Improving the Gender Balance Among Directors of Listed Companies in the EU

I. Equal Treatment, Justice and Democracy

The 2012 proposal for a Directive and the accompanying communication from the European Commission on gender balance in business leadership both refer to equality as a core value of the European Union, referring to TEU Art. 2 and Art. 3(3).^[23] Moreover, both documents highlight the different European policy initiatives that aim to further equality between men and women in general,^[24] or 172that aim to further the participation of women in decision-making.^[25] Thus, the legal basis for the directive is TFEU Art. 157(3), which provides for a legal basis for the adoption of measures to ensure the application of the principle of equal opportunities and the equal treatment of men and women in matters of employment and occupation.

The introduction of the Norwegian, the French and the Danish rules, which are discussed below in Section D, also seem to be dominated by an equality view. The preparatory works that were published prior to the adoption of the Danish regulation states that the aims of the proposed amendment to the Danish Companies Act were – along with a similar amendment to the Equal Treatment Act^[26] – to ensure real progress in the share of women on the boards of directors and to achieve a more equal representation.^[27]

The equality argument has been elaborated in justice and democracy arguments. Broadly speaking, the justice argument relates to the redistribution of resources and power, recognition and representation,^[28] and legislation that promotes gender balance has been seen as a principle of justice. The justice argument includes elements based on social justice, as well as elements based on individual justice.^[29]

The social justice argument is based on a claim for a more equal society. Therefore, it builds on the premise that both men and women have a right to take part in the decision-making in areas of broad societal relevance. Thus, male-dominance is considered unacceptable. Justice is achieved when power posi173tions are divided equally between men and women,^[30] and positive discrimination may be necessary to change the status quo.

While the social justice argument focuses more on the observed unequal society, and less on whether or not it is caused by discrimination,^[31] the individual justice argument relates to individual members of society and the discrimination of women that cause the male-dominance.^[32] Therefore, if discrimination against certain groups exists, then legal strategies can be used to balance this.^[33] The aim is to ensure that everyone is assessed on their individual merits and not on group characteristics, such as gender. Therefore, if qualifications are the same, then women candidates should be favoured, which will ensure equal treatment.

The counterarguments have been that quotas and positive discrimination constitute illegitimate,^[34] unequal treatment and discrimination towards men and that recruitment to boards should be driven by qualifications and not gender.^[35]

The democracy argument is closely related to the social justice argument, as democracy is a condition of social justice. Social justice mandates participation in processes of democratic decision-making, including decision-making in companies.^[36] Therefore, it is a democratic right for women to participate in decision-making organs, and gender balance is important for a democracy in relation to the participation in economic decision-making in large companies. Provided that women represent half the population, they should have the right to occupy half of the seats of power.^[37] A related argument is that participation in democratic processes is the best way of ensuring that one’s views and interests will be voiced,^[38] and the democracy argument also relates to representation 174arguments, as highlighted below. These can either be based on a ‘descriptive representation’ view, according to which it is important for women to be represented by women because of their gender, or an ‘interest representation’ view, whereby it is important for women to be represented by women because they represent certain ideas or beliefs.

The counter argument here is that quotas interfere with the democratic process in companies, whereby shareholders have the right to elect the candidates whom they deem most suited to run the company.^[39] Moreover, it has been argued that this debate may lead to an increase in negative attitudes towards the groups that such regulations are designed to protect.

II. A Question of Representation

A different way of addressing the question of gender quotas is by viewing it as a matter of representation. The concept has been explored in particular in relation to political representation, but it may also provide some clarification of the concept, when this is applied in a corporate context.^[40]

It may be argued that European corporate governance reflects a complex link between corporate decision-making and broader societal welfare,^[41] which may result in a demand for shared control on the part of a number of stakeholders.^[42] One result of a stakeholder orientation may be that a form of ‘descriptive representation’ on the board of directors is necessary.^[43] ‘Descriptive representation’ involves ‘a descriptive likeness between representatives and those for whom they stand.’^[44] This understanding may explain codetermination, which is a legal requirement in a number of European jurisdictions.^[45] In the case of descriptive determination, different groups of stakeholders should be represented on the board because of who they are, not because of their actions or beliefs – there must be a descriptive likeness. Thus, women should represent 175women because they are women. Another view on the influence of stakeholder representation may be that quotas are needed because women represent certain common ideas or beliefs, which are generally found among women, thus ‘interest representation’ is needed to ensure that these common ideas are instilled in the work of company boards.^[46]

However, a counterargument would be that it is questionable, whether women are a distinct stakeholder group that should be represented on the board, simply because they are women (descriptive representation). This would imply that men are represented on the board because they are men. Moreover, this also implies that women are better representatives of women. If such lines of reasoning are adopted, it could be argued that having representation by two genders is an outdated way of considering the issue of gender and that to ensure descriptive representation, other genders could or should be represented as well. It could also be argued that other stakeholder groups should be represented, such as customers, creditors or community members.

