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Document 52012SC0349
COMMISSION STAFF WORKING DOCUMENT Accompanying the document IMPACT ASSESSMENT ON COSTS AND BENEFITS OF IMPROVING THE GENDER BALANCE IN THE BOARDS OF COMPANIES LISTED ON STOCK EXCHANGES Executive Summary
COMMISSION STAFF WORKING DOCUMENT Accompanying the document IMPACT ASSESSMENT ON COSTS AND BENEFITS OF IMPROVING THE GENDER BALANCE IN THE BOARDS OF COMPANIES LISTED ON STOCK EXCHANGES Executive Summary
COMMISSION STAFF WORKING DOCUMENT Accompanying the document IMPACT ASSESSMENT ON COSTS AND BENEFITS OF IMPROVING THE GENDER BALANCE IN THE BOARDS OF COMPANIES LISTED ON STOCK EXCHANGES Executive Summary
/* SWD/2012/0349 final */
COMMISSION STAFF WORKING DOCUMENT Accompanying the document IMPACT ASSESSMENT ON COSTS AND BENEFITS OF IMPROVING THE GENDER BALANCE IN THE BOARDS OF COMPANIES LISTED ON STOCK EXCHANGES Executive Summary /* SWD/2012/0349 final */
COMMISSION STAFF WORKING DOCUMENT Accompanying the document IMPACT ASSESSMENT ON COSTS AND
BENEFITS OF IMPROVING THE GENDER BALANCE IN THE BOARDS OF COMPANIES LISTED ON
STOCK EXCHANGES Executive Summary 1. Problem Definition Company boards in the EU are marked by
persistent and manifest gender imbalances, as evidenced by the fact that only
13.7% of corporate seats are currently held by women. Only 15% of non-executive
directors in the EU are women. Evidence shows that although women not only
possess the educational[1] and professional[2] credentials to participate in the highest economic decision-making
bodies, but are also willing[3] and available[4] to do so, from the outset, they are at a systematic disadvantage
compared to men in attaining top management positions. Women face barriers
rooted in the conduct and business culture of companies when trying to realise their
full professional potential. The current recruitment practices for board
positions are characterised by a high degree of opaqueness contributing to these
barriers, thereby undermining an optimal functioning of the labour market for
top management positions throughout the EU. Female under-representation in board rooms
of publicly listed companies in the EU represents a missed opportunity to make
full use of the EU's human capital, as the positive externalities associated
with enhanced female participation in company boards, which are felt throughout
the economy as a whole, are currently foregone. First, gender imbalance in the boards of
publicly listed companies in the EU constitutes a missed opportunity at company
level. Numerous corporate governance indicators point to the benefits of more
gender-diverse company boards. A lot of evidence shows that companies with more
gender-diverse boards are more profitable, and that the differences are
statistically significant, provided that the level of representation of women
in boards reaches a sufficiently high level in order to influence the
behavioural patterns in decision-making. Second, the under-representation of women
has negative spill-over effects on the wider economy. It contributes to the
gender employment gap (GEG) in terms of the
representation of male and female employees at the different levels of
responsibility in companies, for example, in managerial positions below board
level, but also in terms of the overall labour market participation of
men and women. It then feeds into the gender
pay gap (GPG): women across the EU still earn around 16% less than men on
average, a differential that is even higher in publicly listed companies. In
addition, lower rates of female labour force participation and pay mean a lower
return on education for both individuals and the public sector, with associated
consequences for the EU's gross domestic product (GDP). Empowering women to take leadership
positions and thereby fully exploiting human capital, is key for addressing the
EU's demographic challenges, for competing successfully in a globalised economy
and for ensuring a comparative advantage vis-à-vis third countries. It is a
necessary means to reignite economic growth as laid out in the Europe 2020
Strategy. This view was also endorsed by the public consultation, which
demonstrated a consensus across stakeholder groups that empowering women to
take leadership positions is important for both company performance and
economic growth. Although they acknowledge this need and the economic benefits
of enhancing gender diversity in the workforce, markets fail to make improvements.
