The question of affirmative action to increase the presence of women on corporate boards has been debated for many years and notwithstanding numerous reports published on this matter, the only consensus that can be drawn is that … there is no consensus on this sensitive issue!  

1. Background

As evidence of the continuing interest raised by "board diversity" and the more global issue of gender equality, major studies were carried out in 2009 and 2010 and have all lead to reports confirming the imbalance of women on boards and the need to address this issue. Such reports include:

  • the Corporate Gender Gap Report of 2010, published by the World Economic Forum (Gender Gap Report), which conducted a survey of more than 3,400 companies including the 100 largest employers in each of the 30 member countries of the Organisation for Economic Co-operation and Development (OECD) together with Brazil, Russia and China;
  • the European Board Diversity Analysis 2010, prepared by Egon Zehnder International[1] (Egon International Analysis), which has analysed data relating to a total of 340 of the largest companies (the focus was on companies with a market capitalisation of more than EUR 4 billion) across 17 European countries; the report of Lord Davies of Abersosch, CBE, published on 24 February 2011 and commissioned by the United Kingdom Government (Davies Report), which examines the current situation of the FSTE 350 boards and gives its conclusion after a wide consultation of various interested parties;
  • the report entitled "L'accès et la représentation des femmes dans les organes de gouvernance d'entreprise (Women's access to, and representation in, corporate management bodies), issued in September 2009 by the French Institute of Directors, the French Observatory on Corporate Social Responsibility and the European Professional Women's Network (French Report).

Achieving gender equality is also a major objective of the European Union (EU) and the specific topic of women on boards has raised considerable interest at the level of the European Commission, resulting, as later discussed, in various communications and publications, including:

  • the European Commission Green Paper dated 5 April 2011 on The EU corporate governance framework (Green Paper)[2];
  • the Commission Staff Working Paper of 1 March 2011 on The Gender Balance in Business Leadership (Commission Staff Working Paper)[3].

All of the above analyses and reports more or less highlight the same findings:

  • there remain numerous disparities for women in the business environment, from the top, where they are still under represented at executive and board levels, to the very bottom, where harder access to employment and lower wage rates remain the prevailing pattern;
  • progress has been made over the last decades but mainly in certain economic sectors naturally associated with women – clothing/leisure/personal products, media/entertainment, general retailing and household products[4], and in certain pioneer countries, like Norway which achieves more than 35 % women representation on boards[5]. However, resistance is still strong in certain industrial sectors, including mining, information technology, software, chemicals and aerospace & defence[6], and in certain countries, like Italy and Portugal[7];
  • opponents to quotas or other affirmative actions raise the spectre of incompetent board members and the stigmatisation of women, and plead for "natural" evolution;
  • supporters of positive and compulsory promotion measures for women rely on findings showing, although there is no truly scientific supporting evidence, that boards with more women are more efficient than traditional men only boards[8];
  • impact of affirmative action cannot be denied, while the "do-nothing" approach will result in a very slow progression of women advancement. As quoted in the Davies Report:

"At the current rate of change it will take over 70 years to achieve gender-balance boardrooms in the UK".

2. Recent Developments

The Persuasion Path: UK

As one would expect, to spread the good word, the Steering Board which assisted Lord Davies comprised four women and two men, with diversified backgrounds ensuring access to experience and expertise from both the business and academic environments.

(i) The Analysis

The Davies Report acknowledges the obvious unbalance in women representation on boards of directors – in 2010, women represented only 12.5 % of the directors of 100 FTSE companies[9] –, the too slow increase rate of such percentage, the favourable consequences resulting from a more diversified board from a gender standpoint, and the need to take action.However, after a serious analysis of the pros and cons of quotas and taking into consideration various factors, including the results of the wide on-line consultation showing that only 11 % of the 2,654 responses supported quotas and a number of issues were raised concerning "tokenism[10]", the quota route was not advanced.

The underlying principles of the Davies Report are, on the one hand, that board composition should be driven by "needs, skills and ability" and, on the other hand, that a business-oriented approach should lead to a faster growth in the proportion of women on the boards of UK companies[11]. These principles have been translated into ten recommendations, targeting mainly listed companies and calling, among others, on greater transparency in the appointment of board members and on accountability.

(ii) The Recommendations

The recommendations of the Davies Report include the following:

  • All FTSE 350 companies should set out the percentage of women they aim to have as board members by 2013, and 2015. FTSE 100 companies should aim to have a minimum of 25% female representation by 2015;
  • Quoted companies should disclose the proportion of women on boards, as senior executive positions and employees in the whole organisation; The Corporate Governance Code (UK Code) [12] should be amended to require companies to establish a diversity policy, methods of implementing the policy and disclose an annual summary of the policy and progress made;
  • Companies should report on the above matters in their 2012 Corporate Governance Statement; and Investors should have a greater role in monitoring the appointments of board members.