It is also questionable whether women represent certain common interests, ideas or beliefs that are representative of women.^[47] Although the different interests of stakeholders may be a catalyst for the debate on stakeholder representation on corporate boards, it is difficult to argue that women per se are better representatives of these, often heterogenous groups, than men. In this respect, gender quotas differ from codetermination, as it is more likely that labour representatives on the board favour the protection of workers’ rights.^[48] However, at the end of the day, it may be difficult to see quotas as a phenomenon completely detached from the notion of descriptive representation, as the result of quotas will be that more women will be represented on boards, because they are women.

III. Better Boards, Better Corporate Governance, More Value

A different line of argument looks at the business case of gender quotas and how more women in top-management may not only improve the financial performance of companies but may also be beneficial for society as a whole. Research in this area is extensive and covers many different areas.^[49] One stream of research studies the skills and characteristics which women may bring to the 176board. As a result, the decision-making process of the board may change when more women are represented. Other studies consider the effect of women’s representation on economic outcomes, and yet others examine the way in which increased female representation may be good for society.

The European Commission has argued that gender quotas will ensure better use of the talent pool.^[50] Given that the total pool of talent is roughly evenly distributed among men and women, few women in corporate leadership suggest that women’s skills are under-utilized.^[51] Hence, a French study from 2017 shows that the introduction of a quota in France in 2011 allowed firms to tap into a deeper talent pool.^[52] This argument is closely connected to the arguments relating to value creation.^[53] Women as such have special contributions to make,^[54] and therefore, the inclusion of more women will be an advantage to companies and society at large.

This point of view relies on a understanding of men and women being different, as there is ‘no case for board gender diversity if female directors are very similar to male directors in terms of their skills, experience, and preferences.’^[55] Thus, part of the skills argument relates to the fact that women contribute with new perspectives and ways of solving problems,^[56] which will improve the decision-making processes^[57] and ultimately, company performance.^[58] Such arguments were put forward by the Norwegian government, when it introduced gender quotas in 2003, arguing that increased diversity would contribute to 177better strategic choices, more innovation and speedier transformations, which in the end, would ensure better profitability.^[59]

Some of the characteristics, which have been ascribed to women, are that they are more likely to be benevolent, universally concerned and less power oriented than men;^[60] that women possess skills in human resources and sustainability that are often lacking on boards;^[61] that women appear to act in a more ethical manner than men;^[62] that women are transformational leaders, who elicit more trust and confidence from a firm’s stakeholders^[63]; and that women are less overconfident than men.^[64] Such characteristics may affect the way a board functions, how it monitors company executives, which values and perspectives dominate discussions on the board, and how the board reaches decisions.^[65] The benefits may also relate to diversity on boards in general, as a lack of diversity may promote group-think, which could have a detrimental effect on the development of a company.^[66] In all, more women on boards may lead to better board decisions and thus better corporate governance.

However, concerns have also been raised that it may be dangerous to rely on such stereotyping of women on which the aforementioned arguments rest,^[67]178and that studies on female characteristics may be problematic, due to problems relating to data limitation, selection and causal inference.^[68]

As mentioned above, it has also been argued by the EU Commission and others that more women on boards will not only benefit the companies on whose boards they sit, but society in general. In the 2012 proposal, the Commission states that ‘[t]he under‐utilisation of the skills of highly qualified women constitutes a loss of economic growth potential. Fully mobilising all available human resources will be a key element addressing the EU’s demographic challenges, competing successfully in a globalised economy and ensuring a comparative advantage vis‐à‐vis third countries.’^[69] Likewise, in the 1999 consultation, the Norwegian government highlighted that better gender equality could strengthen the competitiveness of Norwegian companies.^[70] Moreover, it has been stated that more women on boards may ultimately translate into ‘higher and more sustainable growth and employment in the EU.’^[71] These arguments are twofold; firstly, the societal benefits are a derived effect of the financial success of companies. When more value is created in private companies, this has a positive impact on economic growth in society in general. Secondly, strong economies depend on higher female employment rates and higher wage returns on paid jobs.^[72] Thus, this argument is linked to the utilization argument presented above.

