Documents considered by the Committee on 2 December 2015 - European Scrutiny Contents


1 Gender balance on corporate boards

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested; drawn to the attention of the Business, Innovation and Skills Committee and the Women and Equalities Committee
Document detailsProposal for a Directive on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures
Legal baseArticle 157(3) TFEU; co-decision; QMV
DepartmentBusiness, Innovation and Skills
Document Numbers(34423), 16433/12 + ADDs 1-3, COM(12) 614

Summary and Committee's conclusions

1.1 The proposed 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 executive and 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 all directors (executive and non-executive) or 40% of non-executive directors by 2020.

1.2 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 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. Our predecessors also questioned the necessity for action at EU level and recommended issuing a Reasoned Opinion which the House endorsed in January 2013.

1.3 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 proposed Directive, the Government has been willing to explore possible compromise proposals to protect against the eventuality that the blocking minority may not be sustainable.

1.4 The Government has provided regular progress reports on negotiations within the Council. Until recently, the blocking minority (of which the UK forms part) has remained secure. In her latest update, the Minister for Intellectual Property (Baroness Neville-Rolfe) explains that the Luxembourg Presidency intends to seek a General Approach at the Employment, Social Policy, Health and Consumer Affairs (EPSCO) Council on 7 December, provides further details of the compromise text on which it would be based, and indicates that the blocking minority "is not as strong as it once was and positions could easily shift in the coming weeks".

1.5 We note that the Government intends to continue its voluntary and business-led approach to increasing the representation of women on company boards, with a particular focus on FTSE 350 companies, and opposes any regulatory intervention at EU level. As the Minister does not request a scrutiny waiver ahead of the EPSCO Council on 7 December, we infer that she intends to oppose the proposed General Approach. We ask her to report back to us on the outcome of the Council explaining how the UK voted and providing a copy of the text of any General Approach agreed.

1.6 We note that the legislative Resolution adopted by the European Parliament in November 2013 broadly supports the thrust of the Commission's original proposal.[1] We ask the Minister to provide regular progress reports on trilogue negotiations, once underway, and would welcome an early assessment of the areas in which she considers that a compromise may be possible, as well as the implications for publicly listed companies in the UK.

1.7 We draw this chapter to the attention of the Business, Innovation and Skills Select Committee and the Women and Equalities Committee. Meanwhile, the proposal remains under scrutiny.

Full details of the documents: Proposal for a 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

1.8 Our earlier Reports (listed at the end of this chapter) provide a detailed overview of the proposed Directive, the Government's position, and the grounds on which our predecessors 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;[2]

·  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 proposed Directive and their application to publicly listed UK companies; and

·  stakeholder views on the proposal.

1.9 When we considered the proposed Directive in September, we noted that it was only likely to progress further if the UK and other like-minded Member States were unable to sustain a blocking minority. We asked the Minister how confident she was that the blocking minority could be sustained and how substantial the risk that it might unravel.

1.10 We made clear that we expected to receive early warning and, if possible, sight, of any compromise proposal on which the Presidency might seek to secure a General Approach, accompanied by a detailed assessment of its content and policy implications for the UK, as well its impact on all UK publicly listed companies, not just the FTSE-100 companies. We also sought further information on the so-called "flexibility clause" and how it would apply in the UK. A press release issued after the EPSCO Council in June highlighted some "fine-tuning" of this clause to "allow Member States to choose their gender balance methods".[3]

The Minister's letter of 13 October 2015

1.11 In her first letter, the Minister confirms that little progress has been made during the current Luxembourg Presidency. Although the proposal was placed on the agenda for the EPSCO Council on 5 October, it was withdrawn to allow further discussion. She also confirms that the blocking minority is "still standing", without disclosing the identity of the Member States backing the Government's position, but adds that "some movement, in both directions, may occur in the coming months" as a number of Member States reconsider their positions.

1.12 The Minister explains that the inclusion of a "flexibility clause" would not, as currently drafted, be of benefit to the UK as it covers a wider range of companies — likely to be between 450 and 550 large listed companies — than the FTSE 100 and FTSE 250 companies targeted by the Government. The percentage of women represented on the boards of these companies continues to increase. A further report from Lord Davies will be published on 29 October and set out recommendations to improve gender balance which will inform the Government's future policy.

