Transcript provided by Kensho.    

Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.  

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.  

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and  governance issues that are shaping investor activity and company strategy.  

Many companies are under growing pressure to increase diversity on their boards and management teams, and many  countries are taking steps to enhance diversity, for example, by passing laws to increase the representation of women  on corporate boards.  

Esther Whieldon: Several European countries such as France, Germany, Spain and Belgium, have passed laws to elevate  women into top corporate positions. And a 2011 law passed in France appears to be yielding positive results. In 2021,  women represented about 46% of Board members among France's biggest publicly traded companies, and that's  compared with only about 15% in 2011.  

Lindsey Hall: But there's still work to do to achieve gender parity. According to the European Institute for Gender  Equality, while women account for 60% of graduates in the EU, they represent less than 1/3 of Board members and only  8% of Board chairs are women.  

Esther Whieldon: This topic is timely because earlier this week on October 17, the Council of the EU approved a new  directive designed to close that gender gap. And for our listeners who don't know the ins and outs of the EU legal  system, a directive is a legislative act that sets out a goal for all EU countries to achieve.  

Our EU-based colleague, Jennifer Laidlaw, a Senior Writer on the S&P Global Sustainable1 Thought Leadership team, has  been exploring what the new law means for companies, investors and, of course, women.  

First up, she spoke with Miriam Marra, Associate Professor of Finance at Henley Business School in the U.K. Jennifer  asked how the new law might impact the EU's gender parity goals.  

Miriam Marra: So the so-called Women on Boards Directive, as you know, aims to introduce transparent recruitment  procedures in companies so that at least 40% of non-executive directors or 33% of all directors will be occupied by,  again, underrepresented gender, which are obviously in our case, women.  

And companies have to comply by the end of June 2026. The idea is here that in cases where candidates are equally  qualified for a certain post as directors, priority should be given to the candidate from the underrepresented gender.  What I'd like to stress a lot is the point of the 33% across all directors that needed to be appointed from the  underrepresented gender. Because for me, it says let's not just fill boards with women, known executives, but also let's  try to bring women into top decision-making positions.  

As you know, member states can also apply penalties for a company that fail to comply. There could be, for example,  fines or annulment of appointment of directors. And an important thing is that they have a duty also to publish  information on companies that are reaching the targets. And this generally serves as a peer pressure to complement the  enforcement of the directive. However, this provision is -- will be more effective in those countries within the European  Union and those society where the target of gender equality in corporate leadership is actually shared and is felt  important.  

Jennifer Laidlaw: Now Lindsey and Esther, I'm just going to backtrack a bit for our listeners. This law has been a long  time in the making. The European Commission, so that's the EU's executive arm, first proposed the rules in 2012. And EU  countries and the European Parliament finally reached a provisional agreement in June 2022. 

Here's Miriam to explain the long process. You'll hear her mention Ursula von der Leyen, the European Commission's  first female President, who took office in 2019.  

Miriam Marra: So the first draft was prepared in 2012. It was very widely and promptly supported by the European  Parliament in 2013, but then has been, I think, stuck at the level of the European Council for some time, mostly as many  other EU directives because countries were not agreeing about the flexibility that they wanted to have on a national  level.  

But this year, I think a key change has been the support given now by Germany and the Netherlands to the directive. The  2 states had long opposed initial drafts because they preferred a national approach to increase female representation in  corporate leadership, but they agreed on this specific directive because it's -- they say that provides the states with the  right solution and guidance but still leaves them with some flexibility.  

But there are still countries that are not quite happy about it because they would like to keep the issue at the national  level, such as Hungary, Slovakia, Estonia, and Poland opposed the binding nature of the directive, the target deadlines. I  think what is really interesting and meaningful to note is that it is under a woman as President of the European  Commission that this process has finally reached an agreement. And this, in itself, I think is a sign that women leadership  is really needed to accelerate all the diversity and inclusion targets set up by the EU Gender Equality Strategy for 2020- 2025.  

And also, Jennifer, the commission itself is leading by example because under Mrs. von der Leyen's presidency, a fully  gender-balanced college of Commissioners has been achieved in 2020, and there are 13, including herself, 13 out of 27  commissioners are now women. So that's, I think, in itself, a nice sign of a change.  

