Women on Board: The EU Commission’s Proposal for a Directive on Improving the Gender Balance among Non-Executive Directors of Companies Listed on Stock Exchanges and Related Measures

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Anne Peters is Professor of International and Constitutional Law, University of Basel,  and currently fellow at the Wissenschaftskolleg Berlin.

1. Background and core contents of the proposed Directive

On 14 November 2012, the EU Commission tabled a proposal for a Directive on a highly sensitive issue and did so without using the ‘Q-word’ (COM(2012) 614 final). The Commission bases its proposal on Art. 157(3)TFEU which empowers the EU to adopt ‘measures to ensure the application of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation’. The proposed Directive requires that

‘Member States shall ensure that listed companies in whose boards members of the under-represented sex hold less than 40 percent of the non-executive director positions make the appointments to those positions on the basis of a comparative analysis of  the qualifications of each candidate, by applying pre-established, clear, neutrally formulated and unambiguous criteria, in order to attain the said percentage at the latest by 1 January 2020 or at the latest by 1 January 2018 in case of listed companies which are public undertakings.’ (Art. 4(1)).

The Directive further holds that

‘In order to attain the objective laid down in paragraph 1, Member States shall ensure that, in the selection of non-executive directors, priority shall be given to the candidate of the under-represented sex if that candidate is equally qualified as a candidate of the other sex in terms of suitability, competence and professional performance, unless an objective assessment taking account of all criteria specific to the individual candidates tilts the balance in favour of the candidate of the other sex.’ (Art. 4(3)).

The proposed Directive is equally applicable to various board structures for listed companies that exist in member states, both to dual systems (separate management and supervisory boards) and to unitary systems combining management and supervisory functions.

Measures to improve the gender balance through quotas are highly controversial both politically and in legally. Many states of the world have been experimenting with quotas for women in public employment/civil service and for political elections/party lists. Imposing by law quotas for women onto the business sector raises additional legal issues, because such legislation interferes with the business actors’ rights of property, economic freedom, and the freedom of association. Reacting to the conspicuously meagre presence of female managers, some EU member states, notably Norway and Denmark, have already introduced quotas, goals, or reserved seats in the boards of companies’ management positions. In other states such as Germany, such a policy is totally contested. This post sketches out the main legal issues hoping to trigger further debate.

2. Countervailing (fundamental) rights

Starting from the premise (which can of course be contested – but only implausibly so) that a similar number of women as men have the leadership potential, want to lead, and to earn money, the clear underrepresentation of women in top management gives rise to the suspicion that this underrepresentation has causes which are unrelated to real potential and performance of individuals and is therefore discriminatory. On the premise (which again, can be contested – but not inside our current legal system!) that gender discrimination is a societal problem which must be combatted by the law, some kind of legal strategy is warranted to that end. But such a strategy must be lawful. The Directive does not only need a firm legal basis on the EU Treaties but must also respect fundamental rights. The member states which will have to implement the Directive are bound by international, European and domestic constitutional human rights provisions (Cf. Art. 51(1) EU Fundamental Rights Charter).

The legal obligation to give, in the selection of a non-executive director of a company board, priority to an equally qualified candidate ‘of the under-represented sex’ facially interferes with the rights of two different sets of actors: the male candidates who are not selected, and the company itself (if it is a moral person), or its owners. These two sets of rights will be discussed in turn.

Male candidates’ rights to non-discrimination: Men who compete with women for management positions on the boards of companies can rely on their right to non-discrimination on the basis of gender as guaranteed by Art. 21 and 23 EU Fundamental Rights Charter. The EU Directive must also respect the right to non-discrimination as enshrined in Art. 14 ECHR and the case-law of the European Court of Human Rights. That Court has, in contrast to the ECJ, so far not ruled on quotas for women, but only on positive measures in favour of ethnic minorities.

