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European Directive on gender balance for non-executive directors moves a step closer

03 February 2014

Background

In 2012, the European Commission announced its intention to introduce legislation aimed at reaching a 40% objective of women in non-executive board-member positions in publicly listed companies in Europe.

The proposed directive will require public listed companies to meet a target of a 40% presence of women among non-executive directors (NEDs) on their boards by 2020. Small and medium enterprises (companies with less than 250 employees and an annual worldwide turnover not exceeding €50 million) and non-listed companies are not within the scope.

Key features of proposed legislation

  • Companies with less than 40% of female NEDs on their board will be required to make appointments to vacant 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 should then be given to female applicants;
  • The proposal also includes, as a complementary measure, a "flexi quota" which is an obligation for listed companies to set themselves individual, self-regulatory targets regarding the representation of both sexes among executive directors to be met by 1 January 2020 (or 1 January 2018 in case of public undertakings). Companies will have to report annually on the progress made;
  • Qualification and merit will remain the key criteria for a job on the board. The proposed directive establishes a minimum harmonisation of corporate governance requirements, as appointment decisions will have to be based on objective qualifications criteria. Inbuilt safeguards will make sure that there is no unconditional, automatic promotion of the under-represented sex;
  • In line with the CJEU’s case law on positive action, preference shall be given to the equally qualified under-represented sex, unless an objective assessment taking into account all criteria specific to the individual candidates tilts the balance in favour of the candidate of the other sex;
  • Member States with an existing system in place may retain that system provided it is equally efficient as the proposed system in attaining the objective. Member States remain free to introduce measures that go beyond the proposed system; and
  • Member States will be required to set appropriate and dissuasive sanctions for companies in breach of the proposed directive.

The proposed directive is a temporary measure which will be reviewed regularly by the European Commission and which will expire on 31 December 2028.

Next steps

The Commission's proposal will now pass to the Council of the European Union (representing Member States' national governments) for consideration under the normal legislative procedure.

There appears to be some general improvement in gender balance on EU boards, with the most recent figures confirming that the share of women on boards across the EU has been on the rise for the past three years and has now reached 16.6%, up from 15.8% in October 2012.