This market failure can be explained by the tendency of groups with a very
homogenous composition to maintain their composition due to an aversion to working
with persons from different backgrounds or of different gender and a preference
to associate with others from their own group. The current lack of women in boardrooms
generates a vicious circle which perpetuates the under-representation of women
in decision-making. The current board composition affects the attitude of a
company towards gender equality and negatively influences the readiness to
appoint more female board members. The lack of female board members also
implies a lack of adequate mentors, sponsors and role models that could
facilitate a woman's career progression, thereby preparing females with high managerial
potential for board membership. Despite two Council Recommendations (1984
and 1996), several legislative and non-legislative initiatives at national
level and numerous attempts at self-regulation, female representation in boards
of publicly listed companies has only increased by slightly more than 5% from
2003, to 13.7% by 2012. It is expected to advance at roughly the same pace to
reach 20.4% in 2020. There is broad consensus from stakeholders that action is
needed to achieve faster progress. Moreover, divergence or the absence of regulation at national level also poses barriers
to the internal market by imposing divergent corporate governance requirements
on European listed companies. These differences can lead to practical
complications for listed companies operating across borders, as well as for
candidates for board positions. The current opaqueness of the selection
procedures and qualification criteria for board positions in most Member States
represents an important barrier to more diversity of board members and negatively
affects both board candidates' careers and their freedom of movement, as well
as investor decisions. 2. Subsidiarity and Proportionality Gender equality is one of the EU's founding
objectives, as reflected in its Treaties (Article 3(3) TEU) as well as in the
Charter of Fundamental Rights (Article 23). Under Article 8 TFEU the Union in all its policies must aim to eliminate inequalities, and to promote equality,
between women and men. The EU's right to act in issues of gender equality in
employment and occupation follows from Article 157(3) TFEU. The current growing discrepancies in female
representation on boards of listed companies between Member States are
explained by the fact that although Member States may adopt measures to counter
the under-representation of women in economic decision-making, many do not show
any willingness or face resistance to act at their own initiative. Therefore,
imbalances across the Union can only be reduced through a common approach, and
the potential for gender equality, competitiveness and growth can be better
achieved through coordinated action at EU level rather than through national
initiatives of varying scope, ambition and effectiveness. Only an EU-level
measure can help make optimal use of the existing female talent pools. An
EU-level initiative in this area would therefore fully respect the principle of
subsidiarity. There is only a rationale for taking EU
action if it is indispensable to redress the continuing under-representation of
women. The legislative measure will thus be temporary, thus underpinning its
compliance with the principle of subsidiarity. The proposed action is in line with the
principle of proportionality as it would be limited to setting common
objectives and principles. In the spirit of minimum harmonisation, Member
States would be given sufficient freedom to determine how these common
objectives should best be achieved taking into account national circumstances. Any
binding EU measure would not interfere with the possibility for companies to appoint
the most qualified board members. The measure would fully respect the
requirements of the relevant positive action case law of the Court of Justice
of the European Union (CJEU), the specific purpose of which is to ensure
compliance with the principle of proportionality. 3. Objectives The general objectives are to
promote gender equality in economic decision-making and to make full use of the
existing talent pool for more equal gender representation in company boards,
thereby contributing to the Europe 2020 objectives. In line with the underlying
components of the problem, two specific objectives can be defined: i) to
reduce the barriers for women to access board positions and ii) to improve
corporate governance and company performance. This would lead to an operational
objective of introducing a common target for the representation of each sex in
boards of listed companies to be achieved by 2020. 4. Policy Options Having identified the need for a minimum
harmonisation of measures to improve gender diversity in company boards, the
screening of policy options has taken into account the
principles of subsidiarity and proportionality, as well as consistency with the
EU Charter of Fundamental Rights (“Charter”) and other Commission policies. This is reflected in both the limited scope and timeframe to which
any possible initiative would be subject. It would therefore apply only to publicly
listed companies, with the notable exception of SMEs. Listed companies are
highly visible and of pivotal economic importance. Furthermore, the female
representation on their boards is one of the lowest compared to the other categories
analysed. As a working assumption, the target set in
the retained policy options is 40%. This lies between the “critical mass”
minimum that has been found necessary to have a sustainable impact on board
performance (30%) and full gender parity (50%). Setting the compliance period
until 2020 would enable a harmonised effort to increase the number of women on
company boards throughout the EU duly taking account of the different points of
departure of different Member States. 4.1. Option 1: Status Quo This policy option would involve no new
