History and background of the European proposal
On 17 October 2022, the European Council gave its final go-ahead to EU rules to promote more balanced gender representation on the boards of European listed companies. The proposal for the Directive was first presented by the European Commission in 2012 with the aim of promoting gender balance in decision-making at the highest levels of corporate governance. However, the proposal was blocked by several member states, including the Netherlands, for a long time, which member states believed that such legislation should be made at a national level.
Despite the existence of EU legislation prohibiting gender discrimination and despite evidence of the positive impact of gender balance on economic decision-making, women are still vastly outnumbered by men across the EU. Research shows that on average 31.5% of board members and only 8% of board chairs are women. Consequently, public support for measures on diversity in decision-making positions is increasing, resulting in the Netherlands and other member states to change their position on the Directive. The current Dutch government wishes to pursue an active emancipation and anti-discrimination policy and to protect and promote European values such as gender equality, which is in line with the European ambitions of the Directive.
Purpose and content of the Directive
The Directive aims to introduce fair and transparent selection and appointment procedures, so that at least 40% of non-executive board positions, either members of supervisory boards or non-executive directors in a one-tier board, are occupied by the under-represented sex. If member states choose to apply the new rules to both executive and non-executive directors, a target of at least 33% of all director positions applies. Small and middle-sized companies with fewer than 250 employees are excluded from the scope of the Directive.
However, the Directive includes an important exception clause, as a result of which member states that were initially critical have now accepted the Directive. Under the exception clause, member states can suspend implementation of the Directive if they (i) have already taken binding measures that are equally effective as those set out in the Directive – which is the case when national legislation requires that members of the underrepresented sex hold at least 30 % of the non-executive director positions or at least 25% of all director positions in listed companies – or (ii) have made sufficient progress that the targets set out in the Directive are close to being met. The suspension applies for five years from the implementation deadline, so that national initiatives, such as national legislation, are given a chance to lead to results.
In the Netherlands, the law 'Balancing the ratio of men and women on supervisory and management boards' (Evenwichtiger maken van de verhouding van mannen en vrouwen in de raad van commissarissen en raad van bestuur) has been in force since 1 January 2022, potentially allowing the exception clause to be invoked. The law consists of a 33% ingrowth quota for the approximately 100 listed companies in the Netherlands, which quota applies to new appointments as from the moment the law came into force. In addition, the law contains a 33% target figure and transparency obligation for the approximately 5,000 'large' companies in the Netherlands. New appointments to the supervisory board that do not contribute to a more balanced male-female ratio are null and void. For more information on this law, please refer to our earlier news item.
Invoking the exception clause in the Directive could result in the Netherlands not having to amend its own law for the next five years. The Minister of Education, Culture and Science states that recent figures show that the percentage of women on supervisory boards of listed companies in the Netherlands is 33%. If the exception clause will not be invoked, current national legislation would have to be amended in order to fully comply with the Directive, either by changing the ingrowth quota upwards to 40%, or by making the existing 33% target applicable to management boards as well.
The Directive in practice
Companies must meet the targets in the Directive by 30 June 2026, unless the exception clause is invoked by the Netherlands. The Directive also requires listed companies to provide information to the competent authorities once a year about the gender representation on their boards and, if the targets of 33% or 40% have not been met, how they plan to attain them. The member states must publish a list of companies that have met the targets of the Directive annually.
In member states where the targets of the Directive are not met, listed companies should introduce transparent recruitment procedures, based on a comparative assessment of the different candidates on the basis of clear and neutrally formulated criteria. If companies have to choose between equally qualified candidates, they should give priority to the candidate of the under-represented sex. The Directive further provides for the possibility of attaching fines and nullity or annulment of the contested director’s appointment in breach of the Directive. However, it is up to the member states themselves to adopt effective, proportionate and dissuasive enforcement measures to ensure compliance with the Directive.
The Directive still needs to be adopted by the European Parliament. However, the Council and Parliament did reach a preliminary political agreement on the Directive earlier. If the Directive is formally approved by the European Parliament, European member states will have two years to adopt the required national measures. During this period, the Netherlands could also invoke the exception clause, which means that the already existing legislation regarding the ingrowth quota and target scheme remains in force.
Of course, we will continue to closely monitor the developments around the formal adoption procedure of the Directive. Should you have any questions following this news item, please feel free to contact us – we are of course happy to assist.