Gender Diversity on Boards

by Michelle McLoughlin and  Liam Murphy, Knowledge Lawyers at A&L Goodbody LLP.

The European Commission recently welcomed the political agreement reached between the European Parliament and Council on a proposed directive aimed at improving the gender balance among directors of publicly listed companies (the Directive). This political agreement has been more than ten years in the making.

The Directive will seek gender balance in corporate boards of publicly listed companies across the EU by setting a quantitative target for the proportion of members of the under-represented gender on the boards of listed companies (excluding micro, small or medium-sized enterprises (SMEs)). The requirements of the Directive are discussed in more detail below.

Background

The Directive was initially proposed by the Commission in 2012 as a means of “improving the gender balance among non-executive directors of companies listed on stock exchanges”. At the time of its proposal, the Commission stated that “Company boards in the EU are characterised by persistent gender imbalances … Compared to other areas of society, especially to the public sector, the under-representation of women on the boards of publicly listed companies is particularly significant”. We previously noted the significance of the proposed measures when they were initially approved by the European Parliament in November 2013.

Despite broad consensus across the EU in favour of taking measures to improve the gender balance on company boards, not all Member States supported EU-wide legislation and some Member States considered that binding measures at the EU level were not the best way to pursue the objective. The national parliaments of Denmark, the Netherlands, Poland, Sweden and the United Kingdom among others submitted reasoned opinions within eight weeks from the submission of the Commission’s proposal, alleging that it did not comply with the principle of subsidiarity.

The European Parliament continued to push for the adoption of the Directive, seeing its adoption as “an important first step towards equal representation in the public and private sectors” noting that “progress has been most tangible in Member States in which binding legislation on quotas for boards has been adopted.” President of the Commission Ursula von der Leyen, added 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.”

As noted by the European Parliament, in 2022 only 30.6% of board members in the EU’s largest publicly listed companies are women with significant differences across member states from 8.5% in Cyprus to 45.3% in France. In Ireland, representation of women on the boards of the ISEQ-20 has reportedly reached 30%, so while the position here is relatively advanced, further gender parity can still be achieved.

The Directive is in line with recent Irish legislation focused on ensuring gender parity in the workplace such as the Gender Pay Gap Information Act 2021 on which we have extensive resources.

Directive requirements

The Directive will require listed companies to ensure that each gender represents at least 40% of non-executive directors or 33% among all directors by 30 June 2026. Listed companies will be required to provide information to their competent authorities once a year about the gender representation on their boards 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.

Listed companies that do not already comply with these requirements will be required to apply transparent and gender neutral criteria in the appointment of directors, and where candidates are equally qualified, prioritise the under-represented gender.

The Directive will require Member States to establish penalties for listed companies that fail to comply with these selection and reporting obligations that are “effective, proportionate and dissuasive”, which “could include fines and nullity or annulment of the contested director’s appointment”. Member States will also be required to publish identifying information on listed companies which are reaching targets in an effort to encourage non-compliant companies to accelerate compliance, in a reverse ‘name and shame’.

The Directive will allow Member States that have adopted equally effective measures to suspend procedural requirements contained in the Directive. Listed companies that are SMEs are excluded from the scope of the Directive. Whether not in scope companies should be included in the scope of the Directive will be assessed at a later stage, following the Directive’s entry into force.

The Directive’s objectives remain in force only until sustainable progress in gender composition of boards has been achieved and the Directive includes a ‘sunset clause’ to that effect.

Next steps

The agreement reached by the European Parliament and the Council is now subject to formal approval. Once published in the Official Journal, the Directive will enter into force 20 days from the publication date. Member States will then need to transpose new elements of the Directive into national law within two years of that date.