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EU sanctions will enforce female board quotas

A businesswoman stands in front of a conference table in a board room.

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European companies will be forced to hire a female candidate over an equally qualified male – or face sanctions – unless women occupy at least 40 per cent of their board seats by 2020, the European Union justice commissioner said on Wednesday.

EU data show that women fill only 13.7 per cent of board positions in large listed companies.

While the new EU-wide plan does not in fact set mandatory quotas, as an earlier draft proposal suggested, it will introduce a range of administrative burdens to coerce companies to appoint more female non-executive directors.

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Lawyers said the plan – championed by Viviane Reding, justice commissioner – had several shortcomings as it failed to set clear rules on mechanisms for selecting board members. This could expose companies to litigation by female candidates questioning their hiring criteria.

Companies will have to prove they are trying their best to increase the number of women in top management positions to at least 40 per cent. They have to do so by setting their own transparent mechanisms for selecting new board members and reporting annually on their progress towards meeting the 40-per-cent target.

If the target is not met by 2020 a "preference rule" will be applied, giving women candidates for a board seat an advantage over men. An unsuccessful female candidate will have the right to ask the company to disclose the qualification criteria upon which the selection was based.

"This [new rule] will require a comparative analysis of the qualifications of each candidate and the application of clear, gender-neutral and unambiguous criteria – an exercise which is fraught with risk and difficulties in practice," said Naeema Choudry, discrimination lawyer at the law firm Eversheds.

An EU official played down the risk of lawsuits but acknowledged that companies' fears of being tangled in litigation cases would be an incentive for them to meet the 40-per-cent target.

Member states will be required to impose "effective and dissuasive" sanctions on companies which fail to respect the preference rule. The EU did not set any minimum penalties but said a fine was a good example. It was also unclear how countries would monitor the implementation of the directive.

Ms. Reding said the commission would take legal action against any member state that failed to apply sanctions to non-complying companies.

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"Sanctions are going to be applied to companies that have less than 40-per-cent quotas and who are not putting in place an open system for the selection of the candidate to replace an outgoing board member and who do not chose the woman in order to fill the gap if the woman is qualified," she said.

"Would a member state . . . not fulfill their duties on the basis of the directive then the European Commission can start infringement procedures,"she said.

The United Kingdom, which led a group of at least 11 countries opposed to female quotas, welcomed the revised plan. However, one official said that overall the proposal remained vague.

The legislation, which will apply to about 5,000 listed companies across Europe, excluding small and medium-sized groups, will have to be approved by the European parliament and a majority of member states.

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