European Union: European Commission Proposal: 40% Women On Supervisory Boards Of Listed Companies

Last Updated: 19 December 2012
Article by Geert Raaijmakers and Petra Zijp

On 14 November 2012 a draft directive was published by the European Commission which aims to improve the gender balance among non-executive directors in large listed companies. In the future a minimum of 40% of non-executive board positions must be held by members of the under-represented sex, which as a rule means women. Underlying the system is the principle of positive action: when candidates are equally qualified, priority has to be given to the candidate of the under-represented sex. The 40% objective must be reached by 1 January 2020; in the case of listed companies which are public undertakings the obligation enters into force two years earlier. Failure to achieve the objective should result in sanctions by the Member States.

Background

Within the European Union the low share of women in board positions has been a point of particular concern for quite some time. Various self-regulatory initiatives have not led to the desired result of equal representation. According to the European Commission, studies have shown that there is a positive relationship between gender diversity at top management level and a more productive and innovative working climate and company results. In addition the European Commission attaches great value to the fact that the same rules apply to all Member States: at this moment there is great diversity at national level between regulations as regards gender balance, which may have a negative impact on listed companies engaged in cross-border activities and may therefore eventually hinder the proper functioning of the internal market. With its proposal the European Commission has heeded repeated calls from the European Parliament.

Scope

  • The proposal only applies to listed companies defined as companies incorporated in a Member State whose securities are admitted to trading on a regulated market in one or more Member States. 
  • The proposal does not apply to small and medium-sized listed companies, i.e. to companies which employ fewer than 250 persons and whose annual turnover does not exceed EUR 50 million or whose annual balance sheet total does not exceed EUR 43 million. According to the explanatory notes these criteria must apply for two successive financial years. In the case of group companies the consolidated balance sheet total applies.

Contents of the proposal

On 1 January 2020 at least 40% of the non-executive board positions with large listed companies must be held by members of the under-represented sex. Currently women are as a rule under-represented on the boards of large listed companies, which means that the proposal will apply to them in particular. Strictly speaking however, the proposal affects both sexes. Listed companies which are public undertakings must have complied with this objective by 1 January 2018.

Non-executive board positions

Remarkably, the quotum concerns non-executive board positions only, i.e. the position of supervisor on a two-tier board or that of a non-executive director on a one-tier board. The reason given for this by the European Commission is that non-executive board members have an essential role in appointing the highest level of management and shaping the company's human resources policy: appointing more women to those positions in the end is believed to have a positive effect on the male-female ratio throughout the company as a whole.

Companies that fail to meet the 40% objective are obliged to make appointments to board positions on the basis of a comparative analysis of the qualifications of each candidate. The selection criteria must be clear and neutrally formulated. When candidates are equally qualified in terms of suitability, competence and professional performance, priority must be given to the candidate of the under-represented sex, 'unless an objective assessment taking account of all criteria specific to the individual candidates tilts the balance in favour of the candidate of the other sex.' This exception has been included to stay in line with European Court of Justice case law. The Court has ruled that there should always be room for exceptions in justified cases to the application of the principle of positive action, in view of the personal situation of each candidate.

Unsuccessful candidates are entitled to request the disclosure of the qualification criteria and the comparative assessment between the candidates. Where there is a presumption that the candidates were equally qualified, it is the duty of the company to demonstrate the correctness of the choice.

Executive board positions

The 40% objective does not apply to executive board positions (management board). Where this category is concerned the proposal includes a self-regulatory system: enterprises should set themselves objectives reflecting their specific circumstances (so-called 'flexi quota').

Reporting obligation

The listed companies must provide an annual report on the male-female ratio in their management boards and supervisory boards, state the reasons for failing to comply with the objectives and specify the measures that will be taken to achieve equal representation among the sexes. These data must be published on the company's website.

Sanctions

Member States are obliged to adopt effective, proportionate and dissuasive sanctions if the quota are not complied with. Examples given by the proposal are the sanction of an administrative fine, nullity or annulment of an appointment by a judicial body.

Member States' discretion to provide otherwise

Member States may decide that companies where members of the under-represented sex make up less than 10% of the workforce are not required to meet the objective. Member States may also decide that there is a balanced representation of women and men, if women hold at least one third of all director positions, irrespective of whether they are executive or non-executive.

The draft directive provides for minimum harmonisation: Member States may introduce or maintain stricter provisions, provided these do not create unjustified discrimination nor hinder the proper functioning of the internal market.

One-Tier Board Act (Wet bestuur en toezicht): 30% objective

The Dutch legislator has on an earlier occasion laid down rules with a view to increasing the share of women in management positions. The objective of the One-Tier Board Act is to come to a balanced composition of management boards and supervisory boards, with at least 30% of the positions being held by women (and at least 30% by men). This objective applies to 'large' BVs and NVs (including unlisted companies).

In order to be qualified as 'large', at least two of the following requirements have to be met:

  • the value of the assets, based on the acquisition price and production cost, is over EUR 17.5 million;
  • the net turnover for the relevant financial year is over EUR 35 million;
  • the average number of employees during the relevant financial year is 250 or more.

The One-Tier Board Act will enter into effect on 1 January 2013.

Comparison draft directive and One-Tier Board Act

Although both the draft directive and the One-Tier Board Act aim to increase the number of women in management positions, there are significant differences between the two regimes. On the one hand the directive has stricter provisions, because it sets a 40% objective, whereas the One-Tier Board Act contains a 30% objective. On the other hand the scope of the directive is a more limited one: it focuses exclusively on large listed companies and, other than the One-Tier Board Act, does not provide for quota with regard to the management board (executive board positions).

A major difference between the two is the fact that the directive is binding and requires the Member States to impose sanctions in case of non-compliance. The gender balance rule of the One-Tier Board Act contains targets only, and does not provide for sanctions in case of failure to achieve the objective. 

Since the negotiations about the draft directive are yet to start, meaning that the text may yet be amended, it is difficult to indicate at this moment if and to what extent the Dutch gender balance regime will have to be amended.

Practical consequences

The draft directive provides women with more specific remedies to challenge appointments in which preference is given to a man. It is clear that companies are under increasing pressure to work towards gender balance within their boards. Large listed companies would do well to scrutinize their appointment procedures in order to determine whether these do in fact satisfy the requirements. 

The draft directive forms part of a broader development in which greater attention is paid to diversity within the boards of companies. This development concerns more than just gender diversity: for good governance purposes there is a growing call for boards made up of people of diverse professional backgrounds, ages and cultural origins, the idea being that a varied board will look at matters from various angles, causing the decision-making process to be improved and one-sided group think to be avoided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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