From another perspective, it has also been argued that more women on boards have a positive impact on society, as they bring different values to the board. Women are said to take a broader and more long-term perspective on corporate governance; for this reason, more women on company boards may also have a positive effect on areas such as sustainability.^[73]

Frequent counterarguments are that it may be difficult to find women with the right qualifications^[74] and that ultimately, gender quotas may result in less competent women replacing competent men. These are interesting arguments in light of previous remarks that the benefits of employing women lie in the fact that they are different from men, suggesting that there is a rather established notion of which qualifications board members should bring to the board. Another counterargument is that shareholders are best positioned to decide who 179is qualified, and legislators should not interfere with the right to make that assessment.^[75]

In relation to the arguments presented in this section on better boards, better corporate governance and better value creation for companies and society, one needs to remember that the arguments are put forward to aid gender quotas or other regulatory initiatives to support more women on boards. If the arguments were not put forward in this context, one could argue that it would be more interesting to look at the composition of the board from a broader perspective and to discuss how more diversity in general can improve company decision-making. Therefore, from a corporate governance perspective, it may also be argued that the quota discussion detracts from the important discussion on diversity in general, by singling out one aspect.

I. Norway

Although Norway is not a member of the EU, it is to be seen as a forerunner in the area of equal representation, and the quota requirements introduced here in 2003 have been an inspiration to several EU Member States.

Prior to the quota provision in the Companies Act, a quota provision was found in the Equal Treatment Act § 21, according to which, all public committees etc. had to be represented by men as well as women.^[76] In 1999, the government suggested a comprehensive review of the Equal Treatment Act, and a public consultation was published, which included a widening of the scope of the quota provision to include company boards.^[77] The act was not approved at that time and in 2001, the new government carried out yet another consulta180tion on equal representation in public owned companies, as well as in privately owned, public limited liability companies. After the consultation, the Norwegian Parliament approved an amendment to the Norwegian Companies Act in 2003,^[78] which mandated both men and women to be represented on corporate boards in all public limited liability companies (allmennaksjeselskaper). For this type of company, it is mandatory to have a board of directors with at least three members and a management board.^[79] The quota requirement applies to all board members, whether they are elected by the shareholders at the general meeting or by the employees, according to Norwegian co-determination rules.^[80] The share of female representation depends on the size of the board, but for the largest boards (more than nine members) each gender must be represented by at least 40%.^[81] When the amendment was presented in 2003, it involved a voluntary compliance deadline.^[82] This meant that if companies met the 40% threshold no later than 1 July 2005, the mandatory rules of the suggested amendment would never be enforced. When the deadline was passed in 2005, only around 13% of public limited liability companies complied with the 40% threshold.^[83] Therefore, the government decided in December 2005 to put the amendment into effect. Consequently, all public limited liability companies, established after 1 January 2006, had to comply with the set quota of 40%, while existing companies were given a two-year transitional period and had to comply from 1 January 2008.^[84]

The Norwegian quota provision derives from an equality point of view, as the first proposal was an amendment to the Equal Treatment Act.^[85] Although value creation and favourable conditions for private companies were prominent in 181the 2003 proposal,^[86] three arguments dominated the responses to the consultation;^[87] justice, democracy and skills.^[88]

As expected, the requirement to have a balanced representation of both genders had a major effect on the composition of boards. From the beginning, the share of female representation was around 6%.^[89] This share rose to 18% in 2006, 36% in 2008 and in 2009, it reached 40%.^[90] Part of the Norwegian success in reaching the objective of balanced gender representation is likely to be found in the sanctions applied. Non-compliance with the provisions of the Norwegian Companies Act regarding the composition of the board is in general sanctioned, with the ultimate sanction being forced dissolution.^[91] The same sanctions apply to the provision relating to balanced gender representation. In January 2008, when all public limited companies had to comply with the rules, 77 companies were in breach of the gender representation rules.^[92] These companies were given four weeks to comply, and in February 2008, a press release from the Norwegian Business Register (Brønnøysund registrene) stated that 12 companies would be subject to a second four-week period; finally, in April 2008, it was stated that no companies would be dissolved, due to non-compliance with the rules. However, rather than complying with the rules, some companies also changed their legal status from public limited liability companies to private limited liability companies. Although disputed, research finds this number to be as high as 51% of all public listed companies, and concludes that the majority of the companies, when re-organized, became non-listed companies.^[93]182

II. France

France introduced binding gender quotas in 2011, when Law 2011-103 regarding the equal representation of men and women on boards was passed on 27 January 2011.^[94] France is an interesting case, as it is the only Member State, which has reached gender balance.^[95]

