Author: Lívia Djukić
Co-author: Kateřina Nešpůrková

After almost a decade of debates, the EU Directive on improving the gender balance among directors of listed companies has been approved on European soil. The Directive, known abroad as the "Women on Boards Directive", is another of a number of upcoming compliance obligations with an overlap into the ESG topic, which also resonates with the topic of gender equality and equal pay. 

WHAT IS THE AIM OF THE DIRECTIVE?

The Directive aims to increase the number of women as under-represented sexin director positions of companies. According to the European Union, a higher number of women involved in direct decision-making is not only to ensure equal opportunities and pay for men and women, but also to improve corporate governance, attract more female talent to companies, and thus increase the competitiveness and growth of the European economy.

WHO WILL BE COVERED BY THE NEW DIRECTIVE?

The Directive applies to companies having registered office in an EU Member State, whose shares are admitted to trading on a regulated market in one or more EU Member States, i.e., European listed companies. It does not apply to micro, small and medium-sized enterprises.

WHAT QUOTAS WILL LISTED COMPANIES HAVE TO COMPLY WITH?

The Directive requires Member States to ensure that listed companies are subject to one of the following objectives:

• members of the underrepresented sex hold at least 40% of non-executive director positions (typically e.g. a non-executive member of the supervisory board);
• members of the underrepresented sex hold at least 33% of all director positions (i.e., both executive and non-executive directors).

Each listed company will therefore have to comply with the legislation of the Member State in which it has its registered office, and the specific requirements will depend on how that Member State implements the Directive.

BY WHAT MEANS ARE THE QUOTAS TO BE MET?

A means to achieve gender balance will be to increase transparency in the selection processes for director positions. In advance of the selection process, listed companies will be required to establish clear, neutrally formulated, non-discriminatory and unambiguous selection criteria (the “qualification  criteria”), which will be applied throughout the selection process and on the basis of which the best qualified candidate, irrespective of gender, will be selected in an objective manner.

The Directive explicitly states that when choosing between equally qualified candidates of different genders, priority should be given to the candidate of the underrepresented (usually female) sex. Of course, this rule is not absolute - companies will be able to decide in exceptional cases in favour of a candidate of the adequately represented (usually male) sex.

If the unsuccessful candidate requests it, companies will have to inform him/her of:

• the qualification criteria upon which the selection of the suitable candidate was based and how these criteria were assessed;
• considerations exceptionally tilting the balance in favour of a candidate of the adequately represented sex.

The burden of proof in any dispute lies with the listed company, which will be obliged to prove that there were specific objective reasons in a particular selection process for which it exceptionally preferred a candidate of the adequately represented sex. It will therefore be in the companies' interest to document the entire selection process in detail so that they have a quality defence file at hand in the event of a dispute.

WHAT OTHER OBLIGATIONS DOES THE DIRECTIVE INTRODUCE?

Listed companies will also be required to:

• report once a year to the relevant supervisory body on the gender representation on their boards and the measures they have taken to achieve the respective quotas (if they do not meet the quotas, they will also specify reasons why they do not meet the quotas and comprehensively describe the measures they have taken to achieve the quotas);
• include the above information in the corporate governance statement;
• publish information on gender representation and measures taken on their websites in an appropriate and easily accessible manner.

WHAT ABOUT PENALTIES?

The Directive states that appropriate penalties may include fines or the possibility for a court to annul a decision concerning the selection of directors or to declare it null and void(if such decision has been made in breach of the Directive).  Listed companies may only be held liable for acts or omissions which can be attributed to them in accordance with the law of the relevant Member State. The decision on the type and amount of penalties is therefore fully in the competence of individual Member States.

SINCE WHEN WILL THE LEGISLATION BE EFFECTIVE?

Member States must transpose the Directive by 28 December 2024 at the latest. Companies will be required to ensure that they comply with their obligations by 30 June 2026 at the latest. 

CONCLUSION

The European Union is imposing more and more regulatory requirements on companies in the area of corporate social responsibility, which should gradually lead to the fulfilment of individual sustainability objectives. It is apparent that companies that want to meet all these criteria and maintain their competitiveness must include gender equality strategy (including equal pay requirements) in their internal policies and decision-making processes, not only at the HR management level. Multidisciplinary ESG team of HAVEL & PARTNERS follows all these new trends in the area of sustainability and will continue to keep you informed as a good guide on your path towards sustainability. If you need to get more information about individual ESG areas and their potential impact on your business, we will be happy to provide you with a comprehensive tailored service.