Gender Balance: The Legislator Will Intervene in the Process and Method of Selecting Board Members

International Women’s Day has come and gone, but women remain here all year round and continue to face many problems and obstacles simply because they are – women. It is true that many things are better than before, but there is still work to be done. A further step should be the European Directive 2022/2381, which member states must implement by 2026 to increase the number of women in managerial positions in publicly listed companies. What obligations or sanctions await them?

The Directive (EU) 2022/2381 of the European Parliament and Council on improving gender balance among directors of listed companies and related measures of November 23, 2022 (the Directive) aims to rapidly increase the number of women in managerial positions through planned objectives to be achieved by June 30, 2026, with measures, resources, and sanctions that member states are obliged to ensure.

The main goal of the Directive is to ensure the application of the principle of equal opportunities for women and men and to achieve gender-balanced representation among the highest executive positions. The Directive applies to publicly listed companies that meet certain criteria regarding revenue and number of employees, meaning that under the new regulations that will be adopted or amended in Croatia for the implementation of the Directive, companies whose shares are listed for trading on a regulated market in one or more EU member states will be subject to it.

Delicate Entanglement

The Directive is important because its implementation will require the legislator to intervene in the process and method of selecting board members, as well as to enable women to effectively exercise the rights guaranteed by the Directive in court proceedings where the burden of proof that the selection process was conducted in accordance with rules ensuring gender equality will rest on the company.

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The legislator must adopt regulations for the implementation of the Directive by December 28, 2024, so we will witness its application in the Republic of Croatia this calendar year. Given that it is challenging for the state to intervene in entrepreneurial freedoms, especially regarding such delicate issues concerning the management of companies, it will certainly be interesting to see what obligations and sanctions the legislator will impose on listed companies to achieve gender equality.

Why the Directive

The Directive emphasizes that the European Union has a large base of highly qualified women that is continuously growing, considering that 60 percent of university graduates in its area are women, who, despite being a larger highly educated workforce, are still insufficiently included in the labor market and represented in managerial positions.

Additionally, many reasons for the adoption of the Directive cite that the presence of women on boards improves corporate governance as teamwork and decision-making quality are enhanced by a more diverse and collective way of thinking that includes a broader range of perspectives. Numerous studies have shown that diversity leads to a more active business model, more balanced decisions, and improved professional standards in boards that better reflect social reality and consumer needs, while gender balance also fosters innovation.

Furthermore, many studies have shown that there is a positive relationship between gender diversity at the highest management level and the financial performance and profitability of the company. Achieving gender balance in boards from the perspective of the Directive is crucial for ensuring the competitiveness of the European Union in a globalized economy. However, the number of women in boards has grown very slowly across the European Union in recent years, which is now being sought to change through the adoption of the Directive.

Who is Exempt

It was initially emphasized that the Directive is addressed only to listed companies, precisely because listed companies are particularly economically important, visible, and influence the market as a whole. It is also considered that the public nature of listed companies justifies that they be regulated more in the public interest. However, listed companies that employ fewer than 250 people and whose annual turnover does not exceed 50 million euros or whose annual total balance does not exceed 43 million euros are exempt from the application of the Directive.

This threshold applies to all member states, which, given the size of the economy and the revenues generated by listed companies in Croatia, means that a large number of companies will not fall under the rules of gender balance that the Directive carries. Nevertheless, as highlighted in the Directive itself, listed companies set standards for the broader economy, which is why it is expected that their practices will be followed by all companies. Whether this will be the case in Croatia remains to be seen.

Target Ratios

The Directive aims for women to occupy at least 40 percent of non-executive director positions and at least 33 percent of all director positions, including both executive and non-executive directors, in the listed companies to which the Directive applies by June 30, 2026. The rules for achieving gender balance apply to members of boards and supervisory boards of listed companies. To achieve this goal, the Directive sets minimum conditions, i.e., rules that member states are obliged to ensure, which are considered to contribute to achieving that goal.

Additionally, the state will appoint a special body responsible for promoting, analyzing, monitoring, and supporting gender balance in boards. Listed companies will be required to provide this body with information on gender representation in their boards once a year, making a distinction between executive and non-executive directors, and on the measures taken to achieve gender balance among directors. Furthermore, listed companies will be required to publish this information on their websites in an appropriate and easily accessible manner.