However, the right to non-discrimination does not absolutely prohibit distinctions based on gender. It therefore does not rule out giving women preference simply because they are women, as long as this gender-based preference is constitutionally justified. In order to be justified under Art. 14 ECHR, the Strasbourg Court demands that gender-based distinctions must be based on ‘very weighty reasons’ (See only ECtHR (GC) No. 30078/06, Konstantin Markin v. Russia, (2012), para. 127). Normally, this is scrutinised in a two-pronged test: The distinction must have a legitimate objective and it must be proportionate to that objective.

Legitimate objective: The objective of the Directive is, as its title and its Article 1 state: ‘to ensure a more balanced representation of men and women among the non-executive directors of listed companies by establishing measures aimed at accelerated progress towards gender balance’.

The creation of a gender balance in social, political and economic life, if need be through positive measures, is an acknowledged objective of the EU. It is spelled out in a number of legal provisions in the constitutional framework of the EU, in an endless number of secondary law and materials. To name only a few: Art. 23(2) of the European Fundamental Rights Charter expressly states: ‘The principle of equality shall not prevent the maintenance or adoption of measures providing for specific advantages in favour of the under-represented sex.’ (see further the Preamble Additional Protocol 12 to the ECHR; Art. 157(4) TFEU; Art. 3 of the equal treatment Directive (Directive 2006/54/EC).

Proportionality: This prong requires balancing the objective of the Directive against the hardship incurred by the competing male candidate. At this point, the Luxemburg case law has spelled out the rules. In decisions which mostly concerned German cases, the ECJ formulated the following criteria for the admissibility of quotas for women in public employment: the candidates must have equivalent or nearly equivalent qualifications; female candidates must not be accorded an absolute and unconditional priority; all applications must be subject to an objective assessment in which all personal factors are assessed in a case-by-case basis; finally, the recruitment procedure must be proportionate overall. It is permitted to exclude criteria which are only facially neutral but normally indirectly discriminate against women (such as seniority).

Although these requirements have been formulated by the Court with regard to the civil service, they seem to be applicable to jobs on the private market, too. The proposed Directive satisfies these criteria. The Directive notably avoids an absolute and unconditional priority for women. It contains a ‘savings clause’ which allows giving priority to a man if in the specific case ‘an objective assessment’ tilts the balance in his favour (Art. 4(3)).

The second set of rights affected by the Directive are business rights. These are constitutionally protected, notably under Article 16 EU Charter of Fundamental Rights (freedom to conduct a business), Article 17 (right to property), and freedom of association (Article 12). But again, the rights are not absolute. They can be limited under basically similar conditions as the male competitors’ right to non-discrimination. Again, what counts is a legitimate objective and proportionality.

3. Elements of the proposed scheme which save its proportionality

The proposed Directive is in many respects ‘narrowly tailored,’ to use the US constitutional law term. First, a top down regulation seems necessary because self-regulation of individual firms and soft regulation by Corporate Codes have not led to a significant increase of female managers.

The top of the quota is at only 40 percent, as opposed to prescribing full gender parity. The quota relates only to non-executive board members. It therefore avoids interfering with the day-to-day business of the companies which is in the hands of the executive board members. It is only a temporary measure until the gender imbalance is rectified. It allows for exceptions on personal grounds, as stated above. Finally, it does not cover small and medium enterprises which would be disproportionately burdened by the new legal requirement.

Crucially, the Directive asks for priority only for ‘equally qualified’ female candidates. This requirement is indispensable to safeguard fairness and economic reason. At the same time it makes the quota quite soft, because in an advanced stage of a professional career, the ‘equality’ of qualification is exceedingly difficult to define with exactitude. Therefore, the qualification of an unwanted candidate (also of the competing women) can almost always be downplayed and the application of the rule thereby evaded – for the good or the bad.

4. Policy considerations which factor into the balancing

In the end, the assessment whether the proposed Directive is consistent with the EU constitutional framework and an admissible restriction of fundamental rights of affected persons boils down to a balancing exercise. Policy considerations may flow into this balancing.

