On September 30, 2018, Governor Brown of California signed into law a bill, SB-826, to require female representation on the boards of directors of publicly traded companies who identify as being headquartered in the state. SB-826 makes California the first state to attempt to enact female gender quotas for boards of directors. SB-826 will become effective on January 1, 2019 and will require companies subject to the legislation to comply with the first phase of requirements (requiring boards of directors to have at least one female member) no later than December 31, 2019. ...
The California Secretary of State is required to assess compliance annually and is empowered to impose fines for noncompliance. Any corporation subject to Section 301.3 that fails to file on a timely basis information about its board members with the Secretary of State may incur a $100,000 fine. The content and timing of required filings with the Secretary of State will be established through regulations that have not yet been issued. Separately, a corporation’s first failure to have the requisite number of female directors may result in a $100,000 fine and each subsequent violation may result in a $300,000 fine. ...
Even if SB-826 is ultimately invalidated, the legislation reflects the growing sentiment in favor of diversity for boards of directors. According to Institutional Shareholder Services (ISS), more than 80% of investors and 60% of non-investors (including corporate directors and other market constituents) who participated in the ISS 2018 governance principles survey believed it would be problematic if a board of directors did not include any female members. Glass, Lewis & Co. has indicated that beginning in 2019 it will generally recommend against election of the chair of the nominating committee of any Russell 3000 company having an all-male board, and ISS is reported to also be considering adopting a similar policy. Large institutional investors, including State Street Global Advisors, Inc., BlackRock, Inc. and The Vanguard Group, Inc., have also indicated that gender diversity on the board of directors may influence their voting decisions.
Keith Paul Bishop on what female means for purposes of the new statute:
Given the substantial penalties that may be assessed for failure to have the prescribed minimum number of female directors, who counts as a female director could be an important question. The legislature provides a Delphic answer ("γνῶθι ἑαυτόν") by defining a "female" for purposes of the gender quota requirements as "an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth". Cal. Corp. Code § 301.3(f)(1).
Keith Paul Bishop on the tasks assigned to the California Secretary of State's tasks under the statute:
One of the first tasks will be for the Secretary of State's office to publish a report on its web site "documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California and who have at least one female director". Cal. Corp. Code § 301.3(c). The deadline for this report is July 1, 2019. One difficulty that the Secretary of State will be to determine the gender of directors inasmuch as the Securities and Exchange Commission has no gender disclosure requirements. Although many first names are traditionally associated with a gender, many (such as Kim) are not. Implementing this requirement also will likely require the Secretary of State to promulgate rules interpreting the statute and adopting forms. See Cal. Corp. Code § 301.3(e). Rulemaking under California's Administrative Procedure Act is a time consuming process that requires public notice and comment. While the Secretary of State may choose to adopt emergency regulations, this would require a finding that immediate action is required to avoid serious harm to the "public peace, health, safety, or general welfare". Cal. Gov't Code § 11342.5.
The Secretary of State is also charged with enforcing the new law and is authorized to impose fines on violators. Although the Secretary of State does have some existing investigative and enforcement powers with respect to notaries and elections, it has not have substantial experience as a civil prosecutor. The office will undoubtedly need to add staff and adopt regulations to carry out these new tasks.
Lastly, yours truly on whether the bill will survive constitutional scrutiny under the dormant commerce clause.