Although there are provisions in the Equality Act 2010 which allow employers to take certain steps to encourage female representation on their boards, the legal constraints within these provisions mean that, in practice, achieving this can be problematic.
In our briefing we examine the steps companies can take to improve female representation at board level without undertaking unlawful positive discrimination.
On 15 May 2012 the European Parliament’s economic affairs committee narrowly backed gender quotas for boards of banks and next Thursday, 24 May 2012, the European Parliament is set to urge the European Commission to table new measures to close the gender pay gap, including stricter sanctions on employers.
The European Commission’s consultation on redressing the gender imbalance in company decision-making closes on 28 May 2012. The consultation may result in EU-level measures to enhance female participation in economic decision-making, including the possible introduction of quotas.
As at May 2012, women account for 16% of all FTSE 100 directorships and there are only 9 all-male FTSE 100 boards, according to the latest research by Cranfield School of Management. This is up from 15.6% cited in the Davies first annual report in March 2012, and a significant increase from 12.5% a year ago. There has been much progress in the UK since the publication of the Davies report back in February 2011. The issue seems to be gathering momentum with many organisations taking critical voluntary steps to address the balance without government intervention through regulation.
Yet, despite progress in the UK, legislative measures in the form of quotas, together with sanctions for non‑compliance, could be a real possibility. The rate of progress across Europe has been too slow, according to the European Commission’s Women in economic decision-making in the EU: progress report, published in March 2012. Accordingly, the Commission is considering a legislative initiative to improve gender balance in the boards of listed companies across the EU. A consultation has been launched, the outcome of which will determine the approach to addressing this issue.
The consultation closes on 28 May 2012, after which the European Commission will issue a summary of the main outcomes, together with details of a possible legislative initiative.
In addition, some of the UK’s largest institutional investors have publicly asked businesses to declare their aspirational goals for female representation on boards. The Financial Reporting Council has announced changes to the UK Corporate Governance Code applying to financial years beginning on or after 1 October 2012 which require listed companies to:
- report annually on their boardroom diversity policy, including gender; and
- consider the diversity of the board, including gender, when evaluating board effectiveness.
Further, new narrative reporting regulations have been proposed which include a requirement for companies to make disclosures about the percentage of women at different levels of their organisations. Under the proposals, a new annual “Strategic Report” will be required to state the proportion of women on the board. The UK government is also currently considering whether to require wider disclosure by companies on the number of female employees within the whole organisation as well as the number holding senior executive positions. We expect draft legislation on this in Summer 2012 with the new regime to come into force from April 2013.
It is clear that a cultural shift is taking place. For certain companies addressing female under-representation at board level is turning from a marginal issue into something akin to a business imperative. Many employers are taking steps now to develop and retain their female talent and to include more women on their boards on a voluntary basis, rather than waiting for the parameter to be set by the European legislation.
The European consultation addresses the following points:
- the effectiveness of self-regulation by business to address the gender imbalance in corporate boards in the EU;
- what additional action (self-regulatory or regulatory) should be taken to address the issues;
- the economic benefits of having more women on company boards;w
- hether targets for female board representation should be introduced and, if so, what percentage and timeframe would be appropriate (and whether the objectives should be binding quotas or a recommendation);w
- hich companies (eg publicly listed) should be covered by such an initiative;w
- hether both executive and non-executive directors should be covered; and
- what sanctions should apply for failure to meet the targets and whether there should be any exceptions.
Effect of the Equality Act
Companies seeking to achieve targets for female board representation may feel constrained by the Equality Act. This is because the basic position under the Act is that favouring a candidate on grounds of gender is unlawful positive discrimination. However, there are two positive action provisions which operate as exceptions to the basic position and which allow companies to take some steps to achieve a genderbalanced board. The first is a general positive action provision. The second provision is a specific one that relates to positive action in recruitment and promotion, and is more limited in scope.
- General positive action provision
This allows companies to take measures to address under-representation in certain circumstances, for example where an employer reasonably thinks that people with a particular protected characteristic (in this case gender) are disadvantaged or have different needs, or that their participation in an activity is disproportionately low. In such circumstances, the employer may take proportionate measures to enable or encourage people with that characteristic to overcome the disadvantage, to meet their needs, or to enable or encourage their increased participation. This could cover reserving places on management and leadership training courses, creating targeted networking opportunities or providing mentoring.
- Specific positive action in recruitment and promotion
Where an employer reasonably thinks that people with a particular protected characteristic are disadvantaged or that their participation in an activity is disproportionately low, the employer can treat them more favourably than others in recruitment or promotion where they are “as qualified as” the other candidates. However, the employer cannot have a blanket policy of treating women more favourably.