Here are some of the main objections against quotas for women in management positions: They make the professional career of men more difficult. These men will feel hostile towards female competitors whom they deem unjustly preferred, and this will overall destroy the working climate on the upper floors. The enterprises’ position on the market may be hampered, because they will not be able to fill the board positions with sufficiently qualified women. Some say that the Norwegian quota has led to falling share prices of the affected firms, others say that Norwegian forms tried to escape the regulation by changing their legal form or by moving to the UK. I have not seen hard evidence for these assertions. The EU-Commission, in contrast, relies on a recent study which has identified large numbers of highly qualified, ‘boardable’ women in EU member states, so that the pool seems sufficiently large. For women themselves, quotas might be pernicious because it undermines the standing of a manager to be labelled a ‘quota woman’, and it nags at women’s own self-esteem, too. Therefore the measure may backfire.

On the other hand, there are arguments in favour of introducing the quota. The Commission first of all draws the economic card. The currently divergent corporate government requirements imposed by member states’ on listed companies concerning the selection of board members constitute a barrier to the free movement of companies throughout the common market. This is of course the classic argument used by EU to justify that it is competent for regulation in the first place.

Second, the gender quota is fair. Its fairness is not backward looking: There is no merit in attempting to ‘punish’ men for the sexism of their ancestors, and women are not ‘entitled’ to such a remedy. The fairness is forward-looking. A little bit of intervention is appropriate in order to level the still unequal playing field which results from deeply rooted societal gender stereotypes and unconscious, extremely subtle discriminatory attitudes, especially in the tough economic sphere.

Third, the gender quota is efficient, because it will most likely lead to better decision making. Numerous psychological studies have demonstrated that there is such thing as a different female leadership style: more inclusive, more transparent, establishing a lower hierarchy, less risk-averse, less prone to engage in direct competition, and so on. That ostensibly ‘female’ style is most probably mainly owed to female leaders’ (unconscious) adaptation to social pressure because a ‘harder’ style will not be accepted by their male colleagues (because it exactly does not correspond to their expectation of feminine behaviour). Be it as it may, a stronger female presence will result in some kind of pluralism in boards, and this generally contributes to a more thorough debate and to more reflected collective decision-making.

Only with help of a ‘critical mass’ of women will a change of corporate culture be possible, a change of the culture of physical presence in the firm with excessive working hours and crazy travelling schedules, a culture in which burn-out is rampant. Women in boards are role models. Their presence has a ripple effect, especially because non-executive board members will appoint executive board members.

But should it not be left to the market to ‘solve’ the problem? If the absence of diversity on boards really is a competitive disadvantage for business actors, then the mono-cultural firms would fall behind in the economic competition. Competition and not dirigistic politics will eventually lead them to engage more women on board in order to attain diversity which will put them in the position to compete better. However, that market mechanism is very slow, and can only function once sufficient competitors which already have gender-diverse boards exist. A market without an adequate legal framework does not function well. The Directive aspires to set such a framework.

For sure, an ugly measure such as a quota only fixes symptoms and does not go to the root causes of labour segregation and the wage gap. However, given the excruciatingly slow progress we are making in this field, it seems at least not completely erroneous to swallow the bitter pill. The quota must be accompanied by (possibly more expensive!) measures such as education which inspires more women to enter into ‘male’ professions, and men into the ‘female’ professions, more childcare facilities, parental leave for men, and gender-sensitive mentoring programmes for students and young professionals. All this is absolutely necessary to prevent that the quota is more than just window dressing.

Embedded in policies of that type, the quota as suggested by the Commission is still a relatively soft dirigism which can bring to an end the waste of human capital stored in all those well-educated and richly experienced women. Once the numerical goals have been met, such laws will be rescinded, and a well function market will do the rest.

