Nº162
NOVEMBER 11
2023
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ELEANORE HICKMAN
EU WOMEN ON BOARDS DIRECTIVE: WRONG TOOL, WRONG PROBLEM?
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EU LAW LIVE 2023 © ALL RIGHTS RESERVED · ISSN: 2695-9593
Nº162 · NOVEMBER 11, 2023
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EU Women on Boards Directive: Wrong tool, wrong problem? Eleanore Hickman*
Late last year the EU Women on Boards Directive (the ‘Directive’) was dusted off a er over 10 years of delay, and nally brought into effect. e Directive requires Member States to impose a 40% quota for the underrepresented gender amongst the nonexecutive directors of listed companies. In this Long-Read, longstanding questions as to whether a quota is the right course of action are considered in the light of the new Directive and in the context of boardroom diversity across the EU. Accepting that action to address the diversity of corporate boards is still necessary, this Long-Read also considers the Directive’s potential effectiveness.
What does the Directive require from companies? e Directive’s purpose is to diversify corporate boardrooms in Europe in order to ‘boost economic growth, encourage labour market mobility, strengthen the competitiveness of listed companies and achieve gender equality on the labour market’. (1) It requires EU Member States to put in place a 40% quota for the underrepresented gender on non-executive boards in listed companies, or 33% across the whole board (thereby including the executive). (2) is quota should remain in place until the Directive expires automatically at the end of 2038, whether or not it has achieved its objective. (3)
e Directive’s purpose is to diversify corporate boardrooms in Europe in order to ‘boost economic growth, encourage labour market mobility, strengthen the competitiveness of listed companies and achieve gender equality on the labour market’
* Lecturer in Corporate Law and Governance, University of Bristol. is Long-Read draws on a previous article: Eleanore Hickman, ‘ e EU Directive on Women on Boards’ (2023) European Company Law. 1. Directive (EU) 2022/2381 of the European Parliament and of the Council of 23 November 2022 on improving the gender balance among directors of listed companies and related measures (Text with EEA relevance) 2022 recital 25. 2. Directive (EU 2022/2381) Article5 (1)(a). 3. Directive (EU 2022/2381) Article 14.
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Indirectly, the Directive places a number of requirements on companies. Procedurally, companies will need to report to the relevant competent authority in their own Member State, in order to state the details of their quota compliance. (4) e target date for companies to reach the 40% quota is 26 June 2026. Companies that have not met the quota requirements are required to provide reasons, together with ‘a comprehensive description’ of what measures they have implemented or plan to implement in order to address this. (5) Such companies must also address their appointment processes by ensuring they apply ‘clear, neutrally formulated and unambiguous criteria’ established in advance of the selection phase. (6) ere are no EU penalties imposed for failing to meet the quota. However, failure to ful l the procedural requirements that kick in as a consequence of not meeting the quota, should result in an ‘effective, proportionate and dissuasive’ penalty, which can include nes or even the annulment of a board appointment. (7) ere are similarities between the ‘comply or explain’ mechanisms used in various so laws (including the UK Corporate Governance Code 2018), and the Directive’s implementation method which might similarly be described as ‘achieve or explain’. e comply or explain regulatory mechanism is appreciated because of its exibility. e explanatory element to the Directive is similar in that it considerably so ens the application of the mandatory rule to the point it can hardly be considered mandatory. e value judgement needed to decide whether explanations for failure to comply are adequate in each case are considerable and unclear.
Failure to ful l the procedural requirements that kick in as a consequence of not meeting the quota, should result in an ‘effective, proportionate and dissuasive’ penalty, which can include nes or even the annulment of a board appointment
4. Directive (EU 2022/2381) Article 7(1). 5. Directive (EU 2022/2381) Article 7(2). 6. Directive (EU 2022/2381) Article 6(1). 7. Directive (EU 2022/2381) Recital 48.
