Gender Balance in Boardrooms
European Council approves new Directive aimed at enhancing Gender Equality
To date, the female gender is critically underrepresented in the corporate sphere, especially in boardrooms and at executive levels. According to data derived from the European Institute for Gender Equality (“EIGE”), 60% of fresh university graduates in the EU are women but they remain underrepresented in economic decision-making fora, especially at the top levels of the workplace hierarchy. Indeed, the EIGE indicates than only 31.5% of board members are women and that this demographic only represents 8% of chairpersons. In an attempt to address this gender imbalance, the European Council has, on 17 October 2022, adopted the final text of the directive on gender balance on corporate boards (the “Directive”).
The Directive is founded on the principles of equality between men and women and on positive action. In seeking to uphold these principles the Directive introduces measures to ensure a more balanced representation of men and women among non-executive directors of listed companies, by setting out measures aimed at accelerating progress towards gender balance while allowing companies sufficient time to make the necessary arrangements.
It is important to note that the Directive only applies to listed companies, defined as “companies incorporated in a Member State whose securities are admitted to trading on a regulated market” and does not apply to small and medium sized enterprises defined as “companies which employ less than 250 persons and have an annual turnover not exceeding €50 million or an annual balance sheet not exceeding €43, or for an SME which is incorporated in a Member State whose currency is not in euro, the equivalent amount in the currency of that Member State”.
The Directive introduces measures on: (i) targets for corporate boards; (ii) objective criteria for selection and appointment of board members; and (iii) reporting and national adjustments.
Targets for Corporate Boards
In terms of the Directive, by 2026 listed companies ought to aim at having members of the underrepresented sex holding at least 40% of non-executive director positions. Member States also have the option to apply the rules set out under the Directive to both executive and non-executive directors. The overall objective is to have 33% of director positions held by members of the underrepresented sex by 2026 across all EU listed companies.
Objective criteria for the selection and appointment of Board Members
In the event that listed entities fail to achieve the targets established pursuant to the Directive, they must amend their selection process for the appointment of board members by adopting fair and transparent selection and appointment procedures. The selection and appointment process must be based on a comparative assessment of the different candidates using clear and neutral criteria in particular qualifications and merit. Significantly, and in terms of the Directive:
- appointment decisions must be based on objective criteria;
- there is no unconditional, automatic promotion of the under-represented sex; and
- preference will be given to equally qualified candidates of the under-represented sex, unless an objective assessment tilts the balance in favour of a candidate of the other sex.
Reporting and National Adjustments
Member States that already have an effective system (or a more effective system) in place to reach the objective of 40% of non-executive directors of the under-represented sex on boards of listed companies by 2026, are allowed to keep that system. Moreover, Member States are also free to introduce steps that go beyond the procedure established in the Directive.
On an annual basis: (i) listed companies must provide data about the gender representation on their boards and the measures they are taking to achieve the aforementioned objectives; and (ii) Member States must publish a list of all companies that have attained the Directive’s objectives.
The EU acknowledges that on a macro level, increasing women’s labour market participation improves economic growth, enhances competitiveness of European countries and addresses demographic challenges. On a micro level and despite some mixed results, empirical evidence exists that women’s representation on Boards increases the corporate performance and reduces instances of lawbreaking.