Forty percent Venus, sixty percent Mars? The Commission’s Proposal on gender quotas in corporate boards

Juan Carlos Benito Sánchez, LL.M. Candidate at KU Leuven — Twitter @jcbensan

Economic decision-making in the European Union suffers at the highest corporate echelons from a lack of diversity, particularly in the area of gender diversity: over half of the graduates from European universities today are female, yet men outnumber women in corporate boards by a ratio of nearly four to one. What is more, differences between Member States are vast: female representation among directors ranges from less than five percent in some countries to more than thirty percent in others. The latest statistics can be found at the site of the European Commission’s database on women and men in decision-making.

Acknowledging this reality and within the framework of the Women’s Charter and the Strategy for Equality between Women and Men 2010-2015, the European Commission launched in November 2012 its Proposal for a Directive  of the European Parliament and of the Council on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures.

The Economic and Social Committee and the Committee of the Regions having both issued opinions, the proposal was adopted by the European Parliament at first reading in November 2013. In December 2014, however, the Council (Employment, Social Policy, Health and Consumer Affairs configuration) rejected  the proposal because of a failure to reach an agreement, inviting the preparatory bodies ‘to continue their work on the file.’ The latest development came in the form of a progress report  issued on 11 June 2015, concluding that

[t]here is a broad consensus among the Member States in favour of taking measures to improve the gender balance on company boards. While a large number of Member States support EU- wide legislation, others continue to prefer national measures (or non-binding measures at the EU level). Thus further work and political reflection will be required before a compromise can be reached.

Main contents of the proposal

The Proposal for a Directive (as considered by the Council), which ‘seeks to achieve a more balanced representation of men and women among the directors of listed companies by establishing measures aimed at accelerated progress,’ only targets publicly listed companies having their registered office in a Member State and excludes SMEs from its scope of application. It is expected that a trickle-down effect will ensue, thereby leading companies not affected by these measures towards more balanced corporate boards.

Targeted companies should attain by the predetermined deadline (31 December 2020) either (a) 40 percent of members of the under-represented sex among non-executive directors or (b) 33 percent of members of the under-represented sex among all directors, both executive and non-executive. The choice of option is in principle open to the implementing Member State, which may also exempt those companies where women represent less than ten percent of the employees from compliance with the numerical aims. An additional obligation is envisaged for targeted companies to set individual quantitative gender balance objectives when the overall thresholds do not directly apply.

A reporting duty to the national equality bodies has been introduced, following the ‘comply-or-explain’ principle. A document must be compiled detailing the ‘gender representation on [companies’] boards, distinguishing between non-executive and executive directors’ as well as ‘the measures taken with a view to attaining the applicable objectives.’ The same information shall be published in an appropriate and accessible manner on the companies’ websites.

The core of the proposal lies on the series of procedural requirements imposed on companies which fall short of the planned numerical objectives. These companies must, when selecting candidates for director positions, undertake a comparative analysis of the qualifications of each candidate by applying clear, neutrally formulated and unambiguous criteria established in advance. They shall, following this analysis, give priority to the candidate of the under-represented sex, unless an objective assessment of all criteria specific to the individuals tilts the balance in favour of the other candidate(s). The wording of these requirements is directly drawn from the case-law of the CJEU regarding gender quotas (see, inter alia, Judgments in Kalanke, in Marschall v Land Nordrhein Westfalen and in Abrahamsson and Anderson v Fogelqvist.)

Upon request from any candidate, all parameters considered when deciding over selection (the qualification criteria, the objective comparative assessment and, where relevant, the considerations tilting the balance) need be disclosed to her or him in a transparent manner. Moreover, if the candidate of the under-represented sex establishes a prima facie instance of discrimination, the burden will shift onto the respondent company to disprove those allegations—as occurs with other discrimination claims under EU law.

