by Dr. Joy Anwulika Debski, a dual-qualified Solicitor and Chartered Governance Professional (CGI), and Law Lecturer at Robert Gordon University’s Law School, specialising in Global Corporate Governance and Sustainability

Current research from the EU Commission Directorate-General for Research and Innovation (R&I) affirms that gender imbalance is still a thriving issue among EU member states. The report reveals that while women outnumber men in university education, they remain strikingly underrepresented in leadership roles. To address these issues, the EU Parliament put forward a directive on the EU Gender Balance among Directors of Listed Companies Directive 2022, now referred to as the directive.  Member states had the deadline to transpose the directive in 2024, while listed companies  registered within the EU has the mandate to incorporate the directive into their governance structures, company policies on recruitment to the Board, and strategic adaptation mechanisms by June, 2026. By implication, listed companies (with the exclusion of SMEs), are now required by Article 5 of the directive to attain a mandatory quota of 40% of women as non-executive directors (NEDs) or 33% for both non-executive and executive directorship positions.

The Implications of the Directive for Companies

The targets of the directive which member states are to transpose, imply that;

• Affected companies should ensure that the assessment and procedures for their Board appointment are ultimately transparent and free from any gender bias;
• Where candidates for appointment (sex notwithstanding) have equal qualifications, the underrepresented sex (women) should be given priority. This rule of priority is however, safeguarded against unconditional and automatic application, to give room for the adoption of other diversity factors that make a corporate board truly dynamic. By implication, the unconditional application of the priority rule does not portend a general application but a measure to be utilized on a case-by-case basis;
• When a member of the underrepresented sex is unsuccessful in the selection process, the directive imposes a duty of disclosure on the company to divulge its qualification criteria upon request, levelling the ground for accountability. This provision serves a checkmate to Companies that may decide to leverage on the exception of the priority requirements.
• Further, reporting is now a crucial requirement. Hence, companies are now obliged to report on the metrics of achieving the 40% or 33% targets.
• The Directive also expressly require Member States to establish punitive measures to dissuade non-compliance, including fines and annulment of contested directorship appointments. The measures to be adopted in this regard per EU country may differ.
• Additionally, Member States are required to publish a list of compliant Companies, highlighting transparency. This requirement means that Companies could gain social license to operate and inform public perception of their operations.

Increase in running costs is at the fulcrum of complying with every regulatory framework, including the foregoing implications of the directive. Fundamentally, companies still striving to attain the target percentage may have to restructure the size of their Board to achieve compliance. A credible instance is the reported consequential actions of the shareholders assembly of Cassa Depositi e Prestiti (an Italian Development Bank), to increase the number of its directors from 9 to 11 in order to meet the gender balance quota.

Businesses operating in every EU country must apply caution to understand what their law says. For example France, in transposing the directive, required in their national legislation: article 8 of Order No. 2024-934 of October 15, 2024; provides that the election or designation of employees into supervisory boards of companies must also comply with the gender balance quota. While, Spanish law transposing the directive established different meters of punishments to be determined against the company by the National Securities Market Commission. Spain even puts a more ambitious stance to expand the limitation of application beyond listed companies (Chapter VI, BOE-A-2024-15936).

Analysis for the Practicality of Implementation

The priority rule under the directive is not automatic. Hence, the question; whether beyond attaining the quota, the directive is sustainable in driving women’s continued participation in such decision-making positions? Ultimately, it would appear that the ability for companies to fully disclose their requirement criteria without hiding or engaging in wrongful disclosures; would enhance the adaptability of the directive.

While companies in member states with mandatory obligations have been reported to have better records of women NEDs, countries without mandatory quotas have also not done horribly. It would appear that the compulsory approach is not necessarily the master pathway to inclusion. A relatively sustainable approach is to deemphasize the mandatory imposition of gender-based selection policies and give attention to solving other root causes of gender imbalance. Issues like workforce availability per industry affect decision-makers’ composition in different business spheres and levels. Hence where workforce availability is not even, mandating a magical balance may indeed be magical, absurd, and likely unsustainable.

More so the directives have envisaged that other parameters can displace the priority rule such as “professional experience in managerial or supervisory tasks, international experience, multidisciplinary, leadership, communication skills, networking abilities and knowledge in specific relevant areas such as finance, financial oversight or human resources management.” Consequently, women applying for board roles should ensure expertise in these areas.

Conclusion

In other to fully harness the potentials of the directive companies need to make sustainable efforts that establish credible diversity, equity, and inclusion (DEI) strategies within their organization. This effort includes building formidable organizational frameworks and cultural changes to adapt these goals. By taking a proactive approach to identify and address obstacles in achieving their DEI targets, companies can ensure meaningful progress in implementing the directive.

While the directive has been established to enhance women’s participation on boards, it is not an automatic right of passage to the Board. Prospective female board members should research on the skills, attributes, demographics, and diversity of the Boards before application.

In conclusion, this directive demonstrates a mandatory approach to governance of equality and diversity of women on the board. However, the governments of member states can act beyond their mandatory role (to ensure compliance and improve the gender quota under the law) by facilitating and partnering with companies to achieve gender representation beyond the 40/33% stated quota.