5. Conclusion

Overall, the Directive seems to establish a proper balance between the conflicting interests and rights. EU law leaves a quite broad corridor for measures in the field of gender politics, and certainly does not give one right answer to the problem of how to attain gender justice in management. The proposed Directive is within that broad corridor, and is therefore consistent with European fundamental rights standards. Whether it is a wise policy is of course a different matter. But the persistently low proportions of women in high management positions despite a general societal taboo on open gender discrimination in most if not all EU member states suggest that subtle mechanisms, subconscious prejudice and structural barriers still prevent women from enjoying equal professional opportunities, especially when it comes to leadership positions. That glass ceiling needs to be shattered to make the world of managers more diverse and pluralistic. A personal note: I am no business manager and do not aspire to become one. Also, I have been quite firmly opposed to gender quotas throughout all my writing life, and have argued against them in previous publications. But I have grown old enough to learn two things. First, the lapse of time has not brought about sufficient change without quotas; and second, the higher women get in their career the more subtle and more pernicious the discrimination becomes.

The relatively modest proposal contained in the Directive seems to be suited and necessary to increase the involvement of women in economic decision making − but only if it is embedded in policies which tackle the root causes of the absence of women on boards. Only then will staff, colleagues, and superiors be able to see and feel how gender diversity will change corporate culture and performance.

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Veronika Bilkova says

November 30, 2012

Thanks a lot, Anne, this is a very competent and detached analysis of a topic which tends to give rise to heated debates and emotional outburst on all sides.

I agree with virtually all your conclusions.
I particularly like your explanation of the fairness as one of the reasons – the main one for me – for the adoption of the Directive. Indeed, the aim of introducing quotas is not to redress past wrong or to take revenge for those wrongs on present-day men. Nor is it – or should be – to ensure gender equality at any costs and as a goal in itself. By regulating the situation at the output, the Directive actually seeks, in my understanding, to equalise the chances at the input. From that perspective, the quotas are truly a temporary measure, applied to dispose of persisting inequalities, not to create new ones.

Obviously, as any human (and legal) institution, the quotas can be misused or extended too far. They could also turn from an exceptional and temporary measure into a regular and permanent one. The latter risk is probably rather high due to the fact that the quotas (as numbers) are easy to measure and evaluate; as such, they are well fit for bureaucrats (and subject to the risk of bureaucratisation). One may even wonder, whether the EU has selected the quotas because it genuinely believes they are fair and efficient, or whheter it has rather opted for the „least effort“ option, putting aside measures, which, although potentially more promising over the long run, would require more sophistication.

Finally, I would have two queries:

A) I was wondering whether you (or anyone else) know why the Commission has opted for 40%. As I personally do not believe there is a necessary link between the equality in the input and in the output stage, I am rather suspicious of anything nearing 50%. But maybe the Commission has had some elaborate methodology(?). Has it?

B) I tend to prefer holistic approaches to piecemeal initiatives. I was therefore wondering whether the quota system could not somehow accommodate the other equality concerns beyond the gender one. While I am fully aware of the risks implied in this project, it would seem appropriate to me for the Commission to at least contemplate such an option. It most probably has not. Yet, I would be interested to know whether there are any ideas on this issue.

Thank you once again, Anne, and I look forward to reading other comments.

Martin Holterman says

December 2, 2012

I find much to argue with here, but that's an obvious issue of values that we need not discuss. I would just ask this: Why does this need to be done by the EU? The proposal's subsidiarity section is laughable: http://martinned.ideasoneurope.eu/2012/11/22/women-quotas-2/

O, and just for fun, look at the background on this "critical mass" story in the proposal's impact assessment. They cite scientific research on the number of women you need in order to affect the performance of an individual team in order to tell a story - as you do - about influencing the performance of the entire economy (i.e. about a country's competitiveness).

Anne Peters says

December 7, 2012

Dear Veronika, Thank you for lucid remarks and questions on the issue of quotas for women on company boards. Thanks especially for pointing out the risks of bureaucratization! And indeed, without having insider information on the discussion in the EU Commission, it is surely a “cheap” measure in all senses (including financial), if not accompanied by more difficult and more costly measures such as better child care facilities, etc. (I did mention that).
As far as the height of the proposed quota is concerned: 40 percent has been used in Norway, too. I think the Commission just copied it from there. It can be considered mild, because it is under 50 percent. ON the other hand, a too low quota would have prevented the emergence of a so-called critical mass. There seems to be psychological research on the impact of critical mass, but with inconclusive results.