Documents considered by the Committee on 28 January 2015 - European Scrutiny Committee Contents


2 Gender balance on corporate boards

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested; tagged as relevant to the opt-in debate on the draft Regulation establishing a European Union agency for law enforcement training (Cepol) recommended on 3 September 2014; drawn to the attention of the Business, Innovation and Skills Select Committee
Document detailsDraft Directive on improving the gender balance among non-executive directors of companies listed on the stock exchange and related measures
Legal baseArticle 157(3) TFEU; co-decision; QMV
Department

Document numbers

Business, Innovation and Skills

(34423), 16433/12 + ADDs 1-3, COM(12) 614.

Summary and Committee's conclusions

2.1 The draft Directive seeks to redress the gender imbalance on the boards of many publicly listed companies by introducing new procedural requirements for the recruitment and selection of non-executive directors. Although drafted in gender-neutral terms, the objective of the Directive is to increase the presence of women on company boards so that they comprise at least one third of a company's executive or 40% of its non-executive directors by 2020, or sooner (by 2018) in the case of public undertakings.

2.2 Whilst endorsing the objective of greater gender balance on company boards, the Government has consistently opposed EU legislation on the grounds that establishing an EU-wide 40% quantitative objective would be tokenistic, counter-productive and tantamount to introducing quotas. It has advocated, instead, national measures which can be better tailored to the business culture and company law requirements of each Member State. We share the Government's reservations about the necessity for action at EU level and recommended issuing a Reasoned Opinion which the House endorsed in January 2013.

2.3 Progress since then has been slow, not least because the range and diversity of company systems have hampered efforts to agree measures that would work in all 28 Member States. The European Parliament broadly supports the Commission proposal but a number of Member States — sufficient to constitute a blocking minority within the Council — share the Government's concerns. Whilst continuing to oppose the draft Directive, the Government has been willing to explore possible compromise proposals to protect against the eventuality that the blocking minority may not be sustainable.

2.4 We last considered the draft Directive at our meeting on 3 September 2014. We noted that considerable uncertainty remained as to the number of publicly listed companies in the UK to whom the draft Directive would apply and invited the Minister for Employment Relations and Consumer Affairs (Jo Swinson) to provide a clear assessment of the numbers likely to be affected at the earliest opportunity.

2.5 The Government has made clear that stakeholders responding to the review on women on boards undertaken by Lord Davies in 2011 (before the draft Directive was published) overwhelmingly rejected the introduction of "quotas" for women on company boards. The Government has also told us that the provisions contained in the draft Directive "do not amount to quotas"; rather, their objective is to ensure that companies put in place a transparent selection process for board appointments with a view to achieving greater representation of women by 2020.[12] Given these differences of emphasis, we asked the Minister to provide us with a clearer indication of stakeholder opinion on the draft Directive itself, rather than in the context of the Lord Davies review. We also reiterated our request for a summary of the main changes proposed by the European Parliament and the Government's position on them, and sought further progress reports on negotiations within the Council.

2.6 We note that further progress on the draft Directive, as well as the UK's ability to sustain a blocking minority, remain uncertain. We ask the Government to ensure that we have early warning and, if possible, sight, of any compromise proposal on which the Presidency may seek to secure a general approach and to provide a detailed assessment of its content and policy implications for the UK. As negotiations within the Council on the draft Directive appear to be entering an important phase, we draw our chapter to the attention of the Business, Innovation and Skills Select Committee. Meanwhile, the proposal remains under scrutiny and we ask the Government to provide regular progress reports.

Full details of the documents: Draft Directive on improving the gender balance among non-executive directors of companies listed on the stock exchange and related measures: (34423), 16433/12 + ADDs 1-3, COM(12) 614.

Background

2.7 Our earlier Reports (listed at the end of this chapter) provide a detailed overview of the draft Directive, the Government's position, and the grounds on which we recommended that the House issue a Reasoned Opinion. Whilst rejecting the case made by the Commission for EU legislative action on subsidiarity grounds, we have also sought to explore:

·  the trajectory of change within the UK, and across the EU, in securing more balanced gender representation on company boards;[13]

·  the number of publicly listed companies in the UK likely to be affected by the draft Directive — although the Government has indicated that there are approximately 950 such companies in the UK, those qualifying as small or medium-sized enterprises ("SMEs") would be excluded from its application;

·  the scope of possible derogations from the draft Directive and their application to publicly listed UK companies; and

·  stakeholder views on the draft Directive.

The Minister's letter of 5 December 2014

2.8 The Minister provides a brief update on progress in negotiations under the Italian Presidency, observing:

    "Although there is currently no agreement on the Commission's proposal in the Council and the Directive remains blocked, the Italian Presidency has sought to advance the discussion on this file, which it views as an important priority."

2.9 She notes that the Presidency would be seeking agreement on a general approach at the Employment, Social Policy, Health and Consumer Affairs (EPSCO) Council on 11 December, but adds:

    "Our position on the Directive has not changed. However, the Presidency and the Commission have been working to explore ways to address Member States' concerns through drafting changes, in particular to the opt-out clauses. As a result of this, as well as domestic political and policy changes, it is possible that some Member States could move towards supporting a revised text."

The Secretary of State's letter of 20 January 2015

2.10 The Secretary of State for Business, Innovation and Skills (Vince Cable) confirms that there was only a brief discussion of the draft Directive at the EPSCO Council on 11 December and that the Presidency did not press for agreement to a general approach. He continues:

    "The blocking minority of countries opposed to the Directive, which includes the UK, was maintained. As mentioned in previous letters, the Presidency and the Commission have been working to explore ways to address Member States' concerns through drafting changes, in particular to the opt-out clauses. Some Member States are also changing domestic measures, although it is not yet clear how this will impact on their position in respect of mandatory European provisions. We will continue to keep a close eye on Member State positions."