Besides the formal recommendations, it has also been suggested that there needs to be more education on the issue within companies themselves in terms of improving management processes and mentoring programmes. Educating people on the existing barriers is one way of eliminating them, since inequality is not simply a numbers game. It has also been suggested that there needs to be greater communication between head-hunters and consultancies.

The work of the Steering Board will be an on-going process: the tenth recommendation of the Davies Report provides that it will meet every six months to evaluate the results achieved on the basis of the measures taken following their report, and annually to determine whether progress made is satisfactory. This continuing monitoring of the evolution of women representation on boards in the United Kingdom must be tied to Lord Davies' statement in the foreword of his report where he cautions that:

"Government must reserve the right to introduce more prescriptive alternatives if the recommended business-led approach does not achieve significant change".

Hence, UK companies are on notice that the quotas option may be revisited in the future… if they do not do better than the current 12/13 % of women on their boards.

(iii) The FRC Consultation Document: Gender Diversity on Boards

It seems that the above warning has been seriously considered, since less than three months following the publication of the Davies Report, the UK Financial Reporting Council (FRC) has launched a consultation to determine if amendments to the UK Code should be made, in light of the recommendations of the Davies Report, in order to achieve more diverse and effective boards.

In 2010, Provision B.2 of the UK Code had already been amended to add, as a supporting principle of the procedure for the appointment of new directors, the value of diversity in boardrooms, including gender diversity.  Now, the proposal would be to amend Provision B.2.4 relating to the report of the nomination committee as follows (proposed revisions in bold and underlined):

"A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments.  This section should include a description of the board's policy on gender diversity in the boardroom, including any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives. […]"

The addition of a supporting principle to Provision B.6  relating to board evaluation is also proposed:

"Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, the board's policy on gender diversity, how the board works together as a unit, and other factors relevant to its effectiveness."

Comments on the above proposed changes as well as on the timing of their implementation are to be made by 29 July 2011.

The Compulsory Path: France

(i) A Persistent Strategy toward Quotas

France has taken a position in favour of quotas as early as 2006 when legislation providing, among other matters, for a minimum of 20% women representation on boards was adopted[13]. However, the implementation of legally imposed quotas was hindered due to a major legal problem: the Constitutional Court[14] held that such affirmative action was not authorised under the French Constitution which, at the time, allowed positive discrimination only in connection with elections for political functions.

A battle had been lost but not the war: the French Parliament confirmed its intent to impose quotas through the adoption, in 2008, of an amendment to the Constitution extending to professional and social functions the general principle that "The law promotes equal access of women and men […] (our translation)[15]".

In 2009, a report presented to the National Assembly pointed out that little progress had been made between 2006 and 2009[16], and recommended, among other matters, the implementation of quotas.  Hence an Act relating to the balanced representation of women and men in corporate boards and professional equality, which imposes quotas, came into force on January 28, 2011 (French Act)[17].  It is worth noting that in 2010, the French Corporate Governance Code of Listed Companies[18] was amended to include a women on boards oriented recommendation: however, such self-regulation measure did not convince the French Parliament…

(ii) The Implementation of Quotas

Like the Davies Report, the French Act only applies to certain types of companies[19] and provides for a staggered implementation of quotas.

Only companies with a share capital and a Board of directors (conseil d'administration) or a Supervisory Board (conseil de surveillance) (together, the Board(s)), that is, French sociétés anonymes and sociétés en commandite par actions are impacted by the French Act.  But all of such companies, whether private or public, and no matter their size, are now under the general obligation to establish their Board of Directors or Supervisory Board with a view to reach a balanced representation of men and women:  this obligation came into force on 28 February 2011 and provisions relating to quotas as such will only become effective over time. Hence, companies must be in a position to demonstrate, when appointing new directors, that they have made reasonable efforts with a view to meeting this objective. This could be achieved, for example, by providing in the board's appointment policy (to be adopted or amended, as the case may be), a gender diversity principle coupled with an appropriate process for selecting candidates.  Also, the Board should report, in its annual report or its report to shareholders in connection with a meeting called for the election of director(s), on measures taken with a view to complying with such principle.

For the above companies, quotas only apply to:

  • Listed companies;
  • Non listed companies which during a period of three consecutive fiscal years, starting on 1 January 2017[20], (i) employ, on average, 500 permanent employees and (ii) have net revenues or total assets of at least € 50,000,000;

(together the Quotas Companies).