Jennifer Laidlaw: Okay. Yes, I thought it was very interesting that now there's an EU President that's a woman, that  actually this gender quota directive has come back to life in some way. I mean how much influence do you think she  maybe had sort of pushing things along?  

Miriam Marra: I think she had quite a lot because she set it up as one of the initial strategies of her presidency. So I  think she did work hard, Mrs. von der Leyen, to be quite of a key resolver in this issue. And also the commission itself is,  for example, quite ambitious, and they set up a target for 2024 as an EU Commission to achieve gender parity of all the  levels of its own management system.  

So again, I think it's nice that there is a woman leader doing that, but also that the institution itself is trying to lead by  example. I think it's really great that it's not just imposing on others but also doing the job itself.  

Lindsey Hall: Miriam mentioned the aim of the legislation, it's not just to fill up board post with women, but those  appointments must also be made on merit. So Jen, how will that impact companies in how they choose candidates?  

Jennifer Laidlaw: So the European Parliament in June made it quite clear that selection of Board members needs to be  transparent. Listed companies will have to provide information on their board representation once a year. And if they  don't meet the targets, they'll have to explain why.  

To understand how companies will tackle the new rules and what they might mean for investors, I spoke to Hedwige  Nuyens, Chair of European Women on Boards, a lobby group.  

Hedwige Nuyens: For companies, it definitely means that when they are looking for new Board members, when they are  looking at their talent pipeline, when they are talking with executive search firms, this will now become part of the  minimum requirement. So not accepting all-male list of candidates, looking for diversity, also looking for diversity in  general: different nationalities, different origins, different backgrounds, different educational backgrounds.  

So this is really tapping into the bigger need to really have a diversity of thought in the Board, diversity of expertise and  it means recruiting differently, recruiting in a more professional way, opening up and not having only the friends of  friends or acquaintance that perhaps have been playing a role before. 

Jennifer Laidlaw: And what would you say the importance is of having this kind of legislation in ensuring that an  underrepresented gender is fairly represented on a Board?  

Hedwige Nuyens: This is huge. It's very, very important. You have to know, Jennifer, that the differences between  countries is enormous. In France, for example, they have, on average, 45% women on boards. In Estonia, for example,  it's only 8%. So you can see that cultural differences, differences in terms of expectations toward women, regulation  plays a huge role.  

So if we want to be sure that women have equal rights, but also if we want to ensure that companies have the best  potential leads in their executive committee and their boards, you really need to tap into all talent. And so what it will  change, definitely much more potential and career perspectives for women, a different kind of style at the helm of  companies and, in the end, much better-led companies.  

Jennifer Laidlaw: Yes, because that's the interesting thing isn’t it, that there's research that shows that the more diverse  workplace is, the better a company actually performs, right?  

Hedwige Nuyens: Yes, absolutely. So we know that diversified teams perform better, but subject to extremely good  leadership as well. So if you have a bad leader, with a diverse team, that will not work. So it requires also a different  style, excellent leadership, but in fact, that is also what we want at the helm of those top-level companies, which are the  stock-listed companies. But diversity, it's in all shapes and forms.  

So we know, for example, that in the banking industry, where I'm coming from and where I'm acting, there has been a  study by the European Banking Authority, evidencing that banks with a diversified Board have a return on investment  which is 1% higher than all-male boards.  

So the business case is clear. The only thing is that you have to break some habits of the past of nominating people that  you have been known for 20 years from your inner circle and that, by definition, is not diverse.  

Jennifer Laidlaw: To get the impression that investors are likely to give up on a company if they think like a gender is  underrepresented at Board or executive level?  

Hedwige Nuyens: Yes, increasingly, increasingly. And for all kind of reasons because it's a clear proof, if you have an all male Board all from the same ethnicity, you have clear evidence that the Board has not been chosen based on the most  excellent people. It's evident. So it's already a proof of not having gone to the furthest extent to really appoint the best  people.  

So increasingly, that becomes a reason not to invest because you know something is wrong there, something has not  been taken into account. And if they are not even capable of finding the best talent, what about all the rest?  

Jennifer Laidlaw: Using legislation to enforce gender parity has been a subject of debate. Do quotas work? And are they  a long-term solution? Here's Miriam's view.  

