Gender equality: European Commission proposed directive for improving the gender balance of NEDs

Practical Law UK Legal Update 9-522-4236 (Approx. 6 pages)

Gender equality: European Commission proposed directive for improving the gender balance of NEDs

by PLC Corporate

Background

In September 2010, the European Commission adopted a gender equality strategy, which contains a series of actions based around five priorities, including equality in senior positions (see Legal update, European Commission adopts new strategy on gender equality).

On 5 March 2012, the Commission published a report, Women in Economic decision-making in the EU: Progress report, which showed that very limited progress has been made since October 2010 towards achieving gender balance in EU boardrooms. On the same day, the Commission launched a consultation on possible action at EU level, including legislative measures, to redress the continuing gender imbalance on corporate boards in Europe (see Legal update, Gender imbalance in corporate boards: European Commission consultation).

In September 2012, it was reported that EU Justice Commissioner Viviane Reding would propose decisive legislative action on gender quotas for corporate boards in October 2012. However, on 23 October 2012, the Commission announced that it was postponing its presentation of a proposed legislative measure. According to press sources, the reason for postponing its proposal for a mandatory 40% female board quota by 2020 was because the Legal Service of the Commission questioned the legality of the draft legislative proposal (see Legal update, Gender equality: European Commission postpones legislative measure on women in boardrooms until 14 November 2012 and European Parliament votes against an all-male ECB board).

For further background, see Practice note, Gender diversity in boardrooms: EU initiatives).

Response to Commission's March 2012 consultation

The Commission confirmed that there had been a broad consensus from respondents on the urgent need to increase the share of women on company boards, although views varied as to the appropriate means to bring about change. Some respondents suggested focusing first on the non-executive directors and supervisory boards, as this would constitute less significant interference with the daily management of companies, with proposals for executive directors following later.

Proposed directive on improving gender balance among non-executive directors

On 14 November 2012, the Commission published the provisional text of a proposal for a directive of the European Parliament and of the Council on improving the gender balance among non-executive directors of companies listed on stock exchanges and related matters. The purpose of the proposal is to substantially increase the number of women on boards throughout the EU and to promote gender equality in economic decision-making.

The proposed directive lays down measures to ensure a more balanced representation of men and women among the non-executive directors of listed companies.

Exclusion of small and medium-sized enterprises (Article 3)

The proposed directive excludes small and medium-sized enterprises, which are defined as companies which employ less than 250 persons and have an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million.

Objectives with regard to non-executive directors (Article 4)

The proposed directive sets a minimum objective for the under-represented gender holding 40% of the non-executive director positions on the boards of listed companies by 2020. A shorter deadline of 1 January 2018 is set for listed public undertakings (an undertaking over which public authorities may exercise directly, or indirectly, a dominant influence by virtue of ownership). The quantified objective of 40% has only been applied to non-executive directives to strike the right balance between the necessity to increase the gender diversity of boards and the need to minimise interference with day-to-day management of a company.

The proposed directive imposes an obligation on listed companies to make non-executive director appointments on the basis of a comparative analysis of the qualifications of each candidate, by applying pre-established, clear, neutrally formulated and unambiguous criteria.

In order to attain the 40% objective, in the selection of non-executive directors where candidates are equally qualified (in terms of suitability, competence and professional performance), priority should be given to the candidate of the under-represented gender. However, to comply with European case law, the proposed directive does provide an exception to this if an objective assessment tilts the balance in favour of the other candidate.

Listed companies will be required to provide details to an unsuccessful candidate of the qualification criteria used, the objective comparative assessment of those criteria and, where relevant, the considerations tilting the balance in favour of a candidate of the other gender.

The objective of this article may also be met if the listed company can show that members of the under-represented gender hold at least one-third of all director positions, irrespective of whether they are executive or non-executive directors.

Listed companies may justify non-compliance with the objectives set out in this article if less than 10% of the workforce comprise the under-represented gender.

Additional measures by companies and reporting (Article 5)

The draft directive proposes that listed companies will be required to:

Undertake individual commitments regarding gender-balanced representation of both genders among executive directors to be achieved by 1 January 2020 (or 1 January 2018 for public undertakings).
Provide information annually to competent national authorities on the gender split at board level and the measures being taken in view of the objectives relating to executive and non-executive directives laid down in the directive. Such information should also be published on the company's website.

Sanctions (Article 6)

Member states will be required to establish sanctions for infringements of the national provisions adopted pursuant to the directive, which may include a fine or annulment by a judicial body of the appointment of a non-executive directive made contrary to the national provisions adopted.

Implementation and expiry (Articles 8 and 10)

It is proposed that member states will be required to adopt laws or regulations within two years of adoption of the directive.

The objectives of the directive will remain in force only until sustainable progress in gender composition of boards has been achieved and a sunset clause in included (it is proposed that the directive will expire on 31 December 2028).

Communication from the Commission on gender balance in business leadership

On 14 November 2012, the Commission also published a communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on gender balance in business leadership. The communication presents data on women's under-representation in business leadership positions and explains how a new EU legislative initiative, the proposed directive, to improve gender balance in the boards of listed companies would make change structural and irreversible.

Government's response

On 14 November 2012, the Business Secretary announced that the government welcomed the Commission's decision not to impose mandatory quotas for women and that the government believed that the self-regulation model set out in the Davies Review is the best approach for the UK. For further details of the recommendations set out in the Davies Review, see Practice note, Gender diversity in boardrooms: Davies Report: business strategy to increase number of women on listed companies' boards.

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