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European Commission drops quotas in favour of "40% objective" for women on boards

The European Commission has signalled that it will not press ahead with proposals to introduce mandatory 40% representation by women on EU corporate boards.14 Nov 2012

A proposed directive instead calls for a "40% objective" in non-executive board member positions in publicly listed companies by 2020. Companies in which the underrepresented sex makes up less than 40% of the board will be required to favour the underrepresented sex when making appointments where all other qualifications are equal. Public "undertakings", over which public authorities exercise a dominant influence, will be required to meet the same target by 2018. Small and medium-sized enterprises (SMEs), and companies which are not listed on a stock exchange, are exempt from the proposals.

Companies will be able to set themselves individual, self-regulatory targets for executive directors, or those involved in the day-to-day running of the company, as a complimentary measure to the main proposal if they so choose. Member states will be asked to lay down "appropriate and dissuasive sanctions" for companies that do not make board appointments in line with the proposed directive.

Measures to introduce better gender balance on corporate boards in the EU have been led by Justice Commissioner Viviane Reding, who has previously spoken in favour of a mandatory 40% quota. A vote on Reding's original proposals was postponed last month in order to give commissioners "more time to reach an ambitious consensus" in the face of strong opposition from member states including the UK.

"The European Union has been successfully promoting gender equality for over 50 years – however, there is one place where we have not seen any progress: company boardrooms," Reding said. "The example set by countries such as Belgium, France and Italy, who have recently adopted legislation and are starting to show progress, clearly demonstrates that time-limited regulatory intervention can make all the difference. The Commission's proposal will make sure that in the selection procedure for non-executive board members priority is given to female candidates – provided they are under-represented and equally qualified as their male counterparts."

The proposed directive makes it clear that "qualification and merit" will remain the key criteria for a job on a company board. Preference will instead be given to the equally qualified candidate of the underrepresented sex unless an "objective assessment taking into account all criteria specific to the individual candidates" tilts the balance in favour of the candidate of the other sex. Member states will be free to introduce stricter criteria, such as mandatory quotas, if they choose to do so.

Individual companies will be able to set themselves "flexi quotas" for gender representation among executive directors if they choose to do so, setting themselves their own targets to be met by the EU's deadline. Companies that choose to adopt these quotas will have to report annually on their progress against these targets.

In a statement, UK Business Secretary Vince Cable welcomed the Commission's decision not to impose mandatory gender quotas.

"We remain fully committed to increasing women's representation in UK boardrooms, but along with like-minded Member States, we have consistently argued that measures are best considered at national level," he said. "We believe that the UK's business-led, self-regulatory model, as set out in the Davies Review, is the best approach for us. We will now consider the Commission's proposal carefully and work with other Member States to ensure the final Directive supports our efforts to ensure we have diverse and effective boards."

The UK is currently consulting on draft regulations (21-page / 275KB PDF) aimed at improving the quality of companies' narrative reporting. As part of the changes, quoted companies could be required to publish the number of women and men within their organisations both overall and in senior executive positions. A review into gender diversity on company boards in the UK, led by Lord Davies, has set a target of 25% female representation on FTSE 100 company boards by 2015.

According to EU figures only 13.7% of board members at leading European companies are women, up from 11.8% in 2010. It will take around 40 years to achieve 40% female representation if the "slow rate of progress" made over the last ten years is to continue without legislative action, the Commission said.

Several EU member states including Belgium, France, Italy, the Netherlands and Spain have already introduced rules on gender quotas for company boards, while other countries have insisted on gender balance on the boards of state-owned companies. Norway, which is not an EU member, already has a 40% quota. The Commission said that the current "legally fragmented" approach could risk "hampering the functioning" of Europe's Single Market due to different company law rules and sanctions for non-compliance.