Miriam Marra: In my opinion, quotas in the business world, can help ensuring that qualified women are no longer  denied or find difficulty to access top management position. They are qualified, they are well educated. And not because  of their gender per se, but because of their different life experiences, different level of exposure to the business world  and the networking also level.  

However, these quotas as I see them, I see them as temporary measures that aim at eradicating inequality that has been  up over time for some time. And all we -- researchers believe is that after this equality has been reached, then quotas  could be lifted because essentially, the legislation will become effective if companies by themselves become compliant  to the idea of gender equality in corporate leadership.  

So it can help because we live in a situation where the gap is so huge, and the quotas can help up to speed up and to  catch up with the target of equality. 

Jennifer Laidlaw: As we heard earlier, quotas seem to have worked in France. But is that the case in other EU countries?  What about countries where quotas are voluntary? Here's Miriam again.  

Miriam Marra: For example, the European Institute of Gender [Equality] has produced the statistics for the countries  that have acquired this quota-led legislation with a minimum share of women and men on boards. If you look at  Belgium, Germany, France, Italy, Austria and Portugal, you can see that now the average percentage of women on  boards there in last year has reached 37.6% against the 24.3% of the countries that don't have any quotas.  

And also in those countries where there are quotas, you have seen obviously a much faster improvement year-on-year.  So before the quotas were becoming -- became effective, there was an increase of less than 1% of women on boards, so  a very, very slow change in the process. But that jumped then to 3% year-on-year after the quota was introduced. And  this, you can compare it with a stagnant increase of 0.7% of women on board in countries without quotas.  

Now to be honest, there are other countries that bring also a good example of things they have achieved without using  quotas, and one of them is the U.K. So the U.K. has been successful in increasing the percentage of women on board just  by encouraging companies and then leading them to act voluntarily rather than using binding legislation.  

So this is a good example also of achieving things without quotas. But my main concern is that the EU has some level of  heterogeneity across the countries within the Union. And some countries really need to speed up quite a lot to catch up  with the others.  

So I think, and other people think like me that introducing clear legislation, that also leaves some margin of flexibility to  the states can actually help to convey a clear signal from EU top decision makers to all member states to say,  collectively, we do need to together to focus to bring this target in.  

Jennifer Laidlaw: But can quotas alone help? I wondered whether other factors come into play such as education or  childcare to ensure there's a level playing field between women and men. Here's Hedwige to give her perspective.  

Hedwige Nuyens: A quota is, of course, something that has helped at the top of companies. More in general, when you  look at how many women are there in the workforce, how many women managers, how many women in senior  positions, there, of course, the whole list of things that you mentioned come into play. So expectations of society. The  divide of roles, household tasks between men and women. Parental leave, is it -- does it exist? Is it equally taken or  available for men and women?  

Childcare, of course, as you say, education, schooling. So many, many measures make and give a difference between  countries and explain why it has been so much more easy in France and much more difficult in other states. We even  see, for example, in the Nordics, we think that the Nordics are all equal, and it's true. But even in the Nordics, you see  differences with Denmark lagging behind compared to Finland and Sweden.  

So even if society is equal in general, you need more than that and really accompanying measures in terms of  expectation, in terms of possibility of women make it just normal to have a life at work and life in the family and have  equal responsibility of childcare and household in general. So yes, it's very important. But I would say we have been  advocating now for women on boards. You'll also see Jennifer that when you have a female CEO or a female Chair, there  is a trickle-down effect. There will be more women in the board with a female Chair. There will be more women in  executive committee with a female CEO. There will be more attention to balance, a work-life balance with a female CEO.  

So it makes sense to also look specifically at who is leading the company, who is chairing, who is making the strategy,  because that will be beneficial for women in general and for society in general.  

Esther Whieldon: So we've heard about the difficulties in having this law approved. So Jen, how easy is it going to be to  implement across companies in the 27 EU countries? And how effective is it going to be?  

Jennifer Laidlaw: I spoke to Martin Winner, Professor for Business Law at the Vienna University of Economics and  Business. He told me that it might be difficult to implement, and here he is to explain why. 