Sanctions are to be imposed by the Member States alone for the infringement of the procedural requirements, the reporting obligations or the mandate to set individual quantitative objectives. In other words, non-compliance with the numerical quota objectives by the end of the established deadline is not per se penalised beyond requiring companies to state ‘the reasons for not attaining the objectives and a description of the measures which the company has already taken and/or intends to take in order to meet them.’

The Union’s intervention in the field has an essentially temporary character; the ultimate objective of the proposal being to foster gender diversity within corporate boards to the extent that conditions in society are such as to not guarantee that balance on their own. This interim approach is reflected by the sunset clause contained in the proposal: the directive shall expire in December 2029. As a last point, it is notable that the directive would only effect minimum harmonisation, thus allowing Member States to go beyond these measures ‘provided those provisions do not create unjustified discrimination or hinder the proper functioning of the internal market.’

The flexibility clause: a point de discorde

Article 4b of the revised proposal features the most controversial provision and the reason why progress is only very slowly being made: namely, the so-called equivalent efficacy or flexibilityclause. Following this clause, Member States which have enacted measures to ensure a more balanced representation of men and women on corporate boards would be authorised to suspend application of the procedural requirements, given that those measures are equally effective or have attained progress coming close to the aims set out in the directive.

‘With a view to combining flexibility with maximum legal certainty,’ Article 4b exemplifies three scenarios deemed by law to guarantee equal effectiveness, leaving the door open at the same time to analogous situations existing in the Member States. In this respect, the last version of the proposal allows disconnection as soon as ‘members of the under-represented sex hold at least 25% of the total number of all non-executive director positions or 20% of the total number of all director positions and the level of representation has increased by at least 7.5 percentage points over a recent five-year period.’ Beyond 2020, more stringent conditions will have to be complied with if the Member State wishes to maintain the suspension.

Considering the documents issued by the Working Parties of the Council, the flexibility clause has created a major point of contention between delegations. While agreement broadly exists on the main lines of the proposal, Member States are divided between those pushing for the flexibility clause to be enhanced and those warning against any further softening of the text. The recent progress report consequently acknowledges that ‘[s]ome further fine-tuning of the flexibility clause is likely to be required before an agreement can be reached on the Directive.’

Comments

The proposal should be welcomed as a significant step towards tackling gender imbalance within corporate governance in the European Union. Substantive measures in this respect have been long overdue and much awaited; the question thus remaining is if and when consensus within the Council will be reached. The Luxembourg Presidency in its outlook overview of priority dossiers  refers to the proposal on gender balance, recognising that it ‘[has] been blocked in the Council for a considerable time.’

From the standpoint of Discrimination law, it is regrettable that the rationale of the directive appears to be predominantly economically driven, at the expense of considerations of parity, diversity, legitimacy and democracy. Instead of upholding the claim that gender balance in corporate boards will yield microeconomic growth—an assertion which, on the other hand, risks perpetuating gender stereotypes, as it is based on the assumption that women and men act differently in business contexts—, the proposal should rather build upon dependency with a view to eradicating and correcting structural male dominance in decision-making.

De lege ferenda, it would perhaps be advisable to abandon the understanding of quotas purely on the basis of sex and transitioning to a gender terminology that accommodates at the same time additional genders or gender identities. Following this suggestion, measures could be envisaged that give a soft preference in a similar manner not only to female candidates but to candidates of genders or gender identities which differ from that of over-represented male candidates.

As regards the sanctioning regime, more meaningful enforcement measures could be conceived of within the limits of proportionality that do not leave failure to comply with the numerical targets unpunished, e.g. in the form of fiscal incentives or of penalties within the area of public procurement.

One of the striking points of the proposal is undoubtedly that of the flexibility clause. Despite its stated purpose of allowing more proactive Member States to develop their own equality programmes without conflicting with the substance of the proposal; this possibility permits, in practice, a large derogation by means of national tailor-made gender diversity strategies. Whereas due regard must be had to subsidiarity, it should be noted that the envisaged thresholds for equivalent efficacy are deceptively low as a consequence of the watering down of the proposal during the Council deliberations.

