3 Gender balance on corporate boards
| (34423)
16433/12
+ ADDs 1-3
COM(12) 614
| Draft Directive on improving the gender balance among non-executive directors of companies listed on the stock exchanges and related measures
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| Legal base | Article 157(3) TFEU; co-decision; QMV
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| Department | Business, Innovation and Skills
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| Basis of consideration | Minister's letter of 9 November 2013
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| Previous Committee Report | HC 86-xxxiii (2012-13), chapter 8 (27 February 2013);
HC 86-xxiii (2012-13), chapter 1 (12 December 2012)
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| Discussion in Council | No date set
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| Committee's assessment | Legally and politically important
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| Committee's decision | Not cleared; further information requested
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Background and previous scrutiny
3.1 The draft Directive seeks to increase the number of women
represented on the boards of publicly listed companies so that
they comprise at least one third of a company's directors or 40%
of its non-executive directors by 2020, or by 2018 in the case
of public undertakings. The Commission advances three reasons
for action at EU level:
- the improbability of achieving greater gender
balance if Member States act individually — current rates
of progress across the EU suggest that it would take more than
20 years to achieve the suggested targets;
- growing discrepancies in the approaches taken
by Member States which may have a negative impact on the functioning
of the internal market; and
- the removal of barriers to the participation
of women in the labour market in order to stimulate economic growth
and competitiveness.
3.2 The Commission describes the 40% target for
non-executive directors as a "quantitative objective"
rather than a mandatory quota. The draft Directive sets out procedural
rules for the selection and appointment of non-executive directors
which are intended to ensure that candidates are assessed against
objective and gender-neutral criteria. It stipulates that a candidate
of the under-represented sex should only be given priority if
s/he fulfils the requirements of the job in terms of suitability,
competence and professional performance and there are no other
factors tilting the balance towards another candidate. The draft
Directive does not apply to small and medium-sized companies and
Member States may exempt listed companies from the requirement
to meet the 40% objective if their workforce has fewer than 10%
of one sex.
3.3 Whilst underlining its commitment to more
diverse company boards, the Government suggested that "heavy-handed
measures, such as mandatory targets, regulation and legislation"
would "fail to fix the problem" of women's under-representation
on company boards, were tantamount to quotas, and would be "counterproductive."[4]
The Government also highlighted a number of legal and practical
difficulties with the Commission's proposal which are described
in our Twenty-third Report of 12 December 2012.
3.4 We recognised that gender equality was an
area in which the EU has a clear competence to act but considered
that there was, as yet, insufficient justification for the type
of action proposed by the Commission for the following reasons:
- it was too soon to conclude that Member States
were unwilling to act individually, or that the measures they
introduced at a national level would be ineffective;
- the business case advanced by the Commission
for more diverse boards as a means of improving corporate governance
and performance would tend to suggest that there was more, rather
than less, reason for Member States to take action as a means
of securing competitive advantage;
- the obstacles cited by the Commission as impeding
the functioning of the internal market might be theoretically
possible, but a stronger evidence base of problems actually encountered
was needed before concluding that EU action to reconcile divergent
national approaches was necessary; and
- there was insufficient evidence to show that
the draft Directive was the only, or the best, way of increasing
the participation of women in the labour market.
3.5 The House agreed to send a Reasoned Opinion
to the Presidents of the EU institutions on 7 January 2013. Meanwhile,
we invited the Government to comment on the accuracy of the Commission's
prediction that only 17% of UK listed companies within the scope
of the draft Directive would have at least 40% of women non-executive
directors by 2020 and to explain why, given this slow rate of
progress, it considered that the proposal would be counter-productive
and create "more, not fewer, barriers for women and less
effective boardrooms."[5]
3.6 The Government's response, reported in our
Twenty-third Report of 27 February 2013, suggested that the number
of company boards with at least 40% of women directors by 2020
was likely to be "significantly in excess of the 17% projected
by the Commission" and that prescriptive measures, such as
quotas or binding targets, might be perceived as condescending
and tokenistic, undermining the contribution made by women.
