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Freshfields Risk & Compliance

| 4 minutes read

Gender equality in corporate boards – towards an EU Directive

Earlier this summer, the European Parliament (‘EP’) and the Council of EU (‘Council’) reached a political agreement on the provisions of a directive that intends to promote gender equality in corporate boards (‘draft Directive’).  It aims to do so by setting quantitative targets for the proportion of members of the under-represented sex on the boards of listed companies.

In this blog post, we will explore the scope of the Directive and what this new proposal means for the companies that fall under its ambit.  But, before, it is worth noting that this is not a new initiative, but rather one that was proposed by the European Commission (‘Commission’) in November 2012 and is now included in the list of unfinished business carried over to the current Commission.

Scope and applicable law

This is a minimum harmonisation Directive which sets objectives for gender representation in the board of listed companies that have their registered offices in a Member State and whose shares are traded in a regulated marked as defined in Directive on markets in financial instruments.  The latter does not state anything around whether the capital market should be one in the European Union or elsewhere.  Hence, the Directive (on corporate board diversity) will most likely apply to any company with a registered office in the EU which operates in any capital market (including those outside EU, as long as they have a subsidiary in a Member State.  Branches should be expected to be out of scope).

As it is the case with this kind of legislation, Member States will have the competence to set out detailed rules, such as with regards to the penalties (which can be fines, nullity or annulment declared by a judicial body).  The applicable law for a listed company subject to this draft Directive will be the law of the Member State where the listed company has its registered office.

The criteria set by the Directive and potential exemptions

Companies in scope will have to take steps to reach by 2026, the minimum target of having 40% of non-executive director positions held by members of the under-represented sex, or 33% if all board members are included.  When a listed company with a dual board is concerned, should the Directive enter into force, the following rules will apply.

  • If the company applies the 40% benchmark, 40% of the NEDs are required to be from the non-represented gender.  The draft Directive defines as NEDs, any members of the supervisory board.  Therefore, the 40% benchmark will apply to this category.
  • If the company applies the 33% benchmark, 33% of all directors are required to be from the non-represented gender.  The draft Directive defines as director any member of a board (administrative, managerial, supervisory), including employee representatives.  Therefore, the 33% benchmark will apply to any director.

However, Member States who already have existing legislation about gender balance in listed companies’ boards, can choose not to apply Directive’s quantitative requirements in the case when a Member State has similar requirements or when listed companies fulfill the conditions below:

  • Member of under-represented sex, hold at least 30% of all director positions or at lest 25% of the total number of all director positions.
  • Members of the under-represented sex hold at least 30% of the non-executive director positions or at least 25% of all director positions in listed companies.

In the case of the companies with co-determination rights, the quantitative requirements apply also to directors elected by employees.  The draft Directive defines as ‘director’ any member of the board, including an employees’ representative.  The draft Directive provides that where the process for the selection of candidates for appointment or election to the director positions is made through the vote of employees, companies should ensure that voters are properly informed regarding the measures provided for in the draft Directive, including penalties for non-compliance by the company.  The draft Directive also provides that a Member State can decide to suspend the application of the aforementioned quantitative objectives and the means to attain them would depend on the legislation of that Member State.

If companies do not comply with the criteria set out in the Directive, the Member States should ask the companies to adjust their director’s selection process to one that takes into account and compares the qualifications of each candidate in a non-discriminatory way (between candidates of the same suitability, competence and professional performance, priority is given to the candidate of the under-represented gender, unless there are greater reasons to choose the candidate of the other gender – i.e. reasons that serve to achieve diversity in another area) throughout all the process, including the drafting of the vacancy notices etc.  Yet, the Member States have the right to exclude the application of this requirement, should one of the conditions above be fulfilled.

Other requirements 

The draft Directive obliges the listed companies to provide information to a considered candidate upon his/her request, on: (i) the qualification criteria upon which the selection was based; (ii) the objective comparative assessment of the candidates under those criteria); (iii) the specific considerations exceptionally tilting the balance in the favour of a candidate of the other gender.

The draft Directive provides for reporting obligations of the listed companies, as well as shifts the burden of proof to the listed companies.  Hence, companies in scope, will have to prove to national courts or to other competent authorities that the balance has been exceptionally tilted for reasons justified according to the draft Directive.

Next steps

Despite being stuck in the legislative process for a decade, it seems that the draft Directive is moving fast in the legislative train, as this is now one of the priorities in the Commission’s EU Gender Equality Strategy 2020-2025.  Last year the EP adopted its position and in March this year the Council did so too. Now, after political agreement has been reached between both institutions, a formal approval by each of them is expected and the draft Directive will be published in the Official Journal of the EU and will take effect 20 days after its publication.  This would mean that Member States will have to transpose it into their national legislations, which can be expected to take two years and after that the companies in scope will have to be compliant.