action at EU level; simply a continuation of the current situation. 4.2. Option 2: Legally
non-binding option This option would
take the form of a non-binding recommendation to Member States to take
appropriate measures to achieve a representation of at least 40% of each gender
in company boards by 2020, thereby targeting both executive and non-executive
directors of publicly listed companies in the EU. 4.3. Option 3: Minimal legally
binding option – objective set for non-executive board members only The binding legislative option would
introduce a quantified objective to reach at least 40% representation of each
gender in company boards by 2020 only applicable to non-executive directors of
publicly listed companies in the EU. This option would not cover SMEs and would
be temporary in nature, as would the two following ones. 4.4. Option 4: Intermediate
legally binding option – objective set for non-executive directors plus
flexible objective for executive directors In addition to the legislative option of a quantified
target of 40% for non-executive directors, this option would introduce the
obligation to set a flexible objective for executive directors. This would be determined
by the publicly listed companies themselves in the light of their own specific
circumstances. 4.5. Option 5: Maximal legally
binding option – objectives set for both executive and non-executive directors This option would introduce a quantified
target of attaining gender diversity in company boards whereby the level of
representation would have to be at least 40% for each sex by 2020 for both
executive and non-executive directors of publicly listed companies in the EU. 5. Assessment of Impacts 5.1. Assessment of Option 1 If no further action is taken, slow
progress can be predicted towards achieving both the general and specific
objectives, as the participation of women in company boards is expected
to reach only 20.84% by 2020. As a result, this policy option would have a negligible social and
fundamental rights' impact, or for the latter even no impact as far as the
EU-level is concerned, given that the Charter would not be applicable
pursuant to its Article 51(1) to measures taken by Member States that do not
implement Union law. The impact on the gender employment gap would be
very limited since men would still be more than four times as likely as women
to occupy a board position, and more than twice as likely to be managers. The gender
pay gap, which is the difference between
female and male salaries in listed companies, would be
23.72%, whilst the average return on education would be 18.2% for
individuals and 22.11% for the public sector. Company performance is expected to
yield an average of 10.78% ROE for listed companies in the EU-27. As the status quo would not imply any change in investment
or administrative burden, the corresponding costs are estimated to be
zero. 5.2. Assessment of Option 2 Due to its non-binding nature, this option is expected to only tip
the balance in favour of a non-binding action only in the Member States where
this issue is currently under debate. In the light of past experience, a
recommendation is assumed to be limited in its effects. The participation of women in the boards of publicly listed
companies is expected to reach 23.57% by 2020, a slight increase of 2.73
percentage points compared to option 1. It would have a fairly small impact on social
and fundamental rightssince the associated benefits of gender equality
would only be reaped to a very small extent. Where the recommendation is be
implemented and achieves its objective of increasing the proportion of women in
company boards and thereby reduce gender gaps, it would positively contribute
to the promotion of gender equality and the
rights enshrined in Articles 15 (freedom to choose an occupation and right to
engage in work) and 23 (equality
between women and men) of the Charter. Inasmuch as action by Member
States following a recommendation must be considered as implementing EU law
within the meaning of Article 51(1) of the Charter, Member States would have to
ensure that the negative impact on the
rights enshrined in Articles 16 (freedom to conduct a business) and 17 (right
to property) of the Charter are minimised as far as possible. This option would have moderate positive spill-over
effects on the wider economy in terms of reducing the gender employment gap
and the gender pay gap and increasing the average return on education. Due to
the slight increase in the number of female executive and non-executive
directors, it is expected to have a moderate effect on the overall aspects of corporate
governance. On the basis of a conservative estimate company performance
in terms of ROE is projected to increase by 0.67% compared to the baseline,
leading to an additional net benefit for listed companies of about €4 billion. Investment costs would arise only for
Member States that follow the recommendation and, in the case of non-binding
national measures, only for companies that respond to these measures. On that
basis, the total annual investment costs in the EU are estimated to be €3.7
million for 2017 – 2020 and €651800 for 2021 – 2030. The
average annual administrative burden due to the obligation on all
companies affected to report the gender composition of their boards would
amount to €115000. Assuming that all Member States that take measures would
also monitor progress, the total annual average for the costs of monitoring
in the EU is estimated to be €93000. 5.3. Assessment of Option 3 Based on the assumption of full compliance with the target, this
option would generate an increase in the participation of women in
company boards to 32.58% by 2020, a tangible rise of
11.74 percentage points compared to Option 1. Due to the fact that female
non-executive directors’ presence would increase to 40%, this option would have
a considerable impact on social and fundamental rights’ impact. Accordingly,
it would trigger much greater associated benefits of gender equality would be
felt at an appropriate level. This
option would have a clear beneficial impact
