The EU’s new gender balance directive is designed to force change in the EU’s director cohort by requiring that the ‘under-represented sex’ (which could be male) make up 40% of non-executive directors or 33% of all major company directors.
These quotas will apply for each company – not just a national average – and cover executive and non-executive positions on boards of all listed companies, other than those with less than 250 employees, by 30 June 2026.
‘Plan on achieving the right mix of competences, behavioural traits and backgrounds on boards’
Currently, just 32.2% of directors of all listed companies in the EU are women, according to the European Institute for Gender Equality, ranging from just 7% in Cyprus and 12% in Estonia to Italy at 50% and France 47%. The directive could affect many of the nearly 9,000 listed companies in Europe.
A report from PwC states: ‘This should keep pushing discussions on the right board composition up the agenda of all locally listed entities. There is no better time to plan concretely on achieving the right mix of competences, behavioural traits and backgrounds on boards, also in light of these upcoming requirements.’
Best practice
Hedwige Nuyens, chair of European Women on Boards (EWOB) and managing director of the International Banking Federation tells AB that the directive ‘is a major milestone’. Nuyens co-wrote the foreword to an April 2022 EWOB report arguing that ‘a target of 40% can be considered as best practice’.
On transposition, member states may also extend the quota requirement to cover both executive and non-executive directors, in which case at least 33% of all directors should be composed of the underrepresented sex. The choice between the 40% or 33% quotas lies with each member state and not with the listed companies.
Burden of proof
The directive’s key Article 6 sets out how companies can meet such a quota, requiring ‘clear, neutrally formulated and unambiguous criteria shall be applied in a non-discriminatory manner throughout the entire selection process’.
Companies will only have to pick the underrepresented sex when there are two candidates of equal merit, and then other legal considerations, such as diversity policy, could ‘tilt the balance’. The burden of proof would be on companies to show that they had complied with Article 6 if an unsuccessful candidate complains.
‘If you want to recruit more women you have to change the criteria’
Nuyens says these were ‘important new requirements to make sure board members are recruited with sound and transparent selection processes, and the best candidate is chosen without any gender bias’.
She adds that companies will have to adapt recruitment procedures. ‘If you want to recruit more women you have to change the criteria,’ she says, stressing that a requirement for ‘20 years’ board experience would be difficult’ for many talented women.
EWOB will support implementing the directive, building a ‘talent pool of 1,000 senior women ready and eager to take up board positions in European companies’, says Nuyens, working with major companies and executive search firms ‘to ensure the objectives are met’.
Penalties
Companies that fail to hit the 40% or 33% quota by July 2026 face penalties, which member states will lay down in national implementing laws. Nevertheless, the directive stipulates those penalties be ‘effective, proportionate and dissuasive’, such as fines or a judicial body annulling appointments.
Compliance must also be a pre-condition for public contracts and concessions. Peer pressure will also be used with the directive telling both member states and the companies themselves to publish compliance data.
Member states now have until December 2024 to write the directive into their national laws, unless they invoke a controversial suspension clause in Article 12, within those two years. This allows them to suspend indefinitely Article 6 if, on 27 December 2022, either the under-represented sex held a minimum 30% of non-executive or 25% of all director positions in non-SME listed companies, or a national law setting at least those quotas was already in place, with effective penalties.
‘For the moment, member states have not notified the Commission about the suspension,’ a Commission spokesperson tells AB. However, Dutch minister of education, culture and science Robbert Dijkgraaf, told the national parliament on 22 December 22 that the Netherlands would do so. The suspension ends if a national law fails to maintain the quotas set in the directive, however.
Worried about loopholes
Nonetheless, German Green MEP Terry Reintke is worried about this exemption, arguing there are ‘too many loopholes for companies’ within the directive. But Nuyens says the suspension clause had been the deal-breaker in bringing the Netherlands and Germany (which also has existing board gender diversity laws) on side, smashing a decade-long deadlock that had delayed the approval of the directive. She also argues that ‘only a few’ member states had existing protections and so ‘can use this suspension clause’.
‘The most successful companies are those with the most diverse board of directors’
The European Women’s Lobby sees the waiver for listed small and medium-sized enterprises (SMEs) as ‘a critical shortcoming’, particularly because many women work in SMEs. Again, Nuyens dismisses this criticism, because among SMEs, ‘there are not that many listed companies’.
Austrian socialist MEP Evelyn Regner says the ‘landmark law’ is ‘a great asset for European businesses, because the most successful companies are those with the most diverse board of directors’.
She adds that quotas work, highlighting the European Institute for Gender Equality’s figures from October 2022, showing that, on average, women made up 38.3% of boards in the eight EU member states with binding national quotas, compared to 31.4% in those with soft measures and 17.5% in those taking no action.
