EU Implements Quotas to Improve Diversity on Corporate Boards

The Women on Boards Directive was approved by the EU parliament after first being proposed 10 years ago. The law, to be adopted by member states within two years, will implement quotas on the proportion of board seats held by women—40% for only non-executive seats or 33% for both non-executive and executive board positions. 

A few key takeaways:

• The law will apply only to publicly listed companies in the EU. Companies which have less than 250 employees are exempt from the rules.
  
  
• Member states can choose to fulfill the mandate one of two ways: hitting the goal of 40% women on the board, or achieving a female representation of 33% of the board and executive leadership team combined. The smaller goal for the combined positions reflects a bigger challenge (and more powerful impact) with regard to diversifying the executive team versus the board.
  
  
• Where two candidates for a post are equally qualified, priority must go to the under-represented sex.
  
  
• A list of companies that have met the targets of the directive will be posted by member states annually.
  
  
• Listed companies will have to report to member states annually on gender representation on their boards. If they fall short of the targets, they will have to explain their plan to meet them, such as transparent recruitment procedures.
  
  
• Member states will decide effective enforcement measures. However, they themselves will also face punitive measures for failing to implement policies to achieve the directive’s goals. Besides fines, companies could see director appointments annulled for non-compliance with the law.

Challenges: Gender representation on corporate boards varies significantly by country. Currently, 30.6% of board members in the largest EU publicly listed companies are women, with public companies in Estonia having 9% women on boards and those in France having more than 45%. The goals will be more challenging to meet for the states which have lower representations. Other critics also include that the new law will place more emphasis on people’s characteristics but not merit, which will have an impact on the candidate quality and their performance. 

Meanwhile, in the U.S.: A recent ruling in the Los Angeles Superior Court overturned California's law requiring companies to include women on their boards of directors. The court found that the state's gender diversity rule violates the equal protection clause of the California Constitution and prevents the law from being enforced.

Outlook: Even though lawmakers in the EU and the U.S. differ on mandating a gender quota on boards, the push for board diversity will continue around the world.