on gender equality and the rights laid down in Articles 15 and 23 of the
Charter. Although it would also represent a limitation on the rights set out in
Articles 16 and 17 in that it would restrict their right to determine by
whom the company is managed and supervised, there
is still a safeguard since it leaves a sufficiently wide margin of
choice for selecting the most qualified board members as the instrument would
only affect the overall gender composition of the company board. Given that
this option only covers non-executive members, it would be less of a limitation
as this function does not entail day-to-day management tasks. If companies are
not able to find an equally qualified female board member, they do not have to
attain the target. This option would have a positive spill-over effect on
the wider economy in terms of reducing the gender employment gap and the
gender pay gap and increasing the average return on education. It would have a
significant positive impact on corporate governance, with notable
effects on board dynamics. Furthermore, company performance would
visibly benefit from the increase in female board members since this option implies
considerably higher net benefits than Option 2, leading to an increase
in the net income of listed companies of about €15.7 billion, under a
conservative estimate. The
average ROE is projected to increase by 2.61% compared to the baseline. Making the most of the available talent
pool, this option would require €16.6 million in total annual investment
costs for 2017 – 2020 and €3 million for 2021 – 2030. In addition, this option would generate a total annual administrative burden of €124000 for
company reporting, while Member States would incur annual costs of €100000 to monitor
the progress made. 5.4. Assessment of Option 4 The impact of this option on non-executive
directors would be the same as Option 3. As regards the flexible target for
executive directors, it is assumed that each company
would replace one male executive director by one female director (leaving the
average board size unchanged). This would represent a significant increase in
the participation of women to 34.11% by 2020 in executive boards,
thereby nearly doubling the number of executive female board members and
increasing the overall number by 13.27 percentage points compared to option 1. This is due to the fact that on top of a 40% target for
non-executive directors, female presence among executive directors would
increase to 14.44%. Similar to the envisaged impact of
option 3, this option would also have a considerable impact on social and
fundamental rights, as the associated benefits of gender equality would be the
same. Going slightly beyond Option 3 as far as the fundamental rights'
dimension is concerned, however, the minimal prescriptive
provision, which would act as an incentive for companies to raise their share of female executive directors and
thus bring more women into the highest management
posts, could render the beneficial impact on the rights enshrined in Articles
15 and 23 of the Charter even more substantial. Option 4 would not increase the
negative impact on the rights enshrined in Articles 16 and 17, as each company
would be free to set its own objective and determine the extent of its
ambition. This option would have a significant positive spill-over effect
on the wider economy in terms of the reducing the gender employment gap and
the gender pay gap and increasing the average return on education. Corporate
governance indicators would score significantly better under this option. Company
performance would also significantly improve. The corresponding net
benefits are estimated to increase further, generating an additional net
income for listed companies of about €23.7 billion under a conservative
estimate, as the average ROE is projected to increase by
2.92% compared to the baseline. Under this option, the total annual investment costs for 2017
– 2020 are estimated to amount to €18.3 million and €3.5
million for 2021 – 2030. These
investment costs are not negligible but they are very modest given the above benefits
for companies, quite apart from the macroeconomic benefits. The administrative
burden on companies and monitoring costs for Member States would be
the same as under Option 3, at €124000 and €100000 respectively, given that Option
4 does not impose any additional requirements than Option 3. 5.5. Assessment of Option 5 Assuming full compliance, this option is bound
to be the most effective in terms of increasing the participation of women in
company boards. The share is expected to reach 40% by 2020 amongst both executive and non-executive directors (compared to Option
1, this increase of 19.16 percentage points at board level would entail an
increase of 32.19 and 15.25 percentage points for executive and non-executive
directors). This option would have a very high impact on social and
fundamental rights, as the benefits associated with gender equality would
take significant proportions. It would achieve the furthest-reaching and most
sustainable change
in management and business culture, achieving the strongest positive effects
for the position of women on the
labour market. Conversely, the limitation to the rights of Articles 16 and 17
of the Charter would be more significant if gender equality considerations were to limit the choice in
appointing the executive member responsible for a company's day-to-day
management and the most important business transactions. Nevertheless, this limitation does not appear to be disproportionate, especially given the importance of the intended aim of
gender equality which is recognised both in the Charter and the Treaties. In
addition, this limitation can be mitigated since companies would not have to
meet the gender objective where equally qualified candidates of the
under-represented sex cannot be found, for example, in sectors where female
participation in the workforce and management is particularly low, and where
executive positions require specific expertise and experience in that sector.