Given the relatively recent introduction of the specific positive action legislation (in April 2011) and the lack of case law on its proper interpretation, there is some uncertainty about which actions the legislation will cover. In particular, it is as yet unclear how the “as qualified” test will work in practice. The Equality and Human Rights Commission has published a code of practice to which tribunals should refer when considering claims under Equality Act but this does not directly address the specific positive action provision, which came into force at a later date. Government guidance suggests that the provision should be given an expansive meaning, not limited to academic qualifications. The government’s Quick Start Guide uses the phrase “equal merit” rather than “as qualified as”, which suggests that an assessment of a candidate’s overall ability, competence and experience, as well as academic qualifications, would be appropriate. However, tribunals are not bound to have regard to the government’s guide.
There is no obligation on an employer to take positive action measures. However, if it does, its actions must be proportionate. The extent to which it will be proportionate to take positive action measures will depend, among other things, on the seriousness of the relevant disadvantage, the extent of the under-representation and the availability of other means of countering these issues. Therefore, it may be difficult for an employer to know which steps may or may not be lawful under the legislation.
Taking into account this level of uncertainty, some commentators argue that the law should be changed to allow firms to look for and appoint women to be company directors, without having to risk being sued for sex discrimination (see Michael Rubenstein’s Diary in Equal Opportunities Review, April 2012).
Understandably employers could be reluctant to take advantage of the specific positive action exception under the Equality Act given the risks of potential challenge on grounds of discrimination. However, it could well be difficult for a failed male candidate to bring a claim where the successful female candidate looks reasonably strong on paper and where, in terms of potential remedies, he may only be able to claim for loss of a chance to be appointed. Therefore, the likelihood of such claims may be slim. Ignoring this issue would seem to pose a greater risk, not least because of growing investor concern.
Practical tips for lawful action
However, there are a number of steps which companies can take to encourage greater female representation on their boards:
- Review the company’s workforce to establish whether there is significant under-representation of women within senior management, and across all levels of the organisation.
- Measure the success of women at each stage of the recruitment process (junior, mid-level and senior appointments) as well as how women are progressing within the company, including the retention rates.
- Consider setting targets (eg aiming to have 30% women in senior management and 25% female board representation) and involving institutional shareholders in any discussions (however, do not have a blanket policy of treating women more favourably per se).
- Consider succession planning and any proposed retirement plans of current board members.
- Consider whether there is scope to increase the number of board-level positions.
- Consider a voluntary pay audit to identify whether a gender pay gap is deterring women from applying from senior positions.
- Ensure the nomination committee is engaged with the company’s gender diversity strategy.
- When advertising positions, choose journals or magazines known to have a strong female readership, as well as general advertising.
- Discuss the company’s diversity goals with head hunters and executive search agents. Encourage a search for a diverse range of candidates. Care should be taken, as an employer can be vicariously liable for the actions of a consultant or agency.
- Avoid setting a lower standard for women to achieve before being offered an interview than for men, but actively consider how merit should be measured.
- Where significant under-representation of women in a particular sector is recognised, it may, for example, be legitimate to favour a female candidate with experience in a different sector over a man with relevant sector experience where the company considers both would be equally effective in the role.
- If positive action is taken, take care to document the basis for appointing the female candidate.
- Take account of the impact that periods of maternity absence or part-time work due to child-care responsibilities have on experience and career progression.
Retention and promotion
- Introduce mentoring or sponsorship programmes for female staff with influential male or female senior executives within the company.
- Establish or encourage membership of internal and external networks for female staff.
- Make equality and diversity training compulsory for all managers and staff. Also consider training in relation to unconscious bias.
- Offer specialised training events for female staff where a need is identified and encourage female staff to attend senior management development programmes.
- Monitor retention levels carefully, conduct thorough exit interviews and use employee opinion surveys to gauge morale and identify pressure points which may be resulting in a loss of female talent.
- Encourage female staff to consider alternative ways of gaining relevant experience such as taking up non executive roles at a non-competing company.
- Review company policies on flexible working and maternity and adoption pay and leave.
- Offer practical support for female employees returning to work following maternity absence.
- Consider subsidising nursery care and emergency childcare arrangements.
- As with recruitment, do not set a lower standard for women to achieve before being offered a promotion than for men.
- As with recruitment, where significant under-representation of females in a particular sector is recognised, it may be legitimate to favour a female candidate with relevant experience for promotion over a man with similar experience where the company considers both would be equally effective in the role.