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Perhaps the least practically effective requirement of the Directive, is the obligation to give priority to the underrepresented gender in board candidates of equal merit
Realistically, candidates for corporate board positions are highly unlikely to make an overt challenge to a listed company’s decision to appoint another candidate
Perhaps the least practically effective requirement of the Directive, is the obligation to give priority to the underrepresented gender in board candidates of equal merit. (8) It is unlikely to be impactful because candidates for roles on the boards of listed companies will not have the same ‘suitability, competence and professional performance’. (9) Even in the improbable scenario that the candidates have the same length and seniority of experience at the same type and prominence of companies, even if they score precisely the same in terms of competence metrics, tness and propriety and neither have any con icts of interest, there will always be something upon which they can be differentiated that goes beyond gender. If an appointment commi ee has a preferred candidate, it will always be possible for them to point to factors in a candidates background to justify their decision. To mitigate against the possibility that companies will ultimately appoint the candidate they prefer, regardless of merit, the Directive makes it possible for unsuccessful candidates to challenge the appointment decision. In that case the company would need to show that the successful candidate was equally quali ed (if of the underrepresented gender) or be er qualied. (10) is obligation con icts with the con dential nature of board appointment processes. Realistically, candidates for corporate board positions are highly unlikely to make an overt challenge to a listed company’s decision to appoint another candidate. e evidentiary requirements are exceptionally high, given the candidate would need to establish they are more meritorious than their competitor. Adding weight to this difficulty would be the risk of negative publicity within a candidates’ industry regarding their position, making a ainment of future jobs much harder.
8. Directive (EU 2022/2381) Article 6(2). 9. Directive (EU 2022/2381) Article 6(2). 10. Directive (EU 2022/2381) Article 6(3).
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What does the Directive require from Member States? It is for Member States to impose ‘effective, proportionate and dissuasive’ penalties on companies who fail to comply with the quota provisions of the Directive. (11) What the penalties are is for Member States to decide. From the experience of jurisdictions where there are already quotas in place it is clear there is much that can be varied in this regard. In a study examining the 10 European jurisdictions in which there was already a quota, only seven of them provide any method of enforcement. (12) ese jurisdictions employ a wide variety of methods, from dissolution for non-compliance in Norway, to suspension of the payment of fees for other board members in France. (13) However, whilst the speci cs of enforcement remain a ma er to be decided at a national level, the fact that effective and dissuasive enforcement is mandated sets a base level for Member States to meet, albeit one that is subject to interpretation. Other than imposing and enforcing the quota on companies in their jurisdiction, Member States are required to report to the European Commission by the end of 2025 and at two-year intervals therea er, on the progress of the relevant companies. e report should be comprehensive about what has been done to achieve the gender balance sought by the Directive. (14) e European Commission will review the reports and then make its own report to the European Parliament by the end of 2030 (and every two years therea er). Particular concern will be paid to how ‘efficient and effective’ the Directive is at achieving its objectives. (15) Undoubtedly the Directive bestows additional administrative burden on companies and Member States. e extent of the burden will depend on how seriously the obligations are taken. Jurisdictions who responded favourably to gender balancing regulations in the rst place may prove more diligent than others. However, Member States should be judged on the authenticity of the actions they take as opposed to the statistics of boardroom diversity because each Member State has different cultural and contextual backgrounds. In any event, the wheels of this EU regulatory machinery are likely to be slow, making it a long time before we can ascertain how seriously Member States are taking their obligations and consequently the ultimate impact of the Directive.