According to French rules,^[96] private and public limited liability companies with revenues or assets totalling over 50 million euros or employing at least 500 persons for three consecutive years had to achieve equal representation of men and women on boards of directors and supervisory boards. The scope was widened to include companies with more than 250 employees from 2020 onwards.^[97] Thus, by 2017, companies had to reach a 40% gender balance, with an intermediary level of 20% in 2014.^[98] French firms can choose between two forms of governance: a two-tier system with an executive board and a supervisory board or a one-tier system with a Chief Executive Officer (CEO) and a board of directors. The latter system is common in France, as 65% of firms have a one-tier system.^[99] The gender equality provisions apply to both systems, but only to non-executive directors.^[100] In the case of the two-tier system, it is the supervisory board that must comply with the provisions and should there be non-compliance with the law, the appointment of the directors is considered as null and void. Moreover, failure to comply with the law will lead to the non-payment of board attendance fees to the board members.^[101] Although less severe than the Norwegian dissolution sanction, this still seems to have a significant effect, as France is the only Member State in which equal representation has been achieved.

Before the proposal for the bill was presented in 2009, only 10% of the directors of French listed companies were female.^[102] After the bill was proposed, this number increased to 15.4% in 2010, suggesting that companies anticipated that the bill would be passed and immediately began to adapt to a new regime. 183In 2016, the share of female representatives had increased to 36.7% in the 140 largest French companies (those with a capitalization of more than 1 billion euros),^[103] and this figure reached 43% in 2021.^[104]

The French provisions on equal representation were amended in 2021. The amendments enter into forced on 1 March 2026. From this point in time, companies with more than 1,000 employees are to ensure that both genders are represented by at least 30% in the governing bodies (instance dirigeantes), including the executive directors and senior management (cadres dirigeants).^[105] From 1 March 2029, the target quota will increase to 40% in the governing bodies, and companies will be fined if they do not comply with the rules. These fines can be as high as 1% of the companies’ annual staff charges.^[106] Another amendment to the French rules is the introduction of disclosure rules, whereby companies covered by the amendment must disclose the difference in numbers between men and women in management organs on an annual basis, and from 1 March 2023, these numbers must also be reported to the French Labour Ministry (Ministre du Travail, de l’Emploi et de l’Insertion), which will then publish the information on the Ministry’s website.

The French quota regulation also seems to derive from equality considerations, as the law of parity in governing political bodies was a direct precedent to the quota requirement in companies.^[107] Moreover, the 2021 amendment is coupled with other equality initiatives regarding equal pay, payment of social benefits and access to day care.^[108]

III. Denmark

Denmark has chosen a different approach from Norway and France. Rather than introducing quotas, large, limited liability companies^[109] must set target 184figures and adopt policies to increase the share of the underrepresented gender in the company’s management organs.^[110] This regulation was introduced in 2012 and the obligation has been in force since 1 April 2013. Companies must also disclose their progress in relation to set targets and policies. This obligation came into force for the financial years commencing 1 January 2013 or later, and the first reports were published in 2014. The preparatory works stated that the expected result was that there would be a more equal representation of men and women in the top-management company organs. A representation of a minimum of 40% of each gender is considered to be equal.^[111] It was also emphasized that the strengthening of the pool of qualified women for senior management positions was a separate aim. Thus, it was also necessary to improve the representation of women at management level, just below top-management.^[112] The provision was amended in 2022 and the amendments came into force on 1 January 2023, see below.

Public limited liability companies can choose between two management structures:^[113] either a management structure whereby the company is managed by a board of directors with an executive board in charge of the day-to-day management, or a management structure in which the company is managed by an executive board, which operates under the supervision of a supervisory board. Collectively, the two top-management bodies are called the supreme management body. In public limited liability companies, the executive board is either elected by the board of directors or the supervisory board, depending on which structure the company has chosen. Executives can be members of the board of directors, but not the supervisory board. A significant majority of large companies have chosen a model with a board of directors and an executive board.

According to the Danish Companies Act § 139 c, the supreme management board of large, limited liability companies must set target figures for the share of the underrepresented gender in the supreme management board. The target figures only apply to board members elected by the shareholders at the annual general meeting and not the members elected by the employees, in line with Danish codetermination provisions. Each company must set their own target figures, why target figures may be lower than 40%. It has been stated in the 185preparatory works that the target figures must be realistic and ambitious at the same time.^[114] The board of directors must also set a deadline within which it aims to fulfil the target figures. The time horizon should be no longer than four years, which equals the maximum period a person can hold his or her office, without being re-elected.^[115] As soon as a company has an equal representation of men and women, it no longer has to set a target figure. Starting from January 2023, the provisions have been strengthened, so large, limited liability companies must set a new and higher target figure when the existing set target figure is reached, and must continue to do so until equal representation has been achieved.^[116]

