European proposals to increase number of women on boards

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1 November 2012 European proposals to increase number of women on boards Impact for Dutch companies. The Commission s proposals The European Commission has announced its proposals for improving gender balance in Europe s board rooms, with a target of 40% of nonexecutives by Responding to resistance from Member States, the Commission has abandoned plans to introduce a mandatory quota. Instead, a draft EU Directive has been published which will set an objective for listed companies to achieve 40% representation of the under-represented sex amongst nonexecutive directors by This is not a quota as such. Companies that don t meet the target just need to ensure their recruitment processes are transparent and unbiased, and give preference to equally qualified female candidates. If they fail to meet the target by 2020 notwithstanding such processes, they must provide an explanation. Companies are also required to set a voluntary target for the number of executive directors. The Dutch Government has welcomed the fact that the Commission has not sought to impose mandatory quotas and Dutch companies are likely to feel the same way. Objective and target date The objective set by the proposed Directive is for board members of the under-represented sex to hold 40% of non-executive director positions by 1 January 2020 or, in the case of public undertakings, 1 January 2018 (see Public undertaking below). References in the draft EU Directive and in this letter to: > non-executive directors include references to supervisory directors in a two-tiered structure; and > executive directors include references to managing directors in a twotiered structure. Contents The Commission s proposals... 1 Objective and target date. 1 Non-executive directors... 1 How will the objective work?... 2 Which companies will the rules apply to?... 2 Public undertaking... 2 Positive discrimination?... 3 What recruitment processes are needed?... 3 What about executive directors?... 3 Any reporting requirements?... 4 Sanctions for noncompliance?... 4 What happens next?... 4 EU level... 4 Dutch level... 5 Comment... 5 Appendix... 6 Non-executive directors The number of non-executive director positions to be given to women in order to meet the objective is not exactly 40%. It is the proportion closest to 40% but not exceeding 49%. This means that for a board with four non-executive directors, one needs to be female. If there are six non-executive positions European proposals to increase number of women on boards 1

2 there need to be two women. See further the table in the Appendix to this note. There is an option for Member States to provide that where at least one-third of all directors (executive and non-executive) are from the under-represented sex the objective is met, even if the objective is not met in relation to nonexecutive directors. This might be, for example, if a company has five nonexecutive directors, of which only one is a woman, and four executive directors, of which two are women. In that case one-third of the board as a whole would be female. How will the objective work? Companies that do not meet the objective must operate a transparent and unbiased recruitment process and, if there are equally qualified candidates for a non-executive director position, give priority to a candidate of the underrepresented sex. A company which fails to operate such a process or fails to give priority to the under-represented sex will be subject to sanctions (see Sanctions for non-compliance? below). In addition, a company which fails to meet the objective by 1 January 2020 (or 1 January 2018 in the case of a listed company as public undertaking) must give an explanation (see Any reporting requirements? below). Which companies will the rules apply to? The proposals will apply to companies which are incorporated in a Member State with securities admitted to trading on a regulated market in one or more Member States (i.e. listed companies). This means that a company incorporated outside the EU will not be subject to the rules even if it is listed on an EU market. AIM-listed companies will also not be caught by these proposals. However, an EU-incorporated company with a listing of debt on an EU regulated market will be caught by the rules, even if it does not have a listing of equity securities. The rules will not apply to small and medium-sized enterprises (SMEs), even if they are listed. SMEs are companies which: (i) employ fewer than 250 persons; and (ii) have an annual turnover not exceeding 50m (or the equivalent in the home currency) or an annual balance sheet total not exceeding 43m. Member States may choose to provide that companies where the members of the under-represented sex represent less than 10% of the workforce as a whole are not subject to the objective. Public undertaking The target date for listed companies that are public undertakings to meet the objective is 1 January This is earlier than 1 January 2020, the target date for other companies. The explanation according to the draft EU Directive is that Member States exercise a dominant influence over these undertakings and therefore have more instruments to bring about the change more rapidly. European proposals to increase number of women on boards 2

3 Positive discrimination? The Directive provides that, until the objective is met, priority must be given to a candidate of the under-represented sex, but only if that candidate is equally qualified in terms of suitability, competence and professional performance. This ties in with existing EU law as to when positive discrimination is allowed. Priority does not need to be given if an objective assessment taking account of all criteria specific to individual candidates tilts the balance in favour of the candidate of the other sex. It is unclear exactly what might be an acceptable reason to tilt the balance in favour of a male candidate and companies will need to be wary of relying on this exception. If an unsuccessful female candidate for a position on a board where the target is not met establishes facts from which it can be presumed that she was as well qualified as the successful male candidate, the onus is on the company to prove that it has not breached the requirement to positively discriminate. Will this requirement put companies off recruiting men? It will mean that companies will need to consider recruitment of non-executive directors even more carefully than at present. Companies still need to do what is best for the company and its shareholders and so if the male candidate is the best candidate he should be given the role. The difference is that companies need to be prepared to establish why he was the best man for the job, against objective criteria, and why any female candidate was not as well qualified. What recruitment processes are needed? The draft EU Directive requires appointments to non-executive positions by companies which do not meet the objective to be made: > on the basis of a comparative analysis of the qualifications of each candidate; and > by applying pre-established, clear, neutrally formulated and unambiguous criteria. Unsuccessful candidates will have the right to be given, on request, details of the qualification criteria upon which the selection was based, the objective comparative assessment of those criteria and, if applicable, the considerations tilting the balance in favour of a candidate of the other sex. This right to information will apply to all candidates, male or female. It means that companies, nominations committees and head hunters will need to take great care to establish and stick to fair criteria when recruiting new nonexecutive directors. What about executive directors? According to the Directive, listed companies will be required to set individual, voluntary, targets for gender balance among executive directors to be achieved by 1 January 2020 (2018 for listed companies that are public undertakings). It will be much more difficult for companies to set sensible targets for executive directors than it is for non-executives, as most boards have small numbers of executives, vacancies arise less frequently and there are likely to be fewer suitable candidates for any available post. European proposals to increase number of women on boards 3