Why impose quotas now? Given that six EU countries already have a quota in place and that ten (including all those with quotas) have over 30% women on boards, it may seem as though the Directive is being introduced a er the hard work has been done. France already exceeds the quota requirement with 45% women on boards. (16) France has had a quota since 2011. (17) However, there remains minimal consistency across the EU and most Member States continue to
11. Directive (EU 2022/2381) Article 8 (1). 12. Heike Mensi‐Klarbach and Cathrine Seierstad, ‘Gender Quotas on Corporate Boards: Similarities and Differences in Quota Scenarios’ (2020) 17 European Management Review 615, 619. 13. Mensi‐Klarbach and Seierstad (n 12). 14. Directive (EU 2022/2381) Article 13(1). 15. Ibid Article13(4). 16. European Women on Boards, ‘Gender Balance Quota and Targets in the European Union’ (2022) 3. 17. ‘French Law to Increase Number of Women Directors’ (Eurofound)
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Member States should be judged on the authenticity of the actions they take as opposed to the statistics of boardroom diversity because each Member State has different cultural and contextual backgrounds
suffer from a substantial imbalance in boardroom gender representation. As of 2022, Hungary, Estonia and Cyprus continue to have less than 10% women on listed company boards. More than half of EU countries continue to have less than 30% women on boards. (18) ese are all countries that have no quota or very loose measures for improving boardroom gender balance in place. By contrast, the 6 countries that have imposed their own quota are all in the top eight countries for highest proportion of women on boards in the EU. (19) is data suggests that not only does work still need to be done, but that quotas are the way to do it. I argue that to come to such a conclusion in respect of the Directive, is to overlook the challenges and aws in the Directive. e imposition of a quota in Member States that adopted one voluntarily would be administratively burdensome and unnecessary in at least some cases (some quotas operate be er than others). For the countries that have quotas in place, the sensible option may be to opt out of the application of the Directive altogether. To do this, a Member State must be able to demonstrate that, by December 2022 at least 30% non-executive or 25% of all director roles in listed companies were lled by the underrepresented sex, and there were provisions in the national law to effectively mandate for these levels and the publication of the board representation data. (20) Provided these conditions are met, the procedural requirements relating to director appointment and reporting obligations are also suspended. (21) In effect the more onerous targets of 40% and 33% respectively, will be reduced to 30% and 25%. (22) Germany, who blockaded the passing of the Directive for over a decade, have opted out of the Directives provisions on the basis of the mandatory quota that had recently been imposed. (23) Lowering the quota to 30% and 25% for those countries that are already doing be er than most other member states is tricky to justify. (24) To some it may appear unfair and a widespread view of this nature would be detrimental to the operation of the Directive.
18. European Women on Boards (n 16). 19. Ibid 3. 20. Directive (EU 2022/2381) Article 12(1). 21. Directive (EU 2022/2381) Article 7(4). 22. Directive (EU 2022/2381) Article 12(1). 23. ‘Lisa Paus: “Ein Meilenstein Für Die Gleichstellung in Europa”’ (BMFSFJ, 25 November 2022) 24. European Women on Boards (n 16).
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It is hoped that the Directive will bring about consistency. Prior to its implementation some Member States had quotas, some had so law and some had very li le in place to address boardroom diversity
It is hoped that the Directive will bring about consistency. Prior to its implementation some Member States had quotas, some had so law and some had very li le in place to address boardroom diversity. Within these categories there is even further variation. e Directive provides welcome clarity over which companies are subject to the quota i.e. listed companies. is will simplify ma ers for a number of jurisdictions whose quotas were applicable subject to factors that were much harder to monitor, such as company size and number of employees. (25) On the other hand, it also means that some companies will fall outside of the scope of the quota. Large private companies to whom the directive could usefully apply, will be outside of the Directive’s remit.
Is consistency achievable? Ultimately, it is unrealistic to expect all Member States to achieve the minimum 40% women on boards by the 2026 deadline. ere will be cultural and contextual reasons why some Member States are considerably further away from the quota than others. e imposition of a quota will not resolve this. e rigour with which a Member State adheres to the spirit of the Directive is likely to be weakened where they do not support the idea of a quota and/or quotas are misaligned with institutional context. Research suggests that ‘in unfavourable/neutral institutional contexts, so corporate board quotas do not necessarily result in meeting their goals’. (26)
Part of the challenge when imposing a quota across multiple jurisdictions is the divergence in corporate governance laws, norms and practices. (27) One example of potential divergence in the quota’s impact are jurisdictions where non-executive directors are nominated by the employees. e quota will apply regardless, and it is for Member States to work out how to achieve it within the context of their national regulations. (28) is does not effectively address the contradictions. e interaction with company law in different Member States raises other issues. Birkmose notes that, because the Directive cannot force shareholders (29) to vote on directors in a gender
25. Mensi‐Klarbach and Seierstad (n 12). 26. Directive (EU 2022/2381) 624. 27. See, for example, Klaus Hopt, ‘Comparative Corporate Governance: e State of the Art and International Regulation’ (2011) 59 American Journal of Comparative Law 1. 28. Directive (EU 2022/2381) recital 33. 29. Hanne S Birkmose, ‘Improving the Gender Balance Among Directors of Listed Companies in the EU’ (2023) 20 European Company and Financial Law Review 166.
