In March this year the European Commission (EC) launched a consultation on possible action to the taken at European Union (EU) level, including the possibility of legislation, to try to improve the gender imbalance on corporate boards. One of the proposals mooted was the possibility of imposing mandatory quotas for the number of women required to be on boards (see the article in our May Corporate Newsletter for more background). Although a number of Member States, including France, Spain, the Netherlands, Italy and Belgium, do have legislative measures dealing with gender representation on company boards, this approach was not well received generally in the UK where the voluntary model set out in the report of Lord Davies in March 2011, which recommended a minimum target of 25 per cent female directors of FTSE 100 companies by 2015, has now been incorporated into the UK Corporate Governance Code which was updated on 1 October this year.
Despite a number of objections from Member States (including the UK) to the proposed approach in the responses to the consultation, in September it was reported that legislative measures would be introduced to impose a mandatory 40% female board quota by 2020. In October, however, the EC announced a delay in the announcement of its proposals. It is believed that this was because the Legal Service of the Commission questioned the legality of such a proposal given the equal rights legislation of the EU.
On 14 November the EC published details of a proposed Directive to increase progress towards a better gender balance on corporate boards of European companies. The main points in the proposed Directive are:
- a minimum objective of a 40% presence of the under-represented sex among non-executive directors of companies by 2020 (2018 for public undertakings)
- the Directive will apply to all listed companies with the exception of small and medium sized enterprises (those with less than 250 employees and an annual worldwide turnover of less than Euro 50 million). It will not apply to non-listed companies
- companies with less than 40% of the under-represented sex among their non-executive directors will be required to appoint candidates based on the respective qualifications of each candidate using clear gender-neutral and unambiguous criteria. If both candidates are found to be equally qualified priority is to be given to the under-represented gender
- non-compliance with the objective can be justified if less than 10% of the company's workforce comprises the under-represented gender or if members of the under-represented gender hold at least one third of all director positions (executive or non-executive)
- companies will be required to set themselves individual, self- regulated targets (termed a "flexi-quota"), regarding the balance of men and women on their executive boards to be achieved by 2020 (2018 for public undertakings)
- companies will be required to publish information on the gender composition of their board annually, both in relation to executive and non-executive directors
- Member States will be required to lay down appropriate sanctions for companies which do not comply with the Directive
- Member States will be required to adopt the Directive into national law within two years of it being adopted. It is proposed that the Directive will expire at the end of December 2028.
It is interesting to note that these proposals are clearly a watered down version of what the EC originally hoped to impose. What is proposed now is only an objective to reach 40% women non-executive directors rather than mandating a formal quota which is what was originally suggested. Also the Directive focuses only on non-executive directors. The rationale given for this approach is that non-executive directors are not involved in the day to day management of the company and therefore that the Directive will not interfere with the fundamental freedom to conduct a business and property rights – two fundamental rights guaranteed by the EU's Charter of Fundamental Rights. In addition the Directive imposes only unspecified sanctions for companies which fail to meet the target, looking to Member States to set the sanctions. The decision by the EC not to impose mandatory quotas has been broadly welcomed in the UK (see the Business Secretary's statement).