?A European Union (EU) law requiring gender balance on corporate boards was adopted by the European Parliament on Nov. 22, 2022. The directive requires that listed companies have 40 percent of nonexecutive directors, or 33 percent of all directors, be members of the underrepresented sex by the middle of 2026.
Directive 2022/2381 is designed to ensure that gender balance on corporate boards of large, listed EU companies is established, that appointments to board positions are transparent, and that board candidates are assessed objectively based on their individual merits, regardless of gender.
The directive was first proposed in November 2012 but met with fierce opposition from several member states, which argued that binding measures at the EU level were not the best way forward. However, “times have changed,” said Jennifer Granado, an attorney with Linklaters in Brussels. “Now, out of the 27 [EU] member states, only Sweden, Poland, Estonia and Hungary voted against the directive.”
Member states will have two years following the directive’s publication to incorporate its provisions into their national laws. Companies will then have until June 30, 2026, to come into compliance with the 40 percent target for nonexecutive directors or 33 percent for all board members.
Directive Set to Benefit Women at Work
“The directive is expected to play a role in closing the gender pay gap, as well as in ensuring equality at work,” said Laura Llangozi, a lawyer at Freshfields in Brussels. The directive offers an incentive for companies to support and develop female talent at all levels while encouraging women to invest more in their careers, she said.
In outlining potential benefits of the directive, Granado said it will require companies to develop and disclose gender-neutral eligibility criteria, thus improving their recruitment processes. Gender-balanced boards “tend to focus more on diversity and inclusion issues,” she explained.
However, while balanced boards provide role models to inspire more girls and women to aspire to decision-making positions, Granado noted that “much more needs to be done than gender quotas alone to increase women’s participation in the labor market.
“Quotas alone will definitely not ensure women are at the highest decision-making levels in companies,” she said, noting that even in countries with mandatory gender quotas in place, such as France, gender parity often stops at the “power gates,” with very few women advancing to CEO or executive director. Granado expressed hope that the presence of more women on boards will lead to an increased “focus on other issues at the core of the lack of women in companies’ highest positions, such as the companies’ care-leave policies including shared parental leave, mentoring programs and succession planning.”
Both listed and nonlisted companies should focus not just on a gender-balanced board, but on promoting “a diverse board in all its forms,” Granado said. If companies are still focusing only on gender in terms of achieving diversity and inclusion, “I would say they are behind and need to urgently take a more holistic approach.” She added that research suggests that having a more diverse board also makes a company more profitable.
“I also believe other legislative measures, such as the Corporate Sustainability Reporting Directive, which requires more companies, including nonlisted, to report on the diversity of their boards, will have an effect on improving gender parity on boards,” Granado said. “Society and investors are expecting more diverse boards; investors’ pressure cannot be underestimated to drive change.”
Because larger, nonlisted companies often adopt listed companies’ good governance practices, the directive may indirectly improve gender balance on nonlisted companies’ boards, she said.
In addition, Llangozi noted that the directive is a minimum harmonization measure, meaning that member states can choose to expand its scope when implementing it by imposing stricter requirements that extend to nonlisted companies.
Implementation Challenges
Given the directive’s generous time frame for EU countries to implement its provisions, listed companies in member states are likely to be able to diversify their boards on time, Llangozi said. However, she cautioned that “implementation might change across EU countries, as is often the case with EU directives.”
Delays in incorporating a directive into local legislation by member states can occur for many reasons, “including how developed the current legislation is, how long it takes the legislator to discuss the sensitive issues, and local developments,” such as elections, she said. These potential local changes would require global companies “to follow the legislative process in several member states—depending on where they are registered and listed—at the same time, in order to comply with the local implementation of those standards.”
One challenge to implementation is the suspension clause, which allows member states with equally effective measures and sanctions to suspend the requirements of the directive. Member states that already have legislation about gender balance on listed companies’ boards, such as Belgium and Germany, can choose not to officially implement the directive’s quantitative requirements, so long as their regulations require that members of the underrepresented sex hold at least 30 percent of nonexecutive director positions or at least 25 percent of all director positions, Llangozi said.
Ensuring Equal Representation for Women
Member states can take additional steps to ensure women are more fairly represented in economic decision-making, such as implementing measures to ensure pay transparency and equal pay for men and women for jobs of the same kind, Llangozi said.
Granado had additional recommendations for member states to level the playing field for women:
- Promote a more even distribution of child care and caregiving work.
- Ensure effective sanctions against companies for failing to effectively implement gender-balanced boards.
- Go further than what the directive requires. For example, extend a gender quota to nonlisted companies.
In the end, ensuring equal representation for women “is not only member states’ responsibility,” Granado said. “Pressure from society at large and investors will be key in continuing to drive gender parity and more diverse boards.”
Rosemarie Lally, J.D., is a freelance legal writer based in Washington, D.C.