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balanced way, the impact of the directive relates to the nomination of directors, as opposed to their appointment by shareholders. Again the Directive lacks sufficient clarity on this point. It is partly for these reasons that the European Company Law Experts Group suggest that what the Directive should have done was impose a quota but leave it to each member state to work out how best to achieve it in their own jurisdictions. (30)
Opportunities missed? On top of the challenges in its application, there are at least two respects in which the Directive does not go as far as perhaps it should. Firstly, in relation to the executive directors and secondly in relation to other aspects of diversity. In 2012 the European Women’s Lobby highlighted the dichotomy created by focusing on non-executives in that ‘one half of the boards meet demands for gender balance and the other half run the company’. (31) In many respects this prediction seems to have come to pass. For as long as the full-time managerial board positions remain dominated by white males, many of the hoped-for bene ts to improved decision making and social justice concerns will be super cial. e Directive does very li le to address this other than to reduce the quota to 33% where the proportion of the board under consideration includes the executive directors. (32) e optionality that is introduced by having two possible quotas in place, removes any pressure to address the diversity of the executive. Companies that do focus on the 40% quota for non-executives only must then set quantitative objectives as to how diversity among the executive will be achieved. But there are no speci cs about what this might look like or how it is to be enforced. e combined effect is a weak impetus for change to the diversity of corporate power. A be er approach would have been that now adopted in France, whereby ful lment of the quota must include the executives. (33) is new French quota sets 30% as the goal across executives and non-executives for March 2026 and 40% by March 2029. By explicitly including executives, in a way which cannot be opted out from, the importance of gender diversity in positions of power is strongly reinforced.
ere are at least two respects in which the Directive does not go as far as perhaps it should. Firstly, in relation to the executive directors and secondly in relation to other aspects of diversity
30. European Company Law Experts Group, ‘Gender Balance Broom Wagon – e Resurrection of the Commission Proposal on Improving the Gender Balance among Board Members | ECGI. 31. European Womens Lobby, ‘Women on Boards in Europe from a Snail’s Pace to a Giant Leap?’ (2012) 16. 32. Directive (EU 2022/2381) Article 5 (2). 33. ‘LOI N° 2021-1774 Du 24 Décembre 2021 Visant à Accélérer l’égalité Économique et Professionnelle (1) - Légifrance’ Article 14.
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From a broader diversity perspective, it is perhaps surprising that, at a time when discussions on diversity are broader and more inclusive than ever before, the Directive continues to focus solely on gender. Admi edly, to impose a quota that focuses on more than gender is difficult to construct effectively, especially if you also want to incorporate the executives. It raises some exceptionally hard questions such as; what is the appropriate level of detail in respect of which protected characteristics bene t from a quota? Quotas could end up doing considerably more harm than good by virtue of what is le out. Unless quotas can accommodate broader understandings of diversity then I suggest we should not have them at all. ere are other alternatives. In the UK, the corporate governance code expects diversity of ‘gender, social and ethnic background, cognitive skills and personal strengths to be promotes’. (34) is approach has its own aws but at least moves towards a more current understanding of what diversity means. Gatekeepers to the stock exchange can also play a role, as Nasdaq do. For entry into the New York Stock Exchange, companies with boards of more than ve members must have at least one female director and one director who is an underrepresented minority or LGBTQ+, or explain why they do not. is method has led to a 1556% increase in companies in Nasdaq that have an LGBQ+ policy. (35) How that translates to board members is another question.
Conclusion Quotas have become commonplace in the EU, and the Directive seeks to make them more so, with the admirable aim of achieving consistently high levels of board gender diversity across the EU. But the debate has moved on and our sights should be set higher, both in terms of the inclusion of executives and the meaning of diversity. In this way the Directive focuses on the wrong problem. Unfortunately, even with the sights set largely on gender in the nonexecutives, the rigidity with which the Directive applies to countries that have much further to come in relation to diversity, and its interaction with national laws and norms, places the Directives potential effectiveness in doubt. Ultimately, the quota is probably the wrong tool in this context.
34. UK Corporate Governance Code, Principle J. 35. OutLeadership, ‘LGBTQ+ Board Diversity: Progress and Possibilities’ (2023).
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Quotas could end up doing considerably more harm than good by virtue of what is le out. Unless quotas can accommodate broader understandings of diversity then I suggest we should not have them at all
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