To conclude on a pragmatic note, it can be said that the current prospects of more robust European Union legislation tackling gender imbalance within corporate governance are bleak: the still ongoing difficulties within the Council to reach an agreement foreshadow, if anything, an even more compromised version of the text. For the time being, in the European Union it is more around twenty percent Venus, eighty percent Mars. Surely an imbalance of planetary dimensions.

Barnard & Peers: chapter 20

Photo credit: www.livemint.com

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New EU human rights reporting requirements for companies: One step beyond the current UK rules

Anil Yilmaz (Lecturer in Law, University of Brighton) and Rachel Chambers (PhD candidate, University of Essex)  

Background

Among the core objectives of the EU set out in Article 3(3) of the Treaty on the European Union is the creation of an internal market and sustainable development of Europe “based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.” The Single Market Act 2011 fleshed out the features of a “highly competitive social market economy” and provided that it called for new business models where environmental and social concerns “take precedence over the exclusive objective of financial profit.” In this respect, the Act outlined the allocation of tasks for achieving this goal between itself and the industry. While the European asset management industry was asked to use their leverage to promote socially and environmentally responsible businesses, the EU would take action, inter alia, to ensure a level playing field by introducing new rules on environmental and social reporting. Stemming from the Act was also the adoption of the Commission’s 2011-2014 Corporate Social Responsibility Strategy, which reaffirmed the objective of establishing EU rules on social and environmental reporting.  Although CSR has been on the EU agenda for a decade, the 2011-2014 Strategy put forward a more rigorous definition of CSR and demanded better alignment with global approaches to CSR, including implementation of the UN Guiding Principles (UNGPs).  Within the Strategy, the Commission announced its intention to build on the existing reporting requirements for companies.

Prior to the adoption of the recent amendments to Directive 2013/34/EU on company reporting, EU law made the following requirement on companies, not necessarily including small and medium‐sized enterprises (SMEs): “To the extent necessary for an understanding of the company’s development, performance or position, the analysis [in the annual review] shall include both financial and, where appropriate, nonfinancial key performance indicators relevant to the particular business, including information relating to environmental and employee matters.” In November 2010, the European Commission had launched an online public consultation to gather views on the disclosure of non-financial information by enterprises. The consultation had sought both to expand the subjects of such disclosure and to make the requirements more effective.

In January 2013, following the adoption of the 2011-2014 CSR Strategy, the European Parliament adopted two resolutions reiterating the importance of company transparency on environmental and social matters and calling for specific measures to combat misleading and false information regarding commitments to CSR and relating to the environmental and social impact of products and services.   The resolutions expressly acknowledged the role of the UNGPs in improving standards of corporate practice. The European Commission went one step further in its proposal of 16 April 2013, by suggesting an amendment to existing accounting legislation to improve the transparency of certain large companies on social and environmental issues, in particular with regard to human rights impacts.  The European Parliament and the Council reached an agreement on 26 February 2014; the European Parliament adopted the amendments to Annual Financial Statements Directive 2013/34/EU on 15 April 2014; this was adopted by the Council of the European Union on 29 September 2014.

The Reforms

The amendments introduce compulsory reporting of non-financial information by certain large undertakings. Under the new Article 19a certain large undertakings governed by the law of a member state are required to include a non-financial statement in their annual management report, ‘to the extent necessary for an understanding of the undertaking’s development, performance and position and of the impact of its activity.’ Recital 14 determines the personal scope of the reporting requirement based on the number of employees, balance-sheet total and the net turnover. ‘Certain large undertakings’ within the meaning of Article 19a are public-interest entities which have 500+ employees (in the case of a group of companies with the parent governed by a member state law, number of employees will be calculated on a consolidated basis). Public interest entities are defined in Article 2(1) of the Directive as including listed companies, credit institutions, insurance companies and any other entity designated by member states as a public interest entity due to the nature or size of their business.  The press release announcing the adoption of the Directive by the Council says that some 6,000 public interest entities in the EU will fall under its scope.