Besides the duty of the supreme management board to set target figures, the executive board must adopt a policy to increase the share of the underrepresented gender at other management levels (other than the supreme management board) of the limited liability company.^[117] Each company must define which other management levels are relevant for inclusion, considering that the aim is to increase the level of representation by the underrepresented gender at the top level. The executive board must ensure that the policy actively promotes equal opportunities for both genders, and it can focus on areas such as career development, recruitment and hiring procedures.^[118] Starting on 1 January 2023, large, limited liability companies must also set target figures for the underrepresented gender across the other management levels. The duty to issue a policy increasing the share of the underrepresented gender within the other management levels is upheld. Another novelty is that the ‘other management levels’ are defined. These are the two management levels below the supreme management board, namely, the executive board and persons at the same level as the executive board, as well as persons with staff responsibility, directly associated with the executive level.^[119]

The Danish provisions are partly sanctioned. If the board of directors does not set a target figure, then the company may be fined.^[120] However, non-compli186ance with the set target figure is not sanctioned. Thus, a company is not fined if it does not meet the target figures that it has set. In the preparatory works, it is said that sanctions will discourage companies from setting ambitious targets. The requirement to adopt a policy to increase the share of the underrepresented gender is not sanctioned either.

The complimentary disclosure requirement in the Financial Statements Act is, however, sanctioned. According to the Financial Statements Act § 99 b, the companies covered by the provision in the Companies Act must prepare a report determining whether or not the company has reached the target figure set and, if not, why it has not reached that target figure. Moreover, companies which are required to adopt a policy to improve the gender balance across other management levels must also prepare a report on such a policy. The report must include information relating to the way in which the company acts on its policies to increase the share of the underrepresented gender; the company’s assessment of the results achieved; and any expectations for its future activities. If a company has equal representation of men and women on the board of directors or across other management levels and, therefore, is not required to set a target figure or prepare a policy, this must be stated in the management commentary. If the company fails to disclose the report, it may be fined, cf. the Financial Statements Act § 164. The Financial Statements Act was also amended in 2022, to increase transparency on the progress of equal representation.^[121]

Although, the Danish model differs from the Norwegian and the French models, it has also resulted in an increase in the number of women on company boards. When the Danish provision on target figures was introduced, it was mentioned in the preparatory works that 19.18% of board members of all public limited liability companies were women (elected by the annual general meeting, as well as by the employees), while the number of women elected by the annual general meeting in listed limited liability companies was only 6.5%.^[122] There has been a steady increase over the years in the number of female members on the supreme management board,^[123] and in 2021, 22.5% of the board members in listed Danish companies were women (elected by the annual general meeting); this figure is 19.6% across all companies covered by the Danish provisions on target figures. Interestingly however, the total number of female board members is higher (elected by the annual general meeting, as well 187as by the employees). It is 26% for listed companies and 21.1% for all companies. These numbers suggest that more women are elected by the employees than by shareholders at the annual general meeting. In comparison, the figure published by the European Institute for Gender Equality shows that the total share of women on the boards of the largest listed Danish companies was 34.9% in 2021.^[124]

I. Introduction to the Directive on Improving the Gender Balance Among Directors

On 14 November 2012, the European Commission adopted a proposal for a Directive to improve the gender balance among non-executive directors of companies listed on stock exchanges and related bodies.^[129] The stated aim was to address the underrepresentation of women in economic decision-making at the highest level, and to do so, the proposed Directive set a quota level of 40% for the proportion of the underrepresented sex among non-executive directors on the boards of listed companies.

During the following years, the proposal was examined by the Working Party on Social Questions, the Committee of Permanent Representatives and the Council on several occasions, and progress reports have been presented regularly to the Employment, Social Policy, Health and Consumer Affairs Council.^[130] However, no agreement could be reached. Then in March 2022, during the French presidency, a general approach on the proposed Directive was adopted, and on 7 June 2022, the Council and European Parliament reached a political agreement, before the European Parliament approved the final text in November 2022.^[131] Thus, listed companies must have gender balance on their boards by 30 June 2026.^[132]

Even though 10 years have elapsed, the aim is still the same. Despite the fact that some improvement has been made on gender equality in the EU, one may say that it is remarkable how telling the preamble still is. Little has changed in the call for gender-balanced representation among top-management positions.

Accordingly, the text that was adopted in November 2022 is similar, to a large extent, to the text of the original proposal from 2012. Some of the most significant changes relate to clarification of the choice Member States are given in regard to the alternative objective in Article 5,^[133] as well as clarification of which similar national measures may suspend the Directive’s selection process;^[134] it is also emphasized that the shareholders’ right to elect the appropriate directors is not affected by the Directive.^[135]189

II. The Legal Basis

In light of the equality initiatives already undertaken in the EU,^[136] the Directive aims to ensure the application of the principle of equal opportunities for men and women, and achieve a gender-balanced representation of directors in private companies. The way to do so is to establish a set of procedural requirements concerning the selection of candidates for appointment or election to director positions, based on transparency and merit;^[137] the legal basis given is TFEU Article 157(3). This article confers upon the European Parliament and the Council the power 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.