2.11 Whilst agreeing with the aim of the draft Directive, the Government continues to oppose it on subsidiarity grounds:

    "We continue to believe that mandatory processes at the EU level are not the right mechanism and that action taken in each country should be different and take account of that country's starting point, legal system and unique business environment."

2.12 Although there is no agreement within the Council on the need for a Directive, or its detailed provisions, the Government will continue to monitor developments and consider their potential impact for the UK. In this context, the Secretary of State describes the main elements of the text currently under consideration within the Council:

·  the proposal would apply to listed companies with a registered office in a Member State, but exclude those qualifying as SMEs; companies with fewer than 10% of employees of one sex would also be excluded from parts of the Directive;

·  each company should set a target for at least 40% of non-executive or 33% of all director positions to be filled by the under-represented sex by 1 January 2020;

·  Member States would be required to put in place "effective, proportionate and dissuasive" enforcement measures; and

·  a derogation would enable Member States to suspend the application of part of the Directive relating to specific targets, provided they have implemented "equally effective measures with the aim of attaining more balanced representation of men and women among the directors of listed companies".

2.13 Turning to the application of the proposed derogation, the Secretary of State explains that a Member State would have to demonstrate that it meets one of the following conditions:

·  national legislation is in place requiring the under-represented sex to fill at least 30% of non-executive director or 25% of all director positions by 1 January 2020;

·  it has achieved 30% representation of the under-represented sex in non-executive director positions or 25% in all director positions; or

·  it has achieved 25% representation of the under-represented sex in non-executive director positions or 20% in all director positions and these figures represent at least a 7.5% increase over five years.

2.14 The Government has not yet decided whether it would be possible for the UK to benefit from this derogation, but notes that the conditions listed are non-exhaustive and that there remains scope to explore "alternative approaches which would qualify for an exemption". However, as currently drafted, the Government accepts that it would:

    "almost certainly need to extend or adapt our domestic policy in order to try and reach the above targets and thus qualify for the exemption. This is because the scope of the Directive as currently drafted, covers a wider group of companies than FTSE 100/250, on which UK domestic policy has focused."

2.15 The Secretary of State notes that the draft Directive would apply to all UK listed companies, excluding SMEs.[14] Whilst the total number of listed companies is subject to fluctuation, he anticipates that between 550 and 650 would be affected.[15]

2.16 The European Parliament agreed its First Reading position on the draft Directive in November 2013.[16] The Secretary of State summarises the main elements:

·  as in the Commission's original proposal, the draft Directive would apply to listed companies (public as well as private), excluding SMEs, but would also include provision for a review to consider extending its application to non-listed public undertakings and to other non-listed large undertakings;

·  in order to meet the objectives of the draft Directive, each listed company (other than SMEs) would have to ensure that at least 40% of its non-executive directors were from the under-represented sex by 1 January 2020;

·  a requirement to ensure that, at every stage of the recruitment, selection and appointment process, priority is given to candidates of the under-represented sex if they are equally qualified;

·  the inclusion of stronger reporting requirements for listed companies on the measures they are taking to secure greater gender balance on their boards in compliance with the draft Directive; and

·  an extension of the range of sanctions which Member States are required to introduce for non-compliance, including exclusion from public calls for tenders and partial exclusion from EU Structural Funds.

2.17 The Secretary of State says that the Government continues to engage with stakeholders, adding that a majority supports the Government's voluntary approach. He continues:

    "The CBI, for example believe quotas and other legalistic approaches can drive a compliance culture, making diversity a box-ticking exercise. However, TUC are supportive of quotas."

2.18 The Secretary of State describes the "great progress" made in the UK in increasing the representation of women on executive boards since 2010:

    "Analysis published this month by Catalyst shows that we are in the top ten for European countries and well ahead of the rest of the world.  This achievement has been in direct response to the review I commissioned in 2011, led by Lord Davies, and the promotion of the voluntary framework that emerged from it. Representation of women on FTSE 100 boards has jumped to 23% — almost double the number in 2010 — and we now no longer have any all-male boards in the FTSE 100, something I am extremely proud of.

    "We have achieved all of this without the need for legislative quotas.  We are leading the way on this initiative internationally and all eyes are upon us to see when we deliver this ambitious target. The threat of EU mandatory targets remains a reality unless we can show that we can achieve true diversity through other voluntary means.

    "Whilst good and steady progress has already been made towards our 25% target by 2015, this has progressively slowed in the last few months and there is now a real risk that we will not meet the target this year. British businesses cannot afford to be complacent and alarm bells should be ringing in the ears of those who are not yet doing their bit to help us reach our target.

    "To meet it we must re-double our efforts to create a balanced corporate environment and to prevent the EU from imposing tokenistic legislative quotas that British business neither wants nor needs."

Previous Committee Reports

Ninth Report HC 219-ix (2014-15), chapter 6 (3 September 2014); Sixth Report HC 219-vi (2014-15), chapter 1 (9 July 2014); Twenty-eighth Report HC 83-xxv (2013-14), chapter 3 (18 December 2013); Thirty-third Report HC 86-xxxiii (2012-13), chapter 8 (27 February 2013); Twenty-third Report HC 86-xxiii (2012-13), chapter 1 (12 December 2012).


12   See letter of 9 November 2013 from Jo Swinson to the Chair of the European Scrutiny Committee. Back

13   BoardWatch tracks the appointment of women to FTSE 100 and FTSE 250 company boards. Back

14   These are defined as listed companies with fewer than 250 employees and an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million. Back

15   A more precise number is difficult to ascertain because of uncertainties in financial performance data relating to the definition of SMEs. Back

16   First Reading in November 2013. Back


 
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Prepared 6 February 2015