How balanced is your board?

Responses to the UK Government’s Green Paper on corporate governance reform have again highlighted the strong business case for gender diversity in the boardroom. We consider the current UK position, and current proposals at Scottish and EU levels, to tackle this issue.

18 September 2017

Responses to the UK Government’s Green Paper on corporate governance reform have again highlighted the strong business case for gender diversity in the boardroom. Different perspectives are important to ensure that boards do not fall into the trap of a ‘hive mind mentality’, and studies have shown that female representation at board level is linked to improved management and financial performance. However, despite this, only 23% of listed EU board directors – and only 23% of listed UK board directors – are female. Scotland has fewer public boards, but 42% of public sector board positions are presently held by women. 

We consider the current UK position and current proposals at Scottish and EU levels to tackle this issue.

The UK approach
In 2011, the Davies Report made the case for gender diversity relating to improving performance, accessing a wider talent pool and achieving better corporate governance. It set out a target of 25% of FTSE 100 board positions to be held by women by 2015. This target was achieved, but growth has since slowed. Significantly, where women have been appointed it seems that this has frequently been to non-executive roles rather than executive positions. Fewer than 10% of the three most senior positions at FTSE 100 firms were held by women in 2016.

In 2015 the Davies Review extended its target of 25% female board representation to all FTSE 350 companies by 2020. Subsequently in 2016, the Hampton-Alexander Review set a further combined target for 33% of FTSE 100 executive committees and their direct reports to be women by 2020, and a target of 33% of board positions in FTSE 350 companies. There is a long way to go if these targets are to be achieved, as the most recent figures show that only 22% of FTSE 350 board positions are held by women. 15 of these companies still had no women on their boards at all.

The Scottish approach
In Scotland, the targets set by the Davies and Hampton-Alexander Reviews apply to Scottish companies in the FTSE 100/350. In addition, however, the Scottish Government launched a consultation paper at the beginning of this year outlining legislation for an equal gender agenda for public sector boards, proposing a more ambitious target of 50% representation of each sex by 2020. This would apply only to Scottish public authorities without mixed/reserved functions and to appointed non-executive directors, so is relatively limited in scope. 

Following the closure of the consultation, the Gender Representation on Public Boards (Scotland) Bill is currently at the first stage of parliamentary scrutiny, and the proposal may therefore develop as it progresses through the Scottish Parliament.

The European approach
The EU has struggled to agree a response to the issue of gender balance on boards, with its cornerstone proposal first made in 2012, but still yet to be finalised. As it stands, the proposed Directive would apply exclusively to publicly listed companies on the basis that these are the companies which are most visible in the market and so where change is likely to have the greatest widespread impact. The proposal is for listed companies by the end of 2022 to “aim to attain” the objective that “members of the under-represented sex hold at least 40% of non-executive director positions (or 33% of all director positions).” 

SMEs would be exempt, and Member States could choose to exclude companies where less than 10% of employees are the under-represented sex. To ensure that steps taken under the Directive would be positive action rather than positive discrimination, the Directive specifies that it would come into play only when there are two equally qualified candidates of opposite genders contending for the same position. However, the Directive also states that if “an objective assessment… tilts the balance in favour” of the over-represented sex, the Directive could be ignored, reducing the potential impact of the measure. 

Impact of Brexit?
Particularly given the lack of EU-wide consensus on how to tackle the issue, it remains to be seen whether the EU proposal will come anywhere near completion by the time Brexit happens. If it has not been passed by then, then it will be up to the Scottish and UK Parliaments to decide if and how they will seek to continue to improve gender equality in this area.

Particularly at a UK-level, controversy around the potential for using gender quotas to bring about change has meant that legislative proposals attempt to tread the line between facilitating real change while also ensuring measures are classed as ‘positive action’ (which is a legal form of discrimination, and allows employers to favour female candidates for recruitment or promotion in under-represented areas if they are equally qualified when compared to a male candidate). However, given the stalling of progress under the voluntary regime put in place under the Davies and Hampton-Alexander Reviews, it remains to be seen whether striking such a happy medium is actually possible, or will be effective. 

Gender diversity is one of the topics which will be discussed at our upcoming breakfast seminars, taking place in Edinburgh on 5 October and Glasgow on 12 October. Please click here if you would like to find out more, and to sign up.