From a company law perspective, this approach is problematic, in so far as it intervenes in the shareholders’ right to elect board members. This right is generally protected by national company law.^[138] The conflict between the legal basis and company law implications was raised during the initial negotiations in the Council in 2013, and an opinion from the Council Legal Service concluded that ‘non-executive board members do not, in a general way, constitute ‘workers’ in the meaning of EU law.’ Therefore, it was concluded that the proposal for a directive could not be based on Article 157(3). This conclusion was challenged by the Commission, which upheld that the proposal in no way intended to harmonize company law.^[139] The implications for company law are discussed below, but for now it is sufficient to conclude that the application of principles of equal treatment in top-management positions place the Directive in a difficult position between employment matters and company law.

III. Quota Target Levels

The aim of the Directive is to achieve gender balance on company boards. Gender balance is achieved when members of the underrepresented sex hold at least 40% of non-executive director^[140] positions or members of the underrepresented sex hold at least 33% of all director positions, including both ex190ecutive^[141] and non-executive directors.^[142] Thus, the Member States are given a choice and must ensure that listed companies have reached one of the two targets by 30 June 2026. The Annex to the Directive sets out the actual number a company must meet in order to attain the objective established by the Directive based on the size of the board. Article 12(2) highlights that it is possible to apply the targets set in Article 5 separately to shareholder representatives and employee representatives. Member States’ choice in this respect may have implications for the effect of the Directive, as shown below.

Given the choice Member States are provided in Article 5(1), it follows from Article 5(2) that Member States must ensure that listed companies, which are not subject to the objective laid down in Article 5(1)(b), set individual, quantitative objectives in relation to the gender-balanced representation of both genders among executive directors. These companies must aim to achieve such individual objectives by 30 June 2026. Thus, contrary to the binding objective of Article 5(1), it seems that Article 5(2) has a normative rather than a mandatory tone.

Compared to the quotas found in Member States today,^[143] it may be argued that the Directive’s target is ambitious. However, what seems more interesting from a gender equality perspective is that the Directive not only focuses on the non-executive board members, but also aims to improve the gender balance among executive directors, either by opting for a quota for all director positions or by mandating that the individual company sets a quantitative target for the number of executive directors. As discussed above in Section B, the focus in some Member States on the board of directors alone, seems not to have had the ripple effect on other management levels, which the Directive also seeks.

Another issue which should be mentioned, is the terminology of the Directive, which reveals the difficulties of regulating equality currently. Thus, one can question whether the focus of the Directive is too narrow, as the Directive aims to achieve gender-balanced representation among top-management positions, but it does so by highlighting the underrepresented sex. That is, the Directive’s equality provisions are based on a person’s biological sex – the state of being male or female. This approach is narrower than the gender perspective, which is often used to denote a range of identities that do not correspond to the es191tablished ideas of male and female, and instead, describes a person’s self-perceived gender. A counterargument to a broader application could be that this is difficult to manage. How do we establish the way in which a person identifies him/herself and what happens if a person’s self-identification change? Still, an example can be found in the Nasdaq’s Board Diversity Rule, which was approved by the SEC on 6 August 2021.^[144] This requires companies listed on the US Exchange to have a least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Nasdaq-listed companies that do not have at least two diverse directors, can provide an explanation for not doing so, and this explanation can include a description of a different approach. Correspondingly, the UK listing rules were amended in 2022 to focus on gender rather than sex, as people that self-identify as men or women can be included in the count of men and women, respectively on listed companies’ boards. Moreover, other genders may be included as well.^[145] The listing rules also have a wider diversity perspective, as at least one member of the board must be from a minority ethnic background.^[146] Thus, both listing rules illustrate yet another issue; if the Directive is viewed as an equality initiative, can the debate be confined to a question of gender (or sex), or should it be broadened to include minorities as well?^[147] This question is linked to the representation debate above in Section C.II, but is not explored further here.