Policy makers would have to consciously take into consideration the extent of
the restrictions on shareholders’
fundamental rights when choosing this option. This option would have a very significant
positive spill-over effect on the wider economy in terms of the reducing
the gender employment gap and the gender pay gap and increasing the average
return on education. The binding measures for both executive and non-executive
board members would have a very significant positive impact on corporate
governance and company performance could see an increase in the
average ROE by 3.95% compared to the baseline. This would generate an increase
in the net income of listed companies of about €23.7 billion, under a
conservative estimate. Under Option 5 it is expected that total
annual investment costs in the EU for 2017-2020 would amount to €26.5 million, after which the cost would decrease to €5
million for 2021 – 2030. These
investment costs are not negligible but they are rather modest in relation to
the benefits at company level presented above, quite apart from the
macroeconomic benefits. Administrative
burden on companies and monitoring costs for
Member States would be the same as in Options 3 and 4, at €124000 and €100000
per year, respectively. 6. Comparison
of Options All policy options are expected to address
the main drivers of the problem and would help to reduce to different degrees
or even to break the vicious circle that prevents women from participating in
corporate boards. A comparison of the consequences of the various policy
options finds that (i) binding measures are more effective in meeting the
policy objectives than non-binding measures, (ii) measures that target both
executive and non-executive board members are more effective than measures only
targeting one group and (iii) binding measures will generate more societal and
economic benefits than non-binding measures. At the same time, binding measures would
entail comparatively higher costs and administrative burdens, but they are
still rather modest given the projected economic benefits. Furthermore, the
degree of effectiveness of the various policy options is directly linked to the
extent of interference with the rights of the companies and the shareholders as
their owners. Compared to a non-binding measure with a tangible yet limited
effect, a substantial increase of the impact in terms of the policy objectives
would require an instrument with binding force, setting targets for the
composition of company boards. While the consequences of all options on
fundamental rights are justifiable and in line with the principle of
proportionality in view of the legitimacy of the policy objectives and the
in-built safeguards, those that establish quantified targets for executive
board members, the persons directly responsible for the operative day-to-day
management of a company, would produce the most beneficial effects but would
also represent the most significant interference. The choice of option will depend on whether
the increased cost and greater degree of interference with fundamental rights
of binding measures could be justified by their wider socio-economic benefits,
or whether non-binding measures are to be preferred because, although they
generate fewer significant socio-economic benefits, and are less effective in
terms of meeting the policy objectives, they also entail fewer constraints on
the exercise of fundamental rights. The views of
stakeholders will be taken into careful consideration in choosing between the various
options. The administrative burden is expected to be
minimal for all policy options, given that they would apply only to publicly
listed companies which are expected to be able to use existing reporting
mechanisms to provide the necessary information on their compliance to the
Member States. During the preliminary screening exercise of policy options, the
options likely to entail an administrative burden were discarded at an early
stage. 7. Monitoring and evaluation arrangements In a legally binding measure is taken at EU
level (options 3-5), Member States would have to monitor whether listed
companies comply with the targets and report to the Commission on the state of
implementation at national level. The Commission would, in turn, monitor
whether the legally binding instrument has been correctly transposed and
implemented at national level. The Commission would then report to the European
Parliament and the Council on the progress made at regular intervals. It is
expected that a legally binding EU measure would be limited in time, meaning
that it would be repealed after a number of years, if sufficient progress is
made and a realistic prediction arises that the upward trend in the
participation of women in economic decision-making positions could be sustained
upon the discontinuation of the EU measure. [1] Almost 60% of EU university graduates
are women. See Eurostat, Tertiary students (ISCED 5-6) by field of education
and sex [educ_enrl5], 2009. [2] Women account for around 45% of the
people employed across the EU. See Eurostat, Employment by sex, age groups and
nationality [lfsq_egan], 3rd quarter of 2011. [3] Studies show that 83% of mid-level
career women have expressed a strong desire to move up the company ladder. See http://www.mckinsey.com/Client_Service/Organization/Latest_thinking/Unlocking_the_full_potential.
[4] Contrary to the commonly articulated
belief that there is a lack of qualified women to take up a corporate seat in
an EU company board, a 2012 database established by European business schools
demonstrates the suitability and availability of over 7000 'boardable' women
for seats in boards of listed companies. See http://gallery.mailchimp.com/3ad8134be288a95831cc013aa/files/2012_5_Commissioner_Reding_Initiative.pdf.