Selection Criteria

The lack of transparency in the selection process and the criteria for qualification for director positions have been identified as the biggest obstacle to gender balance. Such a lack of transparency prevents potential candidates for director positions from applying for boards where their qualifications would be most sought after and from challenging gender-biased appointment decisions. On the other hand, greater transparency in the criteria for qualifications and the selection process allows investors to better assess the business strategy of the company and make informed decisions. Therefore, from the perspective of the Directive, it is important that the appointment processes in boards are clear and transparent and that candidates are evaluated objectively based on their own merits, regardless of their gender.

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The Directive stipulates that candidates are to be selected based on a comparative assessment of each candidate’s qualifications, and for the purpose of comparison, clear, neutrally composed, and unambiguous criteria must be applied in a non-discriminatory manner. These criteria must be established before the selection process. Additionally, the criteria must be clear throughout the entire selection process, including during the preparation of the job advertisement, the pre-selection phase, the shortlisting phase, and the establishment of candidate pools for selection. Regarding the establishment of clear pre-defined criteria for selecting the most favorable candidate, the Directive emphasizes that it does not interfere with or affect the day-to-day management of listed companies, as they retain the freedom to select candidates based on qualifications or other objectively relevant considerations.

Rule of Preference

In addition to introducing these rules on selection criteria, the main means for achieving gender equality is the rule of preference. Member states are obliged to ensure that when selecting between candidates who are equally qualified in terms of suitability, competence, and performance of duties, preference is given to the female candidate. Only exceptionally can this rule of preference be set aside if there are reasons of greater legal weight in a specific case, such as the implementation of other diversity policies.

It will be particularly interesting to see how the legislator will ensure the application of the rules regarding the establishment of criteria when selecting candidates, and especially what mechanisms will be imposed on companies to apply the rule of preference in favor of the female gender established to achieve gender balance. Indeed, there is a thin line between an imposed attempt to introduce transparency into the selection process and the violation of entrepreneurial freedoms.

All Information on Selection

In addition to the obligations to impose the establishment of transparent criteria for selecting candidates and to achieve the application of the rule of preference in favor of the female gender, member states are obliged to ensure that the company informs the candidate upon request about the following information: the qualification criteria on which the selection was based, the objective comparative assessment of candidates according to those criteria, and, if necessary, any special considerations that exceptionally weighed in favor of a candidate who is not a member of the female gender. The request for such information could imply a limitation on the right to respect for private life and the right to the protection of personal data. Nevertheless, from the perspective of the Directive, such limitations are necessary, are in accordance with the principle of proportionality, and correspond to the objectives of general interest.

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Thus, listed companies will not be able to successfully refuse to provide candidates with the requested information by invoking rules on the protection of personal data or respect for privacy. It is also important to emphasize that the legislator will have to ensure that the female candidate can establish facts in court on the basis of which it can be assumed that this candidate was equally qualified as the candidate of the other gender who was selected. In such court or other proceedings, the burden of proof that the rights of the female candidate were not violated rests on the company.

Advice and Recommendations What Needs to Be Done by the Deadline

– The application of the Directive for listed companies will result in additional obligations for compliance with the new regulations.

– Listed companies must take care to achieve the goals set by the rules for achieving gender balance and urgently prepare their acts and undertake activities to avoid punitive sanctions or the invalidity of decisions regarding the appointment of members of management and supervisory bodies.

– If they want to achieve the goal of gender balance, listed companies, as well as other companies regardless of their structure, must establish clear rules for selecting candidates for director positions, as well as define transparent and clearly defined criteria for selection and establish objective comparative methods for assessing candidates’ qualifications.

– To more easily achieve the goal of gender balance, it is important for listed companies to encourage, support, and develop the inclusion of women at all levels and throughout their careers to ensure that qualified women are provided with opportunities to occupy positions in boards and leadership roles.

– It is important for every listed company to develop a gender equality policy to achieve a more balanced gender representation at all levels. Such policies could include proposing a female candidate and a male candidate for key positions, mentorship programs, and career development guidelines for women, as well as human resources strategies designed to encourage diverse hiring.