The publication of Directive (EU) 2022/2381 known as the 'Gender Balance on Boards Directive' (the Directive) in December 2022 is, in our view, a welcome development in the context of gender diversity.
In brief, the Directive requires EU listed companies to ensure that at a minimum either 40% of all non-executive director positions or 33% of all director positions are held by the "underrepresented sex" (to use the EU's term), by 30 June 2026, with "effective, proportionate and dissuasive" penalties for non-compliant companies. It is understood that typically the underrepresented sex will be women. Where companies are not subject to the second limb requirement, Member States are required to ensure that they set objectives to improve the gender balance among executive directors. The Directive contains a 'sunset clause' provision for an expiration date (currently 31 December 2038). The expectation is that by the sunset date the Directive will no longer be required, as companies outperform its targets.
EU listed companies which are not SMEs will be required to provide information to their competent authorities annually about the gender representation on their boards against the relevant target(s) 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.
The EU's legislative process reflects the prevailing political winds and the Directive's passage through the legislative process is an illustration of how it can be difficult to reach consensus on initiatives that require the input of 27 constituent voices. Having initially been proposed by the Commission in 2012, for ten years it was impossible to achieve the favourable qualified majority required to allow the proposal to progress. Nevertheless the European Parliament continued to push for the adoption of the Directive, seeing it as "an important first step towards equal representation ", and with its inclusion as a central priority of the 2020-2025 gender equality strategy, political agreement on the Directive was finally reached in June 2022.
The Directive takes pains to clarify what is expected of the affected EU listed entities in selecting candidates to achieve the Directive's objectives and in so doing does much to quell possible objections against accusations that its targets may result in positive discrimination, perceived unfairness or disregard for competence. Listed companies that do not meet the Directive's requirements must apply clear, neutrally formulated and unambiguous criteria in their selection processes, and only where candidates are equally qualified in terms of suitability, competence and professional performance, prioritise the underrepresented gender. This is subject to a company's ability, in exceptional cases, to give priority to reasons of greater legal weight (such as the pursuit of other diversity policies invoked within the context of an objective assessment to prioritise a candidate of the other gender).
Our ability to ensure compliance with the Directive requires us to be able to source and monitor information on gender balance on boards. The Directive meets this need by requiring an annual statement from relevant companies in an accessible form as noted above. This will dovetail with the work of organisations like the FTSE Women Leaders initiative in the UK, and Balance for Better Business in Ireland, which already provide useful data points for our understanding of the current state of play when it comes to gender balance among senior staff at listed companies.
This impetus for information in respect of gender balance is also visible in recent legislative initiatives at Member State level like Ireland's Gender Pay Gap Information Act 2021 (recently echoed by rules on pay transparency adopted by the European Parliament). This requires larger employers in the State to publicly provide information on their 'gender pay gaps' at a specific snapshot date and will be rolled out to smaller scale employers in due course. The significant volume of comment on the data this legislation has made available to stakeholders illustrates perfectly how engaged we are as a society with this question and how timely these initiatives are. This is to say that as society welcomes the sea change toward gender equality, our need for clear signposting is evident.
By way of example, consider information released on 7 March 2023 by Better Balance for Business which notes that the percentage of women on boards in the largest Irish listed companies (ISEQ20) currently stands at 35% while other listed companies have 23% of board seats filled by women. This data reveals an encouraging trend (compared to earlier metrics) although overall progress falls short of the targets set by the Directive. Further, the data reveals that women continue to be underrepresented at senior leadership level and key Board seats (there is no female Chair in the ISEQ20 according to this data). This data allows us to track progress towards equal gender representation and to hold laggards accountable. We should remember also that the targets set by the Directive themselves fall short of actual representation of our society given that preliminary Irish census 2022 data reveals a population where women make up slightly more than the majority of adults.
Should we care about ensuring balanced gender representation? If nothing else, as Minister for Children, Equality, Disability, Integration and Youth of Ireland, Roderick O'Gorman noted in a debate in the Dáil in July 2022, gender diversity will ultimately result in "…better balance in economic decision-making" noting that the "…[D]irective plays an important role in achieving this objective." This must surely be right: if we as a society are affected by the decisions made by small groups of people (the directors of systemically important organisations like banks for example) it behoves us to ensure that those small groups are as representative as possible of the society we live in. The hope is that this representation will ensure that all our voices carry into rooms of this kind and that therefore our interests are given legitimate consideration when significant decisions are made. It is therefore imperative that we ensure that the gender balance in those rooms better reflects our society, noting that this is to say nothing for now of other underrepresented minorities which are being looked at in some jurisdictions (for example the FCA's ethnicity requirements for premium listed companies) and doesn't fully take into account a society that is increasingly comfortable with gender descriptions which may be non-binary.
We therefore welcome the direction of this legislative travel and see it as an important aspect of stakeholders' commitment to and focus on ESG matters. While much remains to be done to achieve balanced representation and true gender equality in corporate life, this is a good start.
This article is an excerpt of a longer article that was published in our inaugural ESG & Sustainability Bulletin which is intended to be published on a quarterly basis. If you would like to receive the inaugural issue and sign up to receive further issues as they are published, please visit this link.
For more information in relation to this topic, please contact Liam Murphy, Knowledge Lawyer, Sheena Doggett, Partner or any other member of ALG’s Corporate team.
