On 14 November 2012, the European Commission adopted a legislative initiative designed to address the gender imbalance on company boards that exists across the EU.

This decision follows much debate at EU level on gender inequality in the boardroom.  Last month, the launch of a policy on this subject was postponed as the proposal had, in its initial form, proposed the introduction of mandatory quotas for women on the boards of listed companies, coupled with a series of strict sanctions for non-compliance.  As a result of the substantial opposition that was met to the initial proposal, today’s proposal is a “watered-down” form of what was originally being prescribed.

Objective Target

Today’s proposal sets an objective of attaining a 40% presence of females among non-executive directors of publicly listed companies.  Under this milder proposal, objective targets rather than mandatory quotas are set.  Affected companies are to meet this objective by 2020, save for State-controlled companies that are required to meet the objective by 2018.

Sanctions

The proposal requires member states to decide what action to take against companies that fail to meet the quota.  Member states remain free to go beyond the terms of the proposed directive in their efforts to tackle gender inequality in the boardroom.

Exceptions

The proposal does not apply to non-listed companies, or to small and medium-sized enterprises, being companies with fewer than 250 employees and an annual worldwide turnover not exceeding €50 million.

Executive Directors

A “flexi-quota” that applies to the appointment of executive directors is included in the proposal as a complementary measure.  This measure provides that listed companies are to set themselves self-regulatory targets regarding gender diversity among executive directors.  These self-regulatory targets are also to be met by 2020 (2018 for State-controlled companies) and affected companies will be required to report annually on progress made.

Ireland and Irish Companies

This form of positive action is by no means new to the EU.  A number of countries have already introduced measures on a voluntary basis to address gender imbalance.  Ireland and Irish companies, however, have significant ground to make up.  Presently, women account for only 6.8% of non-executive directors in the largest publicly listed companies in Ireland.

The submission from the Irish Department of Justice and Equality of 25 May 2012 stated that “Ireland had not yet adopted a firm position in relation to gender quotas for corporate boards and looks forward to the Commission’s proposal and to collaborating with the European Institutions in this regard during its forthcoming presidency.”

Parallel to this development, the UK Corporate Governance Code published on 28 September 2012, which applies also to companies with equities listed in Dublin, goes some way to address gender diversity on Boards.  The Code provides (among other things) that the report of the nomination committee should include a description of the board’s policy on diversity, including gender, and any measurable objectives that it has set for implementing the policy.  In addition, in the context of the requirement for periodic board appraisal, the Code provides that evaluation of the Board should now explicitly consider the balance of skills, experience, independence and knowledge of the company on the Board, its diversity, including gender and how the Board works together as a unit, as well as other factors relevant to its effectiveness.  The Code applies for accounting periods beginning on or after 1 October 2012.

What next?

The proposal needs approval from the European Parliament and Council of Ministers.

Comment

Although the measure is aimed at diversity, it is a narrow kind of diversity.  The most important diversity is one that forestalls group think.  Arguably, proceeding from that position would be more logical, as it naturally must lead to more diverse boards, not just as to gender, but as to age, experience, background, etc.

Practical Action

Quotas have not been set, at least not yet, by this measure, the UK Corporate Governance Code or by Irish law.  That said, a practical step for affected companies may be to make a positive attempt to introduce gender-balanced short lists for the appointment of non-executive directors.  Whereas there may be legal impediments to imposing quotas, facilitating admission of a more diverse group of individuals to selection by aptitude and excellence is less likely to be controversial.