Comments on the proposal for a Directive on improving the gender balance among non-executive directors of companies listed on stock exchanges and related matters, COM (2012) 614 – “Women on Boards” directive proposal.
The aim of this proposal is to improve the current gender balance among non-executive directors of listed companies, by setting 40 percent as a quantitative objective for the proportion of the under-represented sex on the boards of listed companies in the EU. Companies would be obliged to work towards that objective by introducing procedural rules for the selection and appointment of non-executive board members. Companies that have not achieved the target would be required to continue to apply the procedural rules, as well as to explain what measures they have taken - and intended to take in the future - in order to reach the 40 percent threshold.
While the Confederation of Swedish Enterprise supports the general aim of the proposal - to improve gender balance in company boards - we do not agree with the means proposed to achieve this. The main reason is that quota rules for company boards imposed at EU level would represent excessive interference with property rights laid down in national company law. It would deny the owners of the company (the shareholders) the right to freely elect board members, which in turn raises serious concerns over company law. It is an integrated part of the ownership rights to freely choose the people who are to manage the owners’ collectively owned asset. Furthermore, the proposal fails to comply with the principles of subsidiarity and of proportionality. The Confederation of Swedish Enterprise shares the view of the Council’s Legal Service that the legal basis referred to in the proposal does not provide the EU institutions with the power to set out rules for the appointment of non-executive members of company boards.
First, the proposal is not based on company law and how companies are organised; instead, it more closely resembles the recruitment procedures for employees. However, for appointments to board membership, the procedure is completely different. There are no applicants or acknowledged candidates for board membership, and non-executive directors are neither appointed nor selected for board membership. Instead, board members are elected by the owners of the company (the shareholders) at the company’s Annual General Meeting (the shareholders’ meeting). This follows from the Swedish Companies Act (hard law). The overarching rule is that the election of board members at the shareholders’ meeting is ‘open’; in Sweden, any shareholder has the right to propose a candidate for the board at the shareholders’ meeting.
The Women on Boards proposal requires the company - at the request of a non-appointed candidate - to inform her or him of the qualification criteria upon which the selection was based, as well as how the criteria for the board position have been applied. In Sweden, meanwhile, the company has no involvement whatsoever in the election of board members, as it is the role of the shareholders to elect board members at the shareholders’ meeting. As a result, the company does not have access to this information and thus cannot disclose it.
It seems impractical to oblige the shareholders to disclose this type of information. Their considerations of why they did not vote for a particular candidate may vary widely, as there could be several hundred - even thousands - of shareholders in the larger listed Swedish companies.
Furthermore, according to the proposal, employee representatives are to be included when determining whether a company is in compliance with the 40 percent objective. However, shareholders have no control over the nomination and election of employee representatives – this is solely the employees’ prerogative. In Sweden, employee representatives are nominated and elected by trade unions in elections; these are not aligned with the meetings where shareholders elect the non-executive board members. Nor are the mandate periods of employee representatives aligned with the duration of the mandates of the non-executive board members. This absence of coordination between the two elements would inevitably create significant complications when seeking to ensure that the company is in compliance with the 40 percent objective. It also leads to that the gender distribution among employee representatives would determine which candidates the shareholders can elect. For example, if all the elected employee representatives of the board are men, at least 40 percent of the board members that are to be elected by the shareholders at the General Annual Meeting must be women in order to comply with the proposal. That would of course be a deeply arbitrary effect given that it is the shareholders that ultimately own the company.
The scope of the Directive clearly goes beyond that which is required to achieve its purpose. In effect, it means that the selection procedure is regulated via aspects that are completely unrelated to gender equality. The obligation for companies to undertake a comparative analysis applying certain criteria should cover all circumstances that ought to be taken into consideration by the shareholders when determining the composition of the board, e.g. the potential members’ competence and relevant experience. However, from a company law perspective, there is no justification for implementing such a widely applicable and far-reaching regulatory measure at an EU level. Neither does the Commission’s own impact assessment address this key aspect of the proposal.
In addition, adoption of the proposal would undermine and disregard successful measures already taken at national level. The increasing number of women on company boards has, in many EU Member States, been achieved through voluntary, non-binding, mechanisms alone. Sweden provides an excellent example of how self-regulation, like corporate governance codes, is an effective way to elect more women to boards. With 39.9 percent of female non-executives on the corporate boards of the largest listed companies, Sweden is the fifth-best performing Member State in the EU.
Board members are trustees, not employees, of the company. Their assignment is built on trust - in the sense of a comprehensive interpretation that includes (but is not limited to) knowledge, experience and personal qualities - and is the distilled essence of the relationship between owners and board. It is a delicate task to have the weight or relevance of perceived trust assessed by a public authority. Owners who appoint someone as their trustee should not be overruled by an external body, whose trust in the person is irrelevant.
For the reasons set out above, the Confederation of Swedish Enterprise firmly believes that the objective of the proposal can be better achieved with measures other than board quotas determined at EU level. Statutory quotas for women on boards is simply not a sustainable approach to bring more women into leadership positions. Instead, we advocate for the use of self-regulatory measures, for example corporate governance codes. As previously mentioned, Sweden already has a relatively high percentage of women on the boards of listed companies, and it was achieved without the need for any legislation on gender quotas. Neither does the Swedish Corporate Governance Code define any concrete objectives for the share of the female representation. It simply states that the board should have a size and composition that ensures its capacity to manage the company’s affairs efficiently and with integrity, that the board members elected by the shareholders at the general meeting are to collectively exhibit diversity and breadth of qualifications, experience and background, and that the company is to strive for gender balance on the board. Diversity, and a better gender balance in boards, is important – but this should not be achieved through statutory quotas, nor through EU rules.