 Non-financial information encompasses “as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters”.  The statement will contain a brief description of the company’s business model, a description of the company policy in those areas and its outcome, main risks faced by the company, including those arising from its business relationships, and how these are managed and the due diligence processes it employs to identify, prevent and mitigate adverse impact. Companies can avoid reporting on one or more of these issues if they do not pursue policies on those issues and provide a ‘clear and reasoned’ explanation of this choice. There is an additional exemption from reporting in exceptional cases where disclosure of such information would seriously harm the commercial position of the company and non-disclosure does not prevent a fair assessment of company’s impact and risk.

Recitals provide some examples of what should be included in the report for each item and refer to a selection of national and international frameworks for further guidance that companies can rely on. In the meantime, the Commission will prepare general and sectoral non-binding guidelines for non-financial reporting.  Member states will have two years to incorporate the new provisions into domestic law, which will be applicable in 2017.  In terms of enforcement of these obligations, Recital 10 requires member states to establish effective national procedures to ensure compliance with non-financial reporting requirements. Finally, it is up to the member state implementing the directive to require independent verification of the non-financial information contained in the report.

Analysis

The adoption of this Directive was hard fought for, and can be seen as a major achievement –both in terms of the content of the reforms but also the symbolic step which their adoption represents.   These are a broad set of reporting requirements, wider than comparable UK law as they include anti-bribery and corruption as well as environmental, social and employee matters and human rights.  By requiring reporting “of the impact of [a company’s] activities” and of the “principal risks related to those matters linked to the undertaking's operations” these provisions focus effort on what is important – reporting the actual human rights risks/impacts to/on society of a company’s operations and prioritising the most severe risks.  This compares favourably to UK non-financial reporting which, as explained below, is focused essentially on providing information to shareholders on which they can assess the financial performance of the company.  The requirement for group reporting of these issues in consolidated statements will allow stakeholders to be informed about the impacts of subsidiaries as well as their parent companies. Business partners are also covered but reporting on risks from supply chains and business relationships is only required “if relevant and proportionate”. The inclusion of risk management processes such as due diligence is useful when trying to understand how companies are tackling the issues which they face in this realm.

However, there are a number of shortcomings in the new Directive.  It does not cover many companies: the original Commission proposal was for it to apply to around 18,000 companies – listed and non-listed – that were of a certain financial size and had 500 employees or more.  As stated above, the adopted proposal only covers around 6,000 “public interest” companies.  The failure to include listed SMEs (although member states can choose to include them) is particularly difficult to understand given that these companies already have to file annual reports, and that despite their size, these companies can have significant human rights impacts.  The methods for enforcement of the obligations and independent verification of the reports are left to member state discretion, which can create inconsistencies in the application of these rules, and ultimately a lack of “teeth” if companies fail to comply.

Does it improve existing UK requirements?

 

The new UK requirement to compile a strategic report which must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include, amongst other requirements, information about social, community and human rights issues came into force in October 2013.  The inclusion of a test of materiality in the statutory guidance on the new statutory regime was controversial.  Under the heading of “Materiality” the guidance recommends that companies include human rights-related information “if its omission from or misrepresentation in the strategic report might reasonably be expected to influence the economic decisions shareholders make on the basis of the annual report as a whole” – as noted above the new European requirement takes a different, and from a human rights protection point of view better, stance by looking at impact on society.

Enforcement of the UK law is weak, a situation which will not be changed by the new EU law. In the UK, the Conduct Committee of the Financial Reporting Council is responsible for monitoring the compliance of the strategic report with the Strategic Report Regulations. It may investigate cases where it appears that required information has not been provided, and has the power to apply to the court for a declaration that a strategic report does not comply with the requirements and for an order requiring the directors to prepare a revised strategic report.  The equivalent powers under the previous statutory regime were seldom used.  Since compliance with the new EU non-financial reporting requirements will be overseen by member state regulators, it is crucial that they have qualified staff with the appropriate human rights expertise to draw on when assessing whether the information required has been provided.

 

 

Barnard & Peers: chapter 9, chapter 14

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