EU breaks deadlock to improve representation of women on boards

Out-Law News | 05 Jul 2022 | 5:56 pm | 3 min. read

The EU has reached provisional agreement on legislation which would increase the presence of women on corporate boards, mandating that at least 40% of non-executive director posts or 33% of all director posts should be held by women.

The agreement comes 10 years after the proposal was first made by the European Commission. The legislation was blocked by the European Council, but EU employment and social affairs ministers agreed on a position in March, opening the way for the necessary agreement between the council and European Parliament.

According to the provisional agreement (41 page / 435KB PDF), merit would remain the key criterion in selection for board positions. However, in cases where candidates are equally qualified, priority would have to go to the candidate of the gender which is under-represented.

Listed companies with more than 250 employees would have to comply with the legislation, and would need to provide information to their regulators once a year about gender representation on their boards and how they will meet the targets if they have failed to do so. This information would also have to be published on company websites.

Companies would have to comply with this target by 30 June 2026.

Beatriz Moriones

Associate, Pinsent Masons

Perhaps the enactment of this EU directive will provide the long-needed drive to put forward penalties once the soft approach and social awareness have made an impression on the public opinion

EU member states would be able to set their own penalties for non-compliance, but these are likely to include fines and the annulment of board member selection.

Several EU member states already have legislation designed to achieve equality on boards, and those which have implemented ‘equally effective measures’ will be exempt from the new regulations.

Employment law expert Sarah Klachin of Pinsent Masons said Germany had introduced the First Leadership Positions Act in 2015 setting a fixed quota for representation on large companies’ supervisory boards, but without requiring a quota for the management boards.

“Evaluation of the First Leadership Positions Act in the last years showed that the proportion of women on the management board has developed less positively than on the supervisory board and that women are still underrepresented on the management board in Germany. In addition, almost 70% of all companies falling within the scope of the flexible quota have chosen a target of ‘zero’,” Klachin said.

Klachin said Germany’s Second Leadership Positions Act, which came into force in August 2021, set more rigid requirements on companies including requirements for more women to be appointed to management boards, and the need to justify setting a ‘zero’ target for appointing women to leadership positions.

Pinsent Masons employment law expert Beatriz Moriones said Spain also had similar measures to the EU proposals, with legislation in place since 2007 requiring a 40% quota of women at board level.

However, Moriones said reforms to the legislation in 2019 lowering the scope to companies with more than 50 employees – from those with more than 250 staff – had not been fully implemented, and there were currently no sanctions for non-compliance.

“Perhaps the enactment of this EU directive will provide the long-needed drive to put forward penalties once the soft approach and social awareness have made an impression on the public opinion,” Moriones said.

Jason McMenamin of Pinsent Masons said the directive would make Irish businesses prioritise gender balance at board level, although many were already making progress in this regard.

McMenamin said the recent introduction of gender pay gap reporting in Ireland could also prompt cultural change in gender representation.

“It is hoped that this should encourage Irish businesses to look beneath their gender pay gap figures, to establish the root cause or causes for any pay disparity between men and women and bring about a cultural change where needed,” McMenamin said.

The Netherlands introduced a quota system for listed companies whose supervisory board does not consist of at least one-third men and one-third women in January 2022. The system prohibits the appointment of supervisory board members whose appointment would not make the ratio more balanced, with certain limited exceptions. If the listed company has a one-tier board the quota system applies to the non-executive directors.

Donaldson Susannah

Susannah Donaldson

Legal Director

Diversity and inclusion as part of wider environmental, social and governance strategies is increasingly gaining attention from regulators and investors

Large public and private limited companies are required to set goals to make their board, supervisory board and management more gender balanced. Companies must also report on their progress against these goals.

Large listed companies must also report on their diversity policy in their management report.

Pinsent Masons employment expert Stephanie Dekker said the Dutch government was likely to take advantage of the suspension clause offered by the draft Women on Boards Directive. With reference to the Female Board Index 2021 which showed that the percentage of women on supervisory boards of listed companies in the Netherlands was 33%, the Dutch government indicated that the Netherlands at least currently meets the exception condition.

“It is therefore uncertain whether the Directive will have an impact on Dutch legislation,” Dekker said.

Susannah Donaldson of Pinsent Masons said the UK was unlikely to legislate for similar targets to the EU.

“However, diversity and inclusion as part of wider environmental, social and governance strategies is increasingly gaining attention from regulators and investors,” Donaldson said.  

Donaldson pointed to the new requirement from the UK’s Financial Conduct Authority for listed companies to set out in their annual reports whether they have met board diversity targets as an example of regulatory pressure within the UK in this area.

“Although there is no legislation proposed, UK companies are under greater pressure to transform diversity and inclusion targets into results,” Donaldson said.