It should be mentioned that a broader approach to the composition of boards would bring the debate closer to the ongoing diversity debate in corporate governance. From a corporate governance perspective, a Directive on gender seems too narrow, and a more appropriate approach would be to discuss how to ensure sufficient diversity on company boards. As discussed above, the legal basis and the text of the Directive leave no doubt that the EU legislative institutions view the Directive as one of gender equality rather than a company law initiative. Therefore, the corporate governance perspective is absent. The right composition of a board is critical when ensuring good corporate governance and long-term value creation, and initiatives which aim to increase board diversity should be welcomed, if presented in the right context. Gender is, how192ever, only one perspective of diversity, and focusing solely on this dimension may divert the focus from other diversity dimensions, such as age, experience and internationalization, which however, may already be found in many corporate governance codes across Member States. Moreover, stating that the Directive ‘in no ways intends to harmonise company law’^[148] displays a poor understanding of company law implications in terms of the regulation of procedures for the selection of board candidates and how this may affect the election of the board. Thus, company law implications ought to have been addressed openly rather than being silenced. It should also be remembered that the EU has, in general, been reluctant to introduce binding rules in relation to the internal affairs of companies, which has been based on a ‘one size does not fit all’ view. Rather, the Commission has issued non-binding recommendations that give companies flexibility to organize their internal affairs as they see fit.^[149]

IV. The Procedure

Listed companies that have not achieved the objectives set in Article 5(1), must, according to Article 6, adjust their process for selecting candidates for appointment or election to director positions.

It states that candidates must be selected on the basis of a comparative assessment of the qualifications of each candidate, by applying clear, neutrally formulated and unambiguous criteria, established in advance of the selection process.^[150] Moreover, in the selection of candidates for appointment or election to director positions, the Member States must ensure that when choosing between candidates who are equally qualified in terms of sustainability, competence and professional performance, priority is given to the candidate of the underrepresented sex, unless reasons of greater legal weight, invoked within the context of an objective assessment and taking account of all the criteria specific to the individual candidates, tilts the balance in favour of the candidate of the other sex. It is stressed that overriding this positive action should only be done in exceptional circumstances.^[151] Finally, after the selection of candidates for appointment or election to director positions, the Member States must ensure that, at the request of a candidate who has been considered for appointment or election, listed companies are obliged to give that candidate informa193tion on the process, to inform the candidate of the reasons for the outcome. More precisely, the Member States must ensure that the companies inform the candidate of:

1. the qualification criteria upon which the selection was based,

2. the objective comparative assessment of the candidates under those criteria and

3. where relevant, the specific considerations tilting the balance in favour of a candidate of the other sex.^[152]

Should a candidate present facts from which it may be presumed that he or she was as equally qualified as the candidate of the other sex, selected for appointment or election, the listed company must prove that there has been no breach of the equal rights provision in Article 6(2).^[153] This provision clearly seems to originate from an equality approach, as there is a focus on the protection of the rights of the individual candidate. However, this protection presumes that a process exists which informs the candidates that they are being considered for the board. While this is often the case in large, listed companies which make use of a nomination committee or an executive search firm,^[154] the opposite may also be the case and a more closed nomination process may be applied. As it is the listed company that must prove that there has been no breach of the procedure in Article 6(2) and, in particular, the positive action obligation, one may ask if this will cause listed companies to apply more closed selection procedures, resulting in candidates not knowing if they are being considered for a seat on the board.

The procedure in Article 6, which is at the core of the Directive, raises the question of the implications it has for company law and whether it interferes with the shareholders’ fundamental right to elect the board members they believe to be best suited to take on a leading role in the company. The 2012 proposal mentioned ‘the selection of non-executive directors,’ which implied that it was the actual selection or election of directors to the board which was regulated.^[155] The wording has been amended in the Directive, and it now mentions ‘the selection of candidates for appointment or election to director positions’ in Article 6. Arguably, this implies that the procedure provided for in Article 6 does not affect the election process at the general meeting, instead, it is the process leading to the nomination of candidates which is regulated. This interpretation is also backed by recitals 35 and 42, and also seems to be supported by Article 8(2), as discussed below. Such an interpretation rightly leaves the 194election of board members with the shareholders, as regulators should be reluctant to interfere with this fundamental shareholder right.^[156] One could, however, argue that a question as fundamental as this, ought to have been addressed clearly in the Directive and not left to interpretation.