3.7 We noted that the Government was only able
to project the proportion of women expected to be occupying board
positions in the top 100 or 350 companies listed on the London
Stock Exchange, whereas the scope of the draft Directive encompassed
(according to Government estimates) approximately 950-odd publicly
listed companies in the UK. We asked whether the Government has
determined how many of these companies would qualify as a small
or medium-sized enterprise and thus be excluded from the scope
of application of the draft Directive, since this could appreciably
affect its impact in the UK. We also asked for progress reports
on the negotiations, indicating how the many concerns highlighted
in the Government's Explanatory Memorandum were being addressed,
and a summary of the outcome of the Government's consultation
of stakeholders.
The Minister's letter of 9 November 2013
3.8 The Minister for Employment Relations and
Consumer Affairs (Jo Swinson) reiterates her strong commitment
to increasing the number of women on UK company boards and at
senior management level and expresses her support for the intentions
underlying the draft Directive, but adds:
"However, I agree with the Committee that any
measures in this area should be undertaken at national level,
taking account of specific national circumstances including business
culture, company law and similar factors. Furthermore, the specific
proposals being put forward by the Commission run counter to the
UK's voluntary approach and would in my view be counterproductive
and have unintended consequences. We have therefore consistently
opposed the Directive on grounds of subsidiarity and proportionality,
as have a number of like-minded Member States."
3.9 The Minister notes that a number of Member
States, as well as the Council Legal Service, have questioned
the legal base for the draft Directive on the grounds that the
role of a company director is unique and may not fall within the
scope of Article 157(3) of the Treaty on the Functioning of the
European Union (TFEU) which concerns "the application of
the principle of equal opportunities and equal treatment of men
and women in matters of employment and occupation." She
draws our attention to a Commission staff working document which
provides a detailed explanation of the reasons for citing Article
157(3) TFEU as the sole legal base for the draft Directive and
concludes that precedent and the case law of the Court of Justice
establish that executive and non-executive board members fall
within the ambit of Article 157(3), either as workers or as self-employed
individuals.[6] The Minister
broadly endorses the Commission's legal analysis and says that
the Government does not intend to challenge the legal base of
the draft Directive, but adds:
"It should be noted that the status of directors
vis- -vis the companies on whose board they serve varies considerably
from one Member State to another — another illustration
of the risks inherent in a one-size-fits-all approach."
3.10 Turning to the content of the draft Directive,
the Minister summarises its key provisions in the following terms:
"The stated objective is that by 2020, women
should constitute a minimum of 40% of the non-executive directors,
or 33% of all directors, on the boards of all listed companies
registered in an EU member state. Small and medium enterprises
(SMEs) are exempted. Member States and individual companies could
use whatever means they wished to achieve this goal, however in
the event that companies did not achieve the target by the set
date they would then be required to put in place a transparent
selection process for board appointments, based on objective qualifications
and open to challenge from unsuccessful candidates. Companies
that did not meet the target and did not put these transparent
processes in place would face enforcement measures.
"A Member State may derogate from implementing
the Directive if it can show that, in aggregate, the listed companies
whose registered offices are in that Member State will meet the
specified target of 40% or 33% as the case may be. The effect
of this derogation clause would be to enable some listed companies
to escape the measures specified in the Directive, provided that
enough other companies exceeded the target to allow it to be met
when all board positions were considered in aggregate.
"It is important to note that these provisions
do not amount to quotas. A company could continue indefinitely
without meeting the target - even with an all-male board. So long
as it implemented the specified selection procedures, it would
not be in breach. While this is a welcome change, I continue to
believe that the provisions are ill-advised and would not be helpful
in the UK context. I have not ruled out compulsory measures if
progress is insufficient, but any such measures would be suited
to the UK context — and would of course be subject to Parliamentary
scrutiny."
3.11 The Minister explains that two European
Parliament Committees — on Legal Affairs and on Women's
Rights and Gender Equality — have jointly considered the
draft Directive (with input from three other Committees)[7]
and their recommendations were expected to be considered in a
plenary sitting in November.[8]
She continues:
"There is a wide range of views in the Parliament
and within political groups. In debate, the draft Directive has
been criticised as much for not being rigorous enough as for being
disproportionate or unwise. MEPs have also drawn attention to
the importance of tackling related issues such as the gender pay
gap and to the need for the EU's own institutions to lead by example,
both of which I welcome.