Hedwige Nuyens: I think what the proposal tries to do is the following. The -- first of all, there is a quota of 40% of non executive directors or 33% of all directors. And member state can decide which of those 2 quotas of female directors it  chooses. And then the company has to make a comparative analysis. And if qualifications of the candidates are equal,  we have to give priority to candidates of the underrepresented sex as the directive says, which means, obviously, the  female candidate. And then the selection must be on the basis of such a comparative assessment, and rounds must be  given to the candidates which have not been selected.  

Now in practice, directors are selected via a vote in the general meeting. And those members in the general meeting  may have different reasons for supporting different candidates. This is a little bit like asking for the justification in an  election for political office Y, did Y become president? That is very hard to do given that individual reasons may differ.  

And finally, it is quite unclear who is responsible if the vote does not follow the objective assessment. Again, the  shareholders themselves cannot be responsible. So I think this is quite hard. It will be quite hard to implement. And this  is not the quota, such the quota or such would be comparatively easy, but the idea of giving reasons of explaining and so  on that may become very difficult in a real life company setting.  

Jennifer Laidlaw: Why is this particularly difficult to do on an EU level?  

Hedwige Nuyens: I think that, first of all, it is difficult because different member state use different approaches to the  issue. Basically, we see 2 different ways to deal with this in the member states. First of all, we have, in some member  states, like Germany, Austria, we have strict quotas. 30% of Supervisory Board members must be women. And any  election violating this is void.  

The advantage of that solution, of course, is companies know precisely what to do, and that is not the approach by the  directive because it does not look at justifications at all. It says 30% women, otherwise, the election is void. That's one  way to do it.  

And then the second way to do it is would be not -- no quota, but asking the company to set a policy as to diversity,  which is the approach in Spain or Sweden and many other member states. And then the company actually can select the  rules which are best suited to its circumstances. And of course, it is also easier to follow broader issues of diversity than  just tender with such a flexible approach.  

I cannot argue which of these 2 approaches is superior. But I think both approaches avoid the difficulties we may see  when implementing the directive.  

Jennifer Laidlaw: Are there any other measures from a legal point of view that help gender parity?  

Hedwige Nuyens: Well, this is a hard question, what other types could help. But I think that there are 2 important issues  which would have to be addressed in order to improve the situation. The first one is that power actually lies with the  executive directors, they'll remain untouched by quota 40% of nonexecutive. And I think at least in the medium term,  the aim will be to improve the gender balance among the executives as well.  

To be honest, I do not know whether this will have to be a legislative measure or whether such a legislative measure can  be successful. But I certainly believe that the situation, as it is today, is not satisfactory. So I think we should address  that. That's the first point.  

And the second thing is that encouragement of and support for women must start much earlier. Companies sometimes,  at least here in Austria, complain that there are few or even no suitable female candidates. I do not know whether this is  true, but -- or whether companies just have to look harder, but there is no doubt that many women can make use of  their full potential because of barriers at earlier career stages. And that, of course, goes far beyond company allowing  something and our society as a whole will have to address in any case. 

Jennifer Laidlaw: So just going back to what we were talking about in the beginning, you were saying they might be very  hard to integrate into company legislation. I mean from that point of view, do you think this actual directive is going to  be effective?  

Hedwige Nuyens: Well, I think for many member states, it will not have a lot of influence. Because in many member  states, such systems are already in place. And actually, the directive itself contains an opt-out mechanism for member  states which already have introduced similar systems. The real purpose of the directive is probably that it operates in  some sort of a broom wagon, namely that there are some member states which have not introduced such provisions or  which have not been successful in implementing them, let's call them the stragglers. And the directive helps these  stragglers to catch up with other member states. So in those member states, it will definitely have an impact.  

Lindsey Hall: Jen, we just heard that companies will have to comply with the law by 2026. What steps can we expect  between now and then?  

Jennifer Laidlaw: So the directivr still needs to be formally adopted by the European Parliament, and it will enter into  force on the 20th day after it's been published in the EU's Official Journal. Member states will then have 2 years to adopt  the required national measures.  

Esther Whieldon: We'll be watching to see how different countries adopt the legislation and what the impact will be on  Board membership over the long term, especially in those countries with a low percentage of women on boards. We'll  be eager to hear more on that, Jen, so please keep us updated.  

Jennifer Laidlaw: Absolutely. I certainly will.  

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. And a special thanks to our producer, Kyle  Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next  time.  

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