Gender balance on boards – signposting a sea change

This article provides an overview of the requirements of the Gender Balance on Boards Directive and its history as it made its slow way through the European legislative process. It also considers the matter of quotas more generally and provides some insight into the state of play in Ireland on the question of gender equality at board and senior executive level. 

The publication of Directive (EU) 2022/2381 known as the Gender Balance on Boards Directive' (the Directive) in December 2022 is a welcome development in the context of gender diversity. The Directive requires EU listed companies to ensure that at a minimum either 40% of all non-executive director positions or 33% of all director positions are held by the "underrepresented sex" (to use the EU's term) by 30 June 2026, with "effective, proportionate and dissuasive" penalties for non-compliant companies.

It is understood that in practically all instances the underrepresented sex will be women. Where companies are not subject to the second limb requirement, Member States are required to ensure that they set objectives to improve the gender balance among executive directors. The Directive contains a 'sunset clause' provision for an expiration date (currently 31 December 2038) in the expectation that by that date it will no longer be required as companies outperform the quota targets. It is also anticipated that non-listed companies will likely be brought into its requirements, whether voluntarily or on a mandatory basis. See Figure 1 for how information in respect of a company's performance against these targets is disclosed.

Figure 1

EU listed companies (which are not SMEs) will be required to provide information to their competent authorities annually about the gender representation on their boards against the relevant target(s) including, where these objectives have not been met, how they plan to attain them. This information is required to be easily accessible on relevant company websites.

The EU's legislative process reflects the prevailing political winds and the Directive's passage through the legislative process is an illustration of how it can be difficult to reach consensus on initiatives that require the input of 27 constituent voices. The Directive was initially proposed by the Commission as long ago as 2012 in recognition of the fact that "Company boards in the EU are characterized by persistent gender imbalances" and that "compared to other areas of society … the under-representation of women on the boards of publicly listed companies is particularly significant."

Not all Member States supported EU-wide legislation to achieve the Directive's goals. It was reported that the national parliaments of Denmark, the Netherlands, Poland, Sweden and the United Kingdom among others submitted opinions objecting to the Commission’s proposal, on grounds for example that it did not comply with the principle of subsidiarity. For ten years it was impossible to achieve a favourable qualified majority to allow the proposal to progress.

However, the European Parliament continued to push for the adoption of the Directive, seeing it as "an important first step towards equal representation ", and with its inclusion as a central priority of the 2020-2025 gender equality strategy, political agreement on the Directive was finally reached in June 2022. In the meantime, outside of the EU advances were being made in certain jurisdictions a key example being Norway with its 2004 introduction of a 40% quota for women on boards of listed companies.

Perhaps part of the politician's battles is a persisting widely-held suspicion against quotas, seemingly based  on notions that they are inherently unfair, that they result in the promotion of candidates who would not be selected purely on merit, in so-called 'positive discrimination'. Those arguments fail to consider the impact of bias (unconscious or otherwise) which operates as a self-selecting and unwritten quota in and of itself. The Directive takes pains to clarify what is expected of the affected EU listed entities in selecting candidates to achieve the Directive's objectives (See Figure 2). Levelling a broad accusation of this kind against quotas also fails to take into consideration the fact that, measurably, targets drive results.

Progress in achieving board gender equality has been faster and deeper in countries that have adopted targets including non-EU Member State nations like the UK (which has recently codified FCA diversity and inclusion rules for listed companies) and Norway (mentioned above and which has recently proposed expanding the ambit of its rules from listed companies to large private company boards as well). In any case, the Directive's proposals do much to address any perceived unfairness or disregard for competence (See Figure 2).

Figure 2

Listed companies that do not already comply with these requirements will be required to apply clear, neutrally formulated and unambiguous criteria in their selection processes, and only where candidates are equally qualified in terms of suitability, competence and professional performance, prioritise the under-represented gender.

This is subject to a company's ability, in exceptional cases, to give priority to reasons of greater legal weight (such as the pursuit of other diversity policies invoked within the context of an objective assessment to prioritise a candidate of the other gender.

Perhaps President of the Commission Ursula von der Leyen, said it best in her 2022 speech to the European Women on Boards' Gender Diversity Award: that the adoption of quotas is necessary because "the glass ceiling remains firm[ly] in place at the top of European companies. If we look beyond boards, at the top leadership positions, just seven percent of the largest European companies are led by a woman. Boards are one thing; it is the knock-on effect that matters. As more diverse boards hire more diverse CEOs those, in turn, hire more diverse managers." Introducing quotas can be the seed that plants broader change.

Our ability to ensure compliance with quotas requires an understanding of the landscape, and that in turn requires us to be able to source and monitor information around this topic. The Directive requires an annual statement from relevant companies in an accessible form which will corroborate the work of organisations like the FTSE Women Leaders initiative in the UK, and Balance for Better Business in Ireland, organisations which have long provided useful datapoints for our understanding of the current state of play when it comes to gender balance among senior staff at listed companies.

This work is bolstered by recent legislative initiatives at the Member State level like Ireland's Gender Pay Gap Information Act 2021 which already requires larger employers in the State to publicly provide information on their 'gender pay gaps' at a snapshot date. There has been a significant volume of comment on the data this legislation has made available to stakeholders.

To add colour to the above assertion, let's consider information released on 7 March 2023 by Better Balance for Business. This notes that the percentage of women on directors' boards in the largest Irish listed companies (ISEQ20) currently stands at 35%. Other listed companies have 23% of board seats filled by women. While this is an encouraging trend compared to earlier data, it falls short of targets set by the Directive. Further, women continue to be underrepresented at senior leadership level and key board seats (there is no female chair in the ISEQ20 according to that data). We must remember also that the targets set by the Directive themselves fall short of actual representation of our society given that data for Ireland at the end of 2021 reveals a population where women make up slightly more than the majority of adults. So, while much has been done there is much more still to do.

As a final thought, we note that Ireland saw the introduction of a Private Members' Bill (PMB) by Fine Gael TD Emer Higgins, moved for second debate in the Dáil on 7 July 2022, which covers much of the same ground as the Directive. While it is not anticipated that the PMB will progress further, not least due to the overlap with the provisions of the Directive, debates that were had around the provision could reasonably be expected to inform the debate of the transposition of the Directive into Irish law and suggest the rigour with which its objectives to ensure diversity will be pursued. As Minister for Children, Equality, Disability, Integration and Youth of Ireland, Roderick O'Gorman, commented at the PMB's second reading, diversity will ultimately result in "…better balance in economic decision-making" noting that the "…[D]irective plays an important role in achieving this objective."

This must surely be right. If we as a society are affected by the decisions made by small groups of people (the executive committees of systemically important companies like banks for example) it behoves us to ensure that those small groups are as representative as possible of the society we live in. This is in the hope that this representation will ensure that our voices carry into rooms of this kind, and that our interests are given legitimate consideration when critical decisions are made. In order to ensure we see this sea change we require the path to be signposted. 

It is therefore imperative that we ensure that the gender balance in those rooms better reflects our society. This is to say nothing for now of other underrepresented minorities, which we are beginning to see become an increasing part of the conversation, for example the FCA's requirements for premium listed companies. We therefore welcome the direction this legislative travel and see it as an important corollary of stakeholders' commitment to and focus on ESG matters.

For more information in relation to this topic, please contact Liam Murphy, Knowledge Lawyer, Sheena Doggett, Partner or any other member of ALG’s Corporate and M&A team.

Date published: 30 March 2023