"The case for voluntary measures has been put
effectively and constructively by UK members. Marina Yannakoudakis
MEP hosted a well-attended meeting in September with speakers
Amanda Mackenzie, a member of Lord Davies's steering group, Helena
Morrissey, founder of the 30% Club and Heather McGregor, executive
search consultant and FT Columnist. MEPs and Commission officials
have praised the UK's approach and the evident commitment from
UK business leaders and Government to improving the gender balance
of listed company boards; they are particularly appreciative of
the leadership of Lord Davies on this issue."[9]
3.12 Progress within the Council has proceeded
at a much slower pace. The Minister explains:
"Discussions in Council working groups have
highlighted the range and diversity of company law systems and
hence the difficulty of devising measures that will make sense
across all 28 Member States. The key issue is that directors are
elected by shareholders to represent them. In some Member States
the company may not have much influence over the selection process
— hence putting an obligation on the company with regard
to selection may not be effective. This applies for example to
employee representatives in dual board systems."
3.13 She says that the Government has "maintained
our principled objections
on grounds of proportionality and subsidiarity" whilst also
putting forward amendments to ensure that provisions derogating
from the draft Directive are effective and to clarify the scope
of the proposal and the applicable law. She continues:
"Our objections on proportionality and subsidiarity
are shared by several other Member States, some of whom also have
concerns over the legal basis of the Directive. For this reason
it is difficult to see a compromise position emerging."
3.14 The Minister encloses a minute statement
tabled by six Member States (including the UK) at the meeting
of Employment Ministers on 20 June 2013, and notes that a number
of additional Member States have since associated themselves with
it. The statement opposes the adoption of legally binding EU
measures and is published as an Annex to this chapter. She adds:
"Officials are keeping in touch with like-minded
Member States who are united in principled opposition to the Directive
— positions that cannot be addressed by drafting changes.
It is of course possible that some Member States could change
their view, not least given the elections that have recently taken
place in Germany and the Czech Republic.
"Given the fundamental nature of the objections,
it is difficult to see how an acceptable compromise can be reached
that would lead to agreed legislative measures. Yet we are in
agreement with Commissioner Reding on the importance of this issue
and the need for political leadership, which she is providing.
Hence our preferred outcome remains influencing company behaviours
by non legislative means. While this would not be binding, it
would allow Member States to unite around a strong political statement
on this important issue."
Conclusion
3.15 We thank the Minister for providing an update
on progress made in the Council and the European Parliament.
Her letter refers to "a welcome change" in the provisions
enabling Member States to derogate from the procedural rules governing
the selection and appointment of non-executive directors if they
have already put in place effective measures to achieve the 40%
quantitative objective. We ask her to explain how this change
differs from the Commission's original proposal and whether she
considers that the UK would be able to make use of this derogation.
We also ask her to provide updated figures on the number of women
represented on the boards of publicly listed UK companies and
to indicate whether the trajectory of change anticipated between
now and 2020 is likely to achieve the 40% quantitative objective.
3.16 We are disappointed that the Minister has
not addressed the question we raised in our Twenty-third Report,
agreed on 27 February 2013, which asked how many of the 950-odd
listed companies in the UK expected to fall within the scope of
the draft Directive would be excluded from its application because
they qualify as small and medium-sized companies. Nor has she
provided a summary of the outcome of the Government's consultation
of stakeholders which we also requested. We ask her to do so.
We understand that the European Parliament voted on the Commission's
proposal at its plenary session on 20 November. We would welcome
a summary of the main changes proposed by the European Parliament
and the Government's position on them. Meanwhile, the draft Directive
remains under scrutiny.
4 See paras 24 and 38-9 of the Explanatory Memorandum
submitted by the Minister for Employment Relations and Consumer
Affairs and for Women and Equalities (Jo Swinson). Back
5
Ibid, see para 24. Back
6
See Council document 12581/13. Back
7
Employment and Social Affairs, Economic and Monetary Affairs,
and Internal Market and Consumer Protection. Back
8
The plenary vote took place on 20 November. Back
9
Lord Davies of Abersoch published a review, Women on boards,
in February 2011, which noted that, at the current rate of change,
it would take over 70 years to achieve gender-balanced boardrooms
in the UK. It recommended a voluntary business-led approach to
securing a change of culture in boardrooms but did not rule out
the possibility of more prescriptive alternatives. Back
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