The European Commission published a draft directive on 14 November 2012, which aims to improve female representation on corporate boards. The draft directive sets out a “minimum objective” for the under-represented sex (ie: women) to make up at least 40% of the non-executive director positions on a corporate board. Companies must also publish targets for female representation among executive directors but there is no obligation to set a minimum objective.

Which companies are in scope?

EU incorporated listed companies with more than 250 employees and annual worldwide turnover of more than €50 million are in scope. The proposal is expected to apply to around 5,000 listed companies in the EU.

Is it a quota or just a target?

It seems that the obligation on member states is to put measures in place to ensure the relevant companies achieve the 40% objective. Appointments must be made on “pre-established, clear, neutrally formulated and unambiguous criteria” to meet the 40% objective. Companies may take positive action to achieve the minimum objective.

If 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 relevant criteria tilts the balance towards the other candidate.

Are there 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, but member states are free to adopt whatever sanctions they see fit.

In some countries, companies won’t face automatic sanctions or fines for failing to meet the 40% objective, but if there are insufficient sanctions for non-compliance, there may be a challenge at EU level that the member state failed to implement the directive properly.

What else is required?

Listed companies are also required to report annually on:

  • their board gender representation
  • the measures taken in light of the 40% objective and
  • their commitment in relation to executive director gender representation.

The government is currently consulting on new narrative reporting regulations which will introduce a requirement for quoted companies in the UK to report on the number of male and female directors, managers and employees. The draft regulations are scheduled to come into force on 1 October 2013 and to have effect in relation to financial years ending on or after that date.

What’s the time-frame?

Companies must aim to meet the minimum 40% objective by 1 January 2020 at the latest. But listed public undertakings have an earlier deadline of 1 January 2018.

Any exceptions?

Listed companies with less than 10% female workforce or where a third of all directors on the board are women (regardless of whether they are executive or non-executive) are exempt from the requirement for 40% female non-executive directors.

What’s next?

If accepted by the commission, the proposal would need the backing of a simple majority of the EU’s 27 member states and then be put to the European Parliament for any amendments before it becomes law.

Existing legislation in EU countries

Some EU countries already have mandatory legislative quotas for female representation on board level; Norway, Spain and Finland have had quotas in place for some time. Last year, France, the Netherlands, Italy and Belgium enacted legislation aimed at improving the gender balance on company boards with varying sanctions for non-compliance. Other countries have embraced voluntary initiatives, such as corporate governance codes, training, networking and mentoring programmes to achieve change without legislation. But currently female representation on EU listed corporate boards is only 13.7%.

How should the UK move forward?

Much progress has been made in the UK to address the gender imbalance on corporate boards through business-led voluntary initiatives following the Davies women in boards report.

Many British businesses and women themselves opposed the imposition of quotas; these can undermine the merit-based appointment process and the effectiveness of the women appointed.

The UK government will need to think about what measures will be required to implement the directive, once the draft is finalised. Women currently only hold some 21.5% of FTSE 100 non-executive directorships so it will be a challenge for many companies to achieve 40% by 2020. Specific legislation may be required to accelerate progress A re-drafting of the current positive action provision in the Equality Act 2010 may be necessary as the current provision is quite limited in scope.

The key to success will be to tackle poor female retention rates within an organisation to ensure that women can be retained in the workplace at a level commensurate with their skills and experience. It is hoped that the new parental and flexible leave measures announced by the government this week will provide parents with more flexibility.

Written by Jemima Coleman, professional support lawyer in the employment team at Herbert Smith Freehills LLP

Jemima Coleman is a professional support lawyer in the employment team at Herbert Smith Freehills LLP and chaired the Employment Lawyers Association (ELA) working party responding to consultation on gender diversity on corporate boards. Jemima has a particular interest in legal developments in relation to directors’ pay and gender diversity at board level. She has published chapters in ICSA Directors Handbook and City and Financial Practitioners’ Guide on Directors Duties and Responsibilities.

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