Although it is debatable whether the given interpretation of Article 6 can justify the Commission’s position that the Directive does not harmonize company law,^[157] it is clear that the prescribed procedure has some practical implications for companies and shareholders, which should be emphasized. Firstly, the procedural requirements only apply to the company, therefore, if candidates for the board are nominated by the shareholders, they can nominate whoever they choose, regardless of gender. Secondly, although the Directive’s objectives with regard to gender balance on boards (Article 5(1)) apply to all directors (as defined in Article 4(3)), including non-executive directors elected by the employees, it is unclear exactly how Article 6 applies to employee representatives elected to the board. It is stated in recital 33 that ‘Member States should establish the means for ensuring that those objectives are achieved, with due regard to the specific rules for the election or designation of employee representatives as laid down in national law and with respect for the freedom of vote in the election of employee representatives.’ This could require that Member States lay down procedural rules that resemble those found in Article 6. However, what if the nomination is carried out by the employees and not by the company? In addition, establishing rules for the selection of candidates to be elected by the employees will not guarantee that the outcome of an election results in equal representation of both genders, as the procedure does not bind the employees when voting. Moreover, it is unclear how the procedures for the selection of candidates for employee representatives and the general meeting interrelate. It is stated in recital 33, however, that it should be ‘possible for Member States to apply the quantitative objectives separately to shareholder representatives and employee representatives.’ If Member States choose not to do so, it is unclear whether the actual election of board members in one system can affect the selection process in the other.^[158]195

All in all, besides it being problematic from a company law perspective that the selection of candidates for the board is placed in an equality framework, it is also questionable which effect the procedure will have on the final composition of the board, which, ultimately, is the objective according to Article 5(1). This is the case partly because the company alone does not decide upon the candidates for the board and partly because the annual general meeting is not bound by the objective of the Directive.

V. Opt-Outs for Member States

As mentioned above, various Member States have adopted different initiatives to improve the representation of the underrepresented gender in company decision-making. For this reason, the Directive allows Member States to suspend the application of the procedure in Article 6, and where relevant, Art. 5(2) if they de facto or de jure fulfil the objectives of the directive by 27 December 2022, when the Directive came into force.^[159] Member States may suspend the application of said provisions, if the members of the underrepresented sex hold at least 30% of non-executive director positions or at least 25% of all director positions in listed companies. Suspension is also possible when a Member State’s national law

1. requires that members of the underrepresented sex hold at least 30% of non-executive director positions or at least 25% of all director positions in listed companies;

2. includes effective, proportionate and dissuasive enforcement measures in the event of non-compliance with the requirements referred to in point (i); and

3. requires that all listed companies not covered by this national law set individual, quantitative objectives for all director positions.

Although the suspension alternative accommodates the many Member States that have adopted either hard law or soft law initiatives to achieve a better gender balance in top-management, it is unclear why lower target levels should be accepted simply because they are set by the Member States?

In order to allow Member States to follow the listed companies’ progress on gender representation on their boards, listed companies have to provide information in this regard to the competent authorities once a year, distinguishing between executive and non-executive directors.^[160] Listed companies must also publish said information in an appropriate and easily accessible manner on 196their websites. If a listed company has not achieved the objectives laid down in Article 5(1) or, where applicable, Article 5(2), the information required from the listed company must include the reasons for not achieving the objectives, as well as a description of the measures which the company has already taken or intends to take in order to achieve the objectives.^[161] Finally, where applicable, the information which the listed companies have to provide, must also be included in the company’s corporate governance statement in accordance with Directive 2013/34/EU.^[162]

The doubts expressed above regarding the effect of Article 6 and the prediction that the actual number of female representatives may be lower than the 40%/33% requirement found in Art. 5(1), are reinforced by Article 12(1), as it allows for de facto or de jure arrangements with representation of at least 30%/25%. Consequently, 11 Member States, which currently have less than 40% representation of women on boards, but more than 30%, are able to avoid the procedure requirements in Article 6. Although the Commission will be reviewing progress on a regular basis,^[163] it seems plausible that many Member States will uphold their current regulation and that the level of gender equality will remain below 40%, which is less than equal representation, as defined by the Commission. Article 13(4) opens for an extension or an amendment of the procedure. However, it is difficult to imagine that anything will change, as long as the fulfilment of the conditions for suspension in Article 12 is regarded as having achieved the fundamental objectives in Article 5(1).

VI. Penalties

Finally, Member States must adopt rules on the enforcement of the national provisions adopted, pursuant to Articles 5(2), Articles 6 and 7. Enforcement provisions must include rules on penalties applicable to infringements by listed companies. The penalties must be effective, proportionate and dissuasive.^[164] However, listed companies may only be held liable for acts or omissions which can be attributed to them in accordance with national law.^[165] Thus, it is explained in the preamble that penalties should not be applied to companies themselves, if under national law a given action or omission is not attributable 197to the company, but to other national or legal persons, such as individual shareholders.^[166] Moreover, it is also stressed that as long as companies comply with the aforementioned obligations, they should not be penalized for failing to achieve the quantitative objectives. Thus, the penalty provision underlines the argument that shareholders are not restricted by the Directive when they vote at the general meeting, and that the obligation of the Member States is to provide for a procedure that may lead to gender balance; however, the listed companies – when they apply the procedure – cannot be held responsible for the outcome of an election at the general meeting.