors and whether the law has a positive effect, negative effect or no effect on board diversity. “This has been a dream for the academics. They are studying everything about it,” Bishop said.

As of September, 20.5% of the 457 Californiabased companies in the Russell 3000 stock index had no female board members and 35 percent had only one, according to research firm Equilar. But that study excludes companies, mostly smaller ones, not in the index.

Starting in March, and annually thereafter, the secretary of state must publish a report that includes, at a minimum, the number of corporations subject to the law that were in compliance during the preceding calendar year, the number of publicly held corporations that moved their U.S. headquarters into or out of California that year, and the number that were subject to the law but are no longer publicly traded. That will shed more light on the subject, but still lacks some crucial information, such as how many were not in compliance.

The interim report published July 1 “is kind of meaningless,” Bishop said. The secretary of state “was given an extremely difficult task given the timing and the way the existing reporting system works. They had to comply, they had to devote resources to generating this report, and at the end of the day, the report doesn’t tell you very much.”

The bill’s lead author, Sen. HannahBeth Jackson, DSanta Barbara, said in a statement that SB826 “required this report as an initial benchmark to showcase those companies that have already stepped up and made gender diversity a priority. But it is a minor snapshot compared to the report we all are eager to see in January, after companies are required to comply with (the) law and report the number of women on their boards to the secretary of state’s office.”