4 Any reporting requirements? In addition to the requirement to set a target for executive directors, companies will be required annually to provide to national competent authorities, and publish on their website, information about the gender representation of both executive and non-executive directors and the measures they have taken to achieve both their own target for executive directors and the 40% target for non-executive directors. If a company fails to meet either of those targets, such information must include: > the reasons why it has not reached the objective; and > what measures it has or will put in place to meet it. Dutch companies need to think not only about what is coming from the EU, but also national rules. See the table in the Appendix to this note for a summary. Sanctions for non-compliance? No sanctions apply if the targets are not met. Sanctions will only apply if: > a company which does not meet the target for non-executives at any time after the national laws come into force fails to put in place the recruitment measures referred to above; > a company fails to publish a target for the number of executive directors; or > a company fails to comply with the reporting measures referred to above. It is for each Member State to lay down the sanctions which will apply. They must be effective, proportionate and dissuasive. Sanctions may include administrative fines and/or the appointment of a non-executive director being declared void if the rules on recruitment process and positive discrimination have not been complied with. What happens next? EU level The Commission s proposal will now pass to the European Parliament and Council of the European Union (representing Member States national governments) for consideration. As the proposals are contained in a Directive, they will need to be implemented into national law by each Member State. After the Directive has completed the European legislative process, Member States will have two years to implement it into national law. This is likely to mean that it is implemented into national law not earlier than The Directive sets out minimum requirements, so Member States may impose more onerous requirements if they so wish. European proposals to increase number of women on boards 4

5 Dutch level By January 2013, large Dutch companies which meet specific standards will be obliged to have women occupy at least 30% of the board seats. This obligation will cease to exist in The Dutch legislator has promised to evaluate this 30% threshold after When doing so, we expect that it will also look at the implementation of the draft EU Directive. Comment These proposals are not mandatory quotas, but they will hopefully go some way in reducing the gender imbalance currently seen in Europe s boards. However, there is a danger that the focus on gender diversity will distract from the benefits of greater diversity in the broader sense. Once the Directive is implemented into Dutch law, nominations committees, HR departments and head hunters of those companies that fall short of the target will need to take great care in ensuring they have transparent recruitment processes which will stand up to scrutiny. Such companies shouldn t wait until that time before taking action. They can start looking at board succession now and see what they can be doing to attract suitable, qualified female candidates for any vacancies (whether executive or nonexecutive). Contacts For further information please contact: Daniella Strik Partner (+31) daniella.strik@linklaters.com Bauke Faber Knowledge Lawyer (+31) bauke.faber@linklaters.com or your usual contact at Linklaters. Details of the Commission s proposals and a link to the draft EU Directive are available here. The draft EU Directive will expire on 31 December Author: Bauke Faber This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Zuidplein XV Amsterdam Telephone (+31) Facsimile (+31) European proposals to increase number of women on boards 5

6 Appendix 1. Calculation of 40% target Number of non-executive directors Number of female NEDs needed to meet target Gender diversity reporting requirements for Dutch companies Requirement? Which companies? When? Dutch Corporate Governance Code: The supervisory board of a listed company needs to aim for a diverse composition in terms of such factors as gender and age. A quorum is not mentioned. The supervisory board is required to publish a profile of its size and composition on the company s website, and if the actual composition differs from the aimed composition to report so annually including how and when the aimed composition will be realised. Nonexecutive directors should interpret this analogously. > Companies with registered offices in the Netherlands and shares or depositary receipts admitted to a stock exchange. > Companies with registered offices in the Netherlands with balance sheet value of more than 500m with shares or depositary receipts admitted to a multilateral trade facility or compatible instrument. Now. Management and Supervision Act: Certain companies have to strive to achieve a gender balance (at least 30% of each sex) in both the executive and supervisory board. There are no formal sanctions, but it is based on the comply or explain approach. As long as the seats are not equally divided between men and women, the company must explain so in its annual report and state how it has tried to reach an equal division and how it aims to realise an equal division in the future. Draft EU Directive: This will require companies to report information annually about the gender representation of both executive and non-executive directors and the measures they have taken to achieve both their own target for executive directors and the 40% target for non-executive directors, plus an explanation of any failure to meet the targets. Companies that meet two of the following requirements: > the value of the assets according to the balance sheet and notes amounts to 17m or more; > the net turnover for the financial year amounts to 35m or more; and > the average number of employees during the financial year is 250 or more. Companies incorporated in a Member State with securities admitted to listing on an EU regulated market. From 1 January 2013 until 1 January From two years after implementation of the Directive (expected not earlier than 2016). European proposals to increase number of women on boards 6