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Gender diversity on corporate boards

What to expect from the new EU Women on Boards Directive, including the practical changes for your management structure and the impact on the national legislation of each Member State.

Women continue to be significantly underrepresented on the boards of directors of companies in every Member State within the European Union and the United Kingdom. In recent years, more and more European countries have introduced statutory gender quotas to balance gender on company boards. The progress year-on-year has, however, been rather slow. The legal provisions in those countries introducing quotas can differ greatly, particularly with regard to sanctions for failure to comply with a quota. It has become clear that the voluntary approach of countries to gender balance on company boards has had limited success, with the exception of the United Kingdom, which has made steady progress year-on-year. With regard to the European Union, we have witnessed how legislative measures with binding gender quotas taken at the national level have a significant impact: in 2020, European countries with mandatory quotas had a 37.6% representation of women on their listed company boards, compared to 24.3% in countries with either soft measures or no measures in place. 

In light of the broad disparity between Member States, the European Commission has now presented its EU Directive on improving gender balance among non-executive directors (the so-called EU Women on Boards Directive). The Directive frames the Commission’s work on gender equality and aims to strengthen gender diversity in corporate boardrooms with binding standards for all European Member States. 

This Client Alert focuses on the impact of the EU Women on Boards Directive on the governance regulations across a benchmark of European countries in which A&O is present (ie Belgium, the Czech Republic, France, Germany, Hungary, Italy, Luxembourg, the Netherlands, Poland, Slovakia and Spain) and summarises the respective approaches. It also illustrates similar new regulation on board diversity targets for listed companies in the United Kingdom to provide a complete overview of the legislation in this area.

Gender diversity on corporate boards and why it matters

Gender inequality is a significant concern

The persistent gender inequality in economics, politics, science, and the arts is a key element of a broader lack of board diversity in general. The principle of gender equality should not be confused with that of diversity: women are neither a group nor a minority, but more than half of the world’s population, not to mention 45% of the European workforce. The balanced participation of women and men in decision-making bodies is an essential imperative of the fundamental principles of democracy and human rights – and now more important than ever. 

Besides the equal treatment with regard to age, cultural and social background, disabilities, sexual orientation and gender identity, gender equality is a general ideological principle within the European Union and the United Kingdom, the process of a sustainable transformation of organisational cultures and structures to combat and reduce gender imbalances and inequalities is still too slow. To achieve gender equality, many European countries as well as the United Kingdom have adopted laws and regulations enhancing these principles: family support, maternity (and paternity) protection, access to equal opportunities, and governance of companies are only some of the legal topics with which the national legislators try tackle a non-diverse work environment.

Female leaders: change and challenges

Gender diversity at the highest leadership level makes a significant difference to overall diversity. The most diverse boards still tend to be found at companies led by women at the executive or board levels. For example, companies with women CEOs have, on average, significantly more gender-balanced boards than those led by men: 33.5% women vs. 19.4%.

But quotas are of course only one tool: it is more important that childcare, and care work in general, are distributed more evenly and rewarded differently. This requires pressure from society, legislation, and financial incentives. 

Diversity as a growth driver

The path to more diversity is not only ethically and socially right. There are also business imperatives behind it. Both in in politics, society and the economy, voices and the call for more diversity are getting more robust. However, although the relevance of the issue is now undisputed, some companies still underestimate the economic potential of diversity and are hesitant to implement it. This neglects important economic resources. In other words: Diversity really matters.

Research suggests that companies with high diversity in its various dimensions are more likely to be profitable. Moreover, diverse teams make better decisions for the company than homogeneous work groups because they can draw on a diversity of ideas. By 2050, improving gender equality would lead to an increase in EU (GDP) per capita by 6.1 to 9.6%, which amounts to EUR1.95 to EUR3.15 trillion. Improvements in gender equality would lead to an additional 10.5 million jobs in 2050, which would benefit both women and men. The estimated GDP impacts of increased gender equality vary considerably across Member States, depending on the present level of achievement of gender equality.

Diverse talents as a necessary talent tool

Given expected demographic trends throughout Europe, it is likely to become even more important for companies to be diverse. The Baltic states Estonia, Latvia and Lithuania, and the majority of regions in Bulgaria, Romania, Germany, Hungary, Poland and Slovakia will lose inhabitants within the upcoming decades. The demographic projections suggest that companies cannot afford to do without talent from different population groups. Lived diversity is also strongly linked to the effect which positive role models create: If companies create and promote these diverse role models, they can better motivate women, people with a migration background or a different sexual orientation to apply for jobs.

Tough sanctions are the most effective

The issue of gender imbalance has gained increasingly more attention, and the debate has increased the pressure to counter inequalities between women and men in leadership positions. Nevertheless, many countries struggle to introduce statutory gender quotas for the top decision-making bodies. The tools used to improve gender equality vary depending on the area concerned, the country at stake and its local culture and situation on this topic. The range of tools varies from mere recommendations or mandatory rules, to minimum mandatory ratios for each gender or mandatory equality.

Over the last two decades, only six out of the 27 European countries as well as the United Kingdom have introduced a statutory gender quota for the highest supervisory and decision-making bodies of certain private sector companies. In 2003, Norway became the first country in the world to introduce a binding gender quota for all publicly traded and state-owned companies. Spain became the first EU state to introduce a binding quota for large, publicly traded companies and was followed by Iceland, Belgium, France, Italy, and the Netherlands. Ten other Member States took soft measures and 11 Member States did not take any measures at all.

The legal provisions in these countries sometimes differ greatly, mostly with regard to sanctions in the event of quota non-compliance: until today, rigid sanctions (ie companies being fined for noncompliance at the very least) in cases of non-compliance are introduced in only a few countries. If countries have voluntary recommendations on gender diversity in leadership positions in their corporate governance codes instead of a statutory gender quota (ie a “comply or explain” approach), or do not take any measures at all, they all score significantly lower than the countries with hard quotas in terms of gender balance at Board level.

The absence of regulation within some Member States does not lead only to discrepancies in the number of women among non-executive directors and different rates of improvement within the European Union, but also poses barriers to the internal market by imposing divergent corporate governance requirements on European listed companies.