The Minister's letter of 26 November 2015

1.13 The Minister expects the Luxembourg Presidency to press for a General Approach to be agreed at the EPSCO Council on 7 December. She provides a copy of the latest compromise text, noting that it bears a limité marking and cannot therefore be published or reported on in any detail which would bring its contents into the public domain.

1.14 The Minister confirms that the Government continues to oppose any regulatory intervention at EU level. She suggests that it would undermine the progress made so far in the UK and that there could be a negative impact on business practice, "not only by moving away from business-led arrangements for increasing representation of women on boards, but by introducing EU rules for selecting candidates for appointment which might be a burden on companies". The Minister notes that Lord Davies published a summary report on 29 October reviewing the progress made during the last five years in implementing the recommendations contained in his Women on Boards report and highlights the following achievements:

    "More women on FTSE 350 boards than ever before, with representation of women more than doubling since 2011 — now 26.1% on FTSE 100 boards and 19.6% on FTSE 250 boards. 550 new women appointments.

    "Dramatic reduction in the number of all-male boards — 152 across FTSE 350 in 2011, now no all-male boards in the FTSE 100 and only 15 in the FTSE 250."[4]

1.15 His latest report sets "a new voluntary, business-led target, for women's representation on Boards of FTSE 350 companies, of 33% to be achieved in the next five years".

1.16 The Minister provides further details on the proposed flexibility clause and the impact of the Directive on UK listed companies:

    "The proposed Directive sets out a mechanism in Article 4a for selecting candidates for appointment. It is designed to achieve the objectives of the Directive (in brief 40% of non-executive positions in listed companies being held by members of the under-represented sex or 33% of both executive and non-executive directors in those companies being held by members of the under-represented sex).

    "The Directive does not apply to small or medium sized companies, even if they are listed. The 'flexibility clause' in Article 4b allows a Member State to introduce alternative measures which either achieve the Directive's objectives or come close to doing so. In addition, if the Member State has met one of the two Directive objectives, with or without taking measures to do so, it is not required to implement Article 4a. This flexibility clause is time limited; it cannot be relied on beyond the end of 2022 unless one of the objectives has been met or the Member State has in place legislation which fulfils certain criteria. The amendments in the latest draft of the proposed Directive affect aspects of the 'flexibility clause' but do not change the potential impact of the proposed Directive on the UK. The proposed Directive contains a requirement to set individual objectives in some circumstances and there are reporting requirements. Member States are also required to designate a body which will promote gender balance on the boards of listed companies. The revisions also extend the implementation date and the date on which the Directive will cease to have effect."

1.17 The Minister explains that if the Directive is agreed on the basis of the latest Presidency compromise text, the voluntary targets set by Lord Davies for the next five years would not be sufficient to come within the scope of the flexibility clause, unless the UK can demonstrate that the boards of UK listed companies comprise 40% of non-executive directors or 33% of non-executive and executive directors of the under-represented sex. This is unlikely because the scope of the proposed Directive — encompassing around 450-550 UK listed companies — is broader than the Lord Davies-led Women on Boards initiative which focuses on FTSE 350 company boards. The Minister continues:

    "The Government agrees that the progress made so far by the Women on Boards initiative must be sustained and that we need a renewed focus on the Executive Pipeline where progress is slow. We have accepted Lord Davies' recommendation to establish a new review on women on boards, with a new reviewer. We believe that this work must remain business led if it is to have full impact and we therefore expect that the remaining recommendations published in October will be for the new steering group to consider."

1.18 The Minister makes clear that the Government is continuing to engage with the UK's blocking minority partners, at official and Ministerial level, but adds:

    "I am aware that the blocking minority is not as strong as it once was and positions could easily shift in the coming weeks."

Previous Committee Reports

Third Report HC 342-iii (2015-16), chapter 9 (9 September 2015); Thirty-seventh Report HC 219-xxxvi (2014-15), chapter 4 (18 March 2015); Thirty-first Report HC 219-xxx (2014-15), chapter 2 (28 January 2015); 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).


1   See the European Parliament's legislative Resolution of 20 November 2013. Back

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

3   See the Council press release of 19 June 2015. Back

4   See Lord Davies' Five Year Summary Report, Improving the Gender Balance on British BoardsBack


 
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Prepared 11 December 2015