The definitive percentage of women on Boards under the French Act has been set at 40 %. However, this quota is somewhat more flexible for small Boards for which the calculation may be rounded up to the lowest number: when the Board comprises eight members or less, the difference between the number of men and women may not be greater than two. This 40 % quota will come into force on 1 January 2017 and is to be met at the close of the first ordinary general meeting of shareholders held after such date.

In addition, for listed Quotas Companies, earlier measures are to be taken:

  • at the close of the first general meeting held after January 1, 2014, the proportion of members of each gender must be at least 20 %;
  • from January 28, 2011, if there is not already at least one man and one woman on the Board, then at least one member – man or woman, as the case may be – , must be appointed at the next general shareholders meeting where Board members are to be appointed.

Complying with quotas is an on-going obligation: when a Board no longer meets the appropriate quota, the Board must, within six months, appoint member(s) to make the Board compliant again. Transparency is also part of the new regulatory framework: in his/her report to be attached to the annual report to the shareholders, the President of the Board must provide information on the composition of the Board and the application of the general principle of equal representation of women and men. Accordingly, gender equality has now become a permanent concern of the Board which must also, on a yearly basis, review company policy on professional and pay equality.

When dealing with enforcement measures, the French Parliament had to balance the effectiveness of the potential sanctions with the need not to disrupt the normal course of business of Quotas Companies. Accordingly, pursuant to the French Act, appointments of Board members in breach of the quotas provisions and resulting in a non compliant Board are null, but decisions in which the wrongly-appointed member(s) participate nonetheless remain valid, thus ensuring stability in the corporate decision-making process. This is not to say that the French Act has no teeth: not only are the appointments made in breach invalid but more importantly, in practice, the Board members are temporarily deprived of their remuneration which they receive only when the Board becomes compliant again. The French Parliament has chosen the legislative compulsory route to reach the objective of gender balanced Boards but its action remains realistic: Quotas Companies are given a reasonable time to comply with the ultimate quota of 40 % and the main sanction is closer to an incentive than to a punishment.  That being said, each Quotas Company should plan well ahead of time and establish, without delay, a formal action plan, building in current board representation and the French Act quota deadlines, to ensure that it is in a position to meet legal requirements and … benefit from diversity over time.

A path to be defined: EU

As detailed in Annex A of the Davies Report, a certain number of Member States of the EU have taken or are in the process of taking measures aimed at promoting gender diversity on corporate boards.  These include, in addition to UK and France, Spain, Iceland, Finland, Austria, Denmark, Germany, Sweden and Poland.

Not surprisingly, the topic of gender diversity on boards is also of interest to the EU which has been working towards achieving equality between women and men for over 50 years with the introduction of an equal pay rule for men and women in the 1957 Rome Treaty[21] and the adoption in 1975 of the first directive implementing this principle[22].

Equality in the economic decision-making process is specifically addressed as a priority area in EU communications relating to strategy for equality between women and men 2010 – 2015[23]. Key actions to be taken by the European Commission include considering targeted initiatives to improve the gender balance in decision-making. The follow-up assessment of the Commission Staff Working Paper[24], includes a list of initiatives and measures taken by various EU Member States, comparing "soft" measures such as corporate governance codes and charters and the more stringent quotas legislation for corporate boards. The Commission notes that, while the most effective strategy to achieve gender balanced boards seems to be quota legislation, no "one-size-fits for all" solution exists, and voluntary measures, such as recommendations in corporate governance codes, also show encouraging results.

Gender imbalance among decision-makers in business across Europe persists and the European Commission confirms, in its Green Paper, that it will continue to address and monitor the issue of gender diversity in economic decision-making. However, for the time being, the Commission is not yet ready for action: it is still in questioning mode, as evidenced by question 6. raised in the Green Paper:

"Should listed companies be required to ensure a better gender balance on boards? If so how?"[25] Nonetheless, there are indications that the EU will soon step in should progress not be satisfactory. Hence, Mrs. Viviane Reding, vice president of the European Commission and EU Justice commissioner issued a clear warning, in setting ambitious targets of 30 % for female representation in boardrooms in 2015, and 40 % in 2020, and advising that she was open to regulatory pressure as early as 2012, if necessary[26]. Initiatives have already been taken by the EU commissioner who challenged listed companies to sign the "Women on the Board Pledge for Europe" by March 2012. This pledge is a voluntary commitment by listed companies to increase women's presence on corporate boards to 30% by 2015 and to 40% by 2020[27]. As of May 2011, only two companies – Guerlain and FES Consulting Empresarial SL – have signed the pledge.

Whatever the route chosen by the EU, its Member States and European-based companies, women on boards is no longer an option but a reality. Companies and markets positioned at the forefront of this trend will no doubt gain a competitive advantage over their more reluctant peers.