Last month, the European Union’s Justice Commissioner Viviane Reding announced a new proposal that will push companies to hire more women directors. Modeled on Norway’s 40% quota for women on boards, the directive includes three major provisions:
1. Supervisory boards must be 40 percent female, and if they aren’t, priority must be given to equally qualified female candidates to fill these non-director roles.
2. When it comes to executive director spots, companies will have the option to set their own gender targets (a “flexi-quota”), and report on them.
3. Each member state will set its own sanctions for companies that do not follow the rules.
The focus of the directive is large, publicly listed EU companies. Those with more than 250 employees and global sales over 50 million Euros will have to comply by 2020. State-owned companies will have until 2018 to comply. According to Bloomberg, that totals about 5,000 companies. The proposal still has to pass the EU Parliament and the EU Council before becoming a law.
Suzanne Horne, a UK-based employment law partner at the global firm Paul Hastings, remarked, “The proposal signals that this issue – boardroom gender diversity – will be very much at the forefront of the corporate agenda over the next decade. And Europe seems very much to be leading the way on this issue.”
While Reding’s announcement has generated quite a bit of media attention over the past month, Horne says there may yet be changes to the legislation. “There is still scope for it to be negotiated – although we get the impression that it’s already been heavily negotiated.” She continued, “It’s a directive, which is important. That means it will set a minimum standard that will apply across the 27 EU member states, and each state has the scope to interpret what is required and what requirements to put in place in terms of sanctions on companies that fail to meet the target.”
She added that several member states (Austria, Belgium, Denmark, Finland, France, Greece, Italy, the Netherlands, Portugal, Slovenia, and Spain) have already enacted boardroom gender legislation. “The view from Viviane Reding is that if they already have something in place which serves the purpose, they won’t have to comply,” Horne explained.
It’s uncertain so far how the quota could affect the boardroom gender composition of companies operating in the EU but headquartered elsewhere, or vice-versa, how it could affect regional branches of companies headquartered in the EU and operating elsewhere in the world.
But regardless of the quota’s legislative reach, Horne believes it could have a measure of influence that will be felt globally. “The interesting question is to what extent the influence of the European boardroom target has on boardrooms outside the EU. It potentially could be a real trend.”
Ultimately, she said, the target is opening up a discussion around what kind of board a company should have – not just in terms of gender, but regarding other demographics as well, like ethnicity or nationality. “If you are operating a company which has diverse customers and clients, then really you should have a board that reflects that to better understand the needs of those customers or clients,” she explained.
Beyond the Boardroom
The quota rules may also impact the percentage of women in leadership throughout corporate hierarchy. Because companies will have to set targets – and adhere to them – when it comes to the gender make-up of their executive directors, they will have to be mindful of gender and succession planning moving forward.
Executive directors tend to be C-level senior leaders working at the company, whereas supervisory (or non-executive) directors maintain more independent positions, influencing areas like corporate governance, remuneration, risk, or audit. “They bring their general business knowledge and experience to the board,” Horne explained.
It may appear that companies are getting more leeway when it comes to the gender balance of executive director positions, but the reality is that the flexi-quota provision of the directive will force them to consider gender when promoting a candidate to CEO or CFO. That means the rules could encourage companies to ensure a robust pipeline of women all the way to senior management.
Horne also suggested that greater flexibility around the area of executive directors enabled the Justice Commission to move past opposition to the plan. “Essentially by going first with the non-executives, it may have been easier for them to get agreement to a proposal and move forward on the issue.”
She continued, “The fact is, in the FTSE 100 for example, there are only 2 female CEOs. Only 7% of all executive directors are women compared to 17.4% of non-executive directors. Therefore, there remains a substantial disparity across the two roles.”