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Gender parity

Make space for women on corporate boards

Catherine D. Karlsson  Senior Research Analyst, Financial Crime and Reputational Risk

Annalisa Contrafatto  Senior Research Analyst, Financial crime and reputational risk

Catherine D. Karlsson  Senior Research Analyst, Financial Crime and Reputational Risk

Annalisa Contrafatto  Senior Research Analyst, Financial crime and reputational risk

Women are on their way in

For the past few decades the pace of attaining gender equality in corporate boardrooms has been slow. However, the European Commission (EC) proposals to enforce gender balance on company boards could see matters speed up significantly.

According to an October 2014 study conducted by the EC, Europe’s largest companies have a female representation of only 20.2% on nonexecutive boards with an even lower percentage on executive boards. The rate of increase since 2003 has been recorded to be 0.6% per year; at this current rate it would take a minimum of 40 years to get anywhere close to gender balance on corporate boards.

Thus far, recommendations and the promotion of gender equality communicated by the European Union (EU) have had an insignificant impact on the corporate world. Since 2012 the EC has been attempting to pass a law on gender balance as the next step forward in dealing with the issue. In November 2013 the proposed EC directive was voted in by the European Parliament and is now being discussed by the Council of the EU.

If enacted, this proposed law will be applicable on nonexecutive boards of publicly listed companies and subsequently affect around 5,000 entities within the EU region.

Women on corporate boards: 40% representation

What then will the requirements entail? The objective is to increase female representation on nonexecutive boards to 40%; however, going beyond this percentage is encouraged. That is not to say that women should be systematically favored above men, but rather that in a situation where both parties are evaluated to be equally qualified for a position, the underrepresented gender would be given priority (it just happens to be that the underrepresented gender in big companies generally is women).

Companies would be expected to implement this objective by 2020. However, entities with public undertakings will be urged to reach the 40% target two years earlier in 2018. Small and medium-sized companies with no more than 250 employees and a turnover not exceeding 50 million euros will be exempt from the law as they are perceived to lack the organizational capacity to achieve such change.

Once the 40% objective has been attained amongst EU member countries, the directive is set to expire by 2028.

Gender balance already enforced by some countries

The EC has stated that 11 EU member countries have already formed their own laws on gender balance. Taking a closer look at the various countries’ fact sheets, it becomes evident that laws referred to are policies and recommendations, rather than actual legislation. However, what differentiates them from recommendations historically communicated by the EU is that these recommendations include specified minimum percentages for the inclusion of females on company boards.

Most of these countries, including Belgium and France, apply self-regulation where gender balance is simply recommended by their respective country’s corporate governance code. Currently it is only Italy which has clearly articulated the consequences of noncompliance within Law 120/2011. The law says that the publicly held and state-owned companies in Italy, which do not comply with the 33% gender quota (on both executive and nonexecutive boards) as of 2015, will be issued a warning by the Department for Equal Opportunities under the Prime Minister’s Office. After a warning has been issued, the company has 60 days to comply with the quota. Should it not comply, a second warning will be issued. The company then has a further 60 days to comply and in the event it fails to do so, the board of directors will be dissolved.

It is argued by the EC that since the earliest gender balance initiative in 2011, these 11 countries have shown progress which supports the idea that regulatory intervention drives tangible change.

As yet it is not known whether the Commission intends to apply sanctions for noncompliance of the proposed directive, and if so, what such sanctions would entail. However, the initiatives taken by these 11 countries are slowly forcing the EU to act in order to avoid having to navigate various country-specific regulations and sanctions in the region, which if enforced, might impact cross-border investments and business.

Gender equality is the way forward

Studies on the effect of gender balance on performance suggest a positive correlation between higher female representation on company boards and better performance. Logically, it makes sense as diversity brings strength to a company, through the ability to see various perspectives, which consequently lays the foundation for sound decision making. The need to conform to these recommendations is becoming increasingly crucial as more companies are operating globally.

For many corporates it will be a tough challenge to attain the required target of 40% female representation on their boards. It will require strong and strategic leadership, which is capable of attaining organizational transformation. In order to meet the tight deadlines for implementation, organizations will need to put measures in place as soon as possible to avoid the implications of noncompliance.

Whether the reason for the EU taking action in favor of gender equality at this time is sprung from a genuine will to affect gender equality, or is rather about protecting itself, can be debated. Either way, the outcome will be one of positive change, where businesses who adapt and embrace change will win in the end.

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