EU member states will newly be required to adopt binding regal regulations under which listed companies must staff their boards such that the underrepresented sex is not put at a disadvantage.
Directive (EU) 2022/2381 of the European Parliament and the Council on improving the gender balance among directors of listed companies and related measures was passed on 23 November 2022. The title clearly indicates that the new obligations will for now affect only listed companies, as they are seen by the lawmaker as having the greatest social (and economic) significance. The Directive expressly states that it does not apply to micro enterprises or to SMEs, but nonetheless invites them to observe similar rules on a voluntary basis.
The bulk of the Directive consists of a summarization of its value-based assumptions and its assessment of the current situation in the recitals. It perceives equality between women and men to be a major founding value of the European Union, and makes reference to a number of other pieces of EU legislation and recommendations aimed at fostering gender-based equality across the private sector.
The Directive postulates the requirement of gender-balanced representation in top management positions, by establishing a set of specific procedural requirements concerning the transparent selection of candidates for appointment or election to director positions. In so doing, it points to numerous studies which have shown that diversity leads to a more proactive business model, more balanced decisions, and enhanced professional standards. According to the studies, gender balance at the executive level leads to improved financial performance and profitability, and thus has relevance in terms of ensuring the Union’s competitiveness. In addition, it is expected that a higher representation of women on boards also helps ensure a greater presence of women at all levels of management and in the workforce.
The member states are now tasked with the passage of legislation that obliged listed companies to ensure that, by mid-2026, members of the underrepresented sex hold at least 40% of the non-executive director positions at such companies, or at least 33% of all director positions. The Directive freely admits that this requirement cannot be satisfied mathematically, but nonetheless asks companies to come as close as possible to these targets.
The process of selecting among candidates should be marked by a high degree of transparency. During the selection process, clear, neutrally formulated and unambiguous criteria are to be applied, which were established in advance of the selection process. Among equally qualified candidates, priority shall be given to the candidate who is of the underrepresented sex. However, if the appointed or elected candidate is in the individual case someone who belongs to the sex with greater representation, then the company must be able to cite the objective reasons for overriding the Directive’s principles.
In this respect, listed companies will also have a stricter duty of information toward candidates in individual selection procedures and heightened annual reporting obligations toward the competent authorities with respect to the progress made by listed companies toward achieving the stated goal. This information must be posted on the company’s website.
Further, the Directive requires the member states to stipulate proportionate penalties in order to be able to enforce the aforementioned obligations, and to ensure that unsuccessful candidates have recourse to the courts if they believe that their qualification was equal to the candidate of the other sex who was selected for appointment or election to a director position. The examples given by the Directive for such adequate penalties for infringing on domestic rules include e.g. financial penalties (fines) or the court-ordered annulment of decisions whereby individual directors were appointed.
Source:
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