The European Commission has published a draft Directive which aims to improve gender diversity on boards of EU listed companies.

The draft sets a 40% "minimum objective" for the proportion of female non-executive directors. The proposal also requires companies to publish targets for female representation among their executive directors but without setting a minimum objective.  The revised proposals have been welcomed by the UK Government as a step away from mandatory quotas. The drafting is unclear but the obligation seems to be to put procedures in place to try to achieve the 40% objective, rather than imposing an obligation to actually get to 40%.

Summary

  • The draft Directive sets a 40% "minimum objective" for the proportion of female non-executive directors (ie 40% of the non-executives, not 40% of the whole board).
  • It applies to companies incorporated in the EU and listed on any EU regulated market, but not to unlisted EU companies or to listed EU SMEs ie only EU listed companies with more than 250 employees and an annual worldwide turnover of more than €50m will be in scope.
  • The draft also requires companies to set themselves targets for board executive representation but without setting a minimum objective.
  • The proposed Directive is drafted to address any gender imbalance and refers to the "under-represented sex".  With women currently holding only some 13.5% of seats on the boards of EU listed companies, the focus is therefore on improving female board representation by 2020.

Implementing measures

Under the draft Directive, Member States would be required to implement measures:

  • where "members of the under-represented sex" hold less than 40% of the non-executive director positions on the board, to ensure appointments to the boards of EU listed companies are made on the basis of a "comparative analysis" of the qualifications of each candidate.  The company must apply "pre-established, clear, neutrally formulated and unambiguous criteria"  to meet the minimum 40% objective by 1 January 2020 at the latest (or 1 January 2018 in the case of listed public undertakings in which public authorities have a dominant influence). 
  • to ensure that positive action is taken to achieve the minimum objective: that is where candidates are equally qualified in terms of suitability, competence and professional performance, priority will be given to the under-represented sex, unless an objective assessment of all the criteria specific to the individual candidates tilts the balance the other way. 
  • to require listed companies to adopt individual commitments in relation to executive gender representation on boards and to report publicly on an annual basis about their board gender representation and on the measures taken in the light of the 40% objective and their commitment in relation to executive gender representation.
  • Where listed companies do not meet the 40% NED objective, or where they do not meet their own individual commitment in relation to executive gender representation, to require them to include reasons for this in their report on board gender representation and to set out measures they intend to adopt to address this.

Exemptions

Member States may exempt listed companies from the 40% NED objective if:

  • women make up less than 10% of the workforce of the company; or
  • a third of all directors on the company's board are women, regardless of whether they are executive or non-executive directors.

Where Member States have already adopted alternative measures to address board gender diversity, they are permitted to rely on those measures instead of adopting new provisions to implement the draft Directive, provided that these measures enable women to hold at least 40% of NED positions in listed companies by 1 January 2020 at the latest (or 1 January 2018 in the case of listed public undertakings with dominant public authority influence). It is not clear what measures the Commission would view as satisfying this requirement.

Sanctions for non compliance

The draft Directive requires Member States to:

  • lay down rules on sanctions to be applied in the event of breach of the national implementing measures; and
  • take all necessary steps to ensure that these sanctions are applied.

Member States are free to adopt whatever sanctions they see fit in this regard but the draft Directive states that they must be "effective, proportionate and dissuasive".  Examples given include fines and annulment of an appointment, or election, of a NED.

The proposal will now be considered by the European Parliament and the European Council. There are a number of areas where the wording in the draft Directive is not clear and it is therefore hoped that these will be addressed whilst it is being debated at EU level. If the Directive is adopted by the EU, it is proposed that Member States would have two years to implement it into national law.

The Commission's press release and the draft Directive are available from the Europa website. The BIS press release is available from the BIS website.