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July 28, 2014

Gender Equality: European Commission Publishes Directive to Improve Gender Balance of Listed Companies

A proposed directive recently published by the European Commission aims to facilitate improved gender equality in an estimated 5,000 European companies listed on various stock exchanges.  The Commission states that gender-balanced boards have the potential to improve companies’ financial performance. The European Commission recently proposed a directive with the aim of accelerating progress to greater gender equality in corporate boardrooms (Proposed Directive).  The Proposed Directive will attempt to break the so-called glass ceiling preventing women from attaining the top positions in an estimated 5,000 European companies listed on various stock exchanges.

Legislative Background

The Commission’s right to act in issues of gender equality in employment and occupation is derived from Article 157(3) TFEU.  This provision provides the legal basis for any binding measures aimed at ensuring the application of the principle of equal opportunities and equal treatment of men and women in the workplace.

Following the adoption of recommendations on the promotion of positive action for women (84/635/EEC) in 1984, and the balanced participation of women and men in the decision-making process (96/694/EC) in 1996, the Commission identified equality in decision making as one of the priorities of the Women’s Charter (COM(2010)0078) and of its Strategy for Equality Between Women and Men 2010–2015 (COM(2010) 491) in 2010.

In 2011, “Women on the Board Pledge for Europe” was launched.  This called for publicly listed companies to voluntarily commit to increasing the proportion of women in boardrooms to 30 per cent by 2015 and 40 per cent by 2020.  However, little progress was made under this pledge, and by 2012, only 24 companies had signed the pledge.

In addition, the European Parliament called for legislation in its resolutions of 6 July 2011 and 13 March 2012 on equality between women and men in business leadership in the European Union.

In response, the Commission launched a public consultation (IP/12/213) in March 2012 to identify what measures should be taken to address the persistent lack of gender diversity in boardrooms of listed companies in Europe.  The results of this consultation formed the basis of the Proposed Directive.

Rationale of the Proposed Directive

The Commission states that gender-balanced boards have the potential to improve the financial performance of companies.  Recent studies indicate that more women in top jobs can contribute to a more productive and innovative working environment.  The result, according to the Commission, is improved company performance due to a more diverse and collective mind-set incorporating a wider range of perspectives and, therefore, more balanced decisions.

The Commission has stated that men currently constitute 85 per cent of non-executive board-member positions (NEDs) in Europe’s boardrooms.  Despite growing public debate and various initiatives, the number of female NEDs has only grown, on average, 0.6 per cent year on year since 2003.

Past voluntary initiatives to improve gender equality in boardrooms have displayed fragmented approaches and resulted in little progress.  Most progress can be seen in those countries that have introduced legally binding laws for company boards.  France, for example, accounts for more than 40 per cent of the total EU-wide change recorded between October 2010 and January 2012.

Key Elements of the Proposed Directive

In response to Resolutions of the Parliament of 6 July 2011 and 13 March 2012, the Proposed Directive includes the following key elements:

  • The Proposed Directive aims to attain a 40 per cent objective by 2020 of the under-represented gender amongst NEDs of publicly listed companies.
  • The 40 per cent objective will be considered satisfied where the under-represented gender accounts for one-third of all board positions (whether executive or non-executive).
  • Member States are permitted to maintain current systems provided they are equally efficient as the proposed system in attaining the 40 per cent objective by 2020.  Member States remain free to introduce measures that go beyond the proposed system.
  • Companies with less than 40 per cent of the under-represented gender amongst NEDs will be required to make appointments to those positions on the basis of a comparative analysis of the qualifications of each candidate, by applying clear, gender-neutral and unambiguous criteria.  Given equal qualification, priority shall be given to the under-represented gender unless an objective assessment favours the candidate of the other gender.
  • Safeguards should ensure that there is no unconditional, automatic promotion of the under-represented gender.
  • The 40 per cent objective will not apply to executive directorship positions, in order to avoid interfering with the freedom to conduct a business and with property rights—both fundamental rights guaranteed by the Charter of Fundamental Rights of the European Union.
  • The Proposed Directive aims to attain by 2020 self-imposed targets regarding gender representation amongst executive directors.  Companies will be obliged to make annual progress reports.
  • Member States will be required to lay down appropriate and dissuasive sanctions for non-compliance with national provisions adopted following the Proposed Directive.
  • Small and medium-sized enterprises (companies with fewer than 250 employees and an annual worldwide turnover not exceeding EUR 50 million), non-listed companies and listed companies in which less than 10 per cent of the work force comprises the under-represented gender will not be required to comply with the proposed regulations.

Next Steps

The Commission’s proposal will be submitted to the Parliament and Council of the European Union for consideration under the normal legislative procedure (also known as “co-decision procedure” between the two institutions which decide on an equal footing, with the Council voting by qualified majority and the European Parliament voting by simple majority).

Please click here for more information on the Proposed Directive.

*Robert Lister, a trainee solicitor at the London office, contributed to this article.

© 2014 McDermott Will & Emery

About the Author

Katie Clark, McDermott WIll Emery Law Firm, Labor employment attorney
Partner

Katie Clark is a partner in the law firm of McDermott Will & Emery UK LLP, based in its London office.  Her practice focuses on contentious and non-contentious employment matters. 

Katie is recognised as a leader in her field in Chambers UK 2011.  She is described as a “recognised force for her advocacy and commercial employment advice”, Chambers UK 2010 and as “very knowledgeable, superbly responsive, and no-nonsense…” Legal 500 UK 2011.

Her clients include global corporations, financial...

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