The Parliamentary Under-Secretary of State for Skills (Matthew Hancock)
I beg to move,
That this House considers that the draft Directive of the European Parliament and of the Council on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures (European Union Document No. 16433/12 and Addenda 1 to 3) does not comply with the principle of subsidiarity for the reasons set out in Chapter 1 of the Twenty-third Report of the European Scrutiny Committee (HC 86-xxiii); and, in accordance with Article 6 of Protocol No. 2 of the Treaty on the Functioning of the European Union on the application of the principles of subsidiarity and proportionality, instructs the Clerk of the House to forward this reasoned opinion to the Presidents of the European Institutions.
The motion is in the name of my right hon. Friend the Secretary of State for Business, Innovation and Skills. This debate gives the House a welcome opportunity to discuss gender balance among non-executive directors of listed companies, and to decide whether to send a reasoned opinion on the European Commission’s recently published proposal, improving the directive, to the Presidents of the EU institutions. In short, we are here to debate women on boards.
The aim of the draft directive is to increase substantially the number of women on corporate boards throughout Europe. The directive sets an objective of ensuring that, at a minimum, 40% of non-executives on the boards of listed companies are female by 2020. It aims to do that by ensuring that companies have transparent, gender-neutral appointment processes in place for their boards. Member states would be required to have a range of sanctions in place for companies that failed to do that. For companies that are listed, over which public authorities have a dominant influence, the proposed objective is to reach a minimum 40% representation by 2018.
Mrs Anne Main (St Albans) (Con)
Does my hon. Friend share my concern that there is confusion here between equality of opportunity and equality of outcome? If we are not careful, we could have the same few women on different sorts of boards, rather than genuinely offering opportunities for many women to apply.
Matthew Hancock
My hon. Friend makes a good point. A number of objections have been raised, and that adds to them.
Keith Vaz (Leicester East) (Lab)
I am grateful to the Minister for giving way so early in his speech. Has he received any document from the European Union about the wider diversity of our industry and business—for example, ethnic diversity? I fully support the proposals for gender diversity, but it is important to understand that this country and Europe have changed. The ethnic minority communities are not represented on the boards of FTSE companies, but we would like them to be.
Matthew Hancock
So would I. The right hon. Gentleman makes an important point that is not in today’s document. The importance of diversity on boards is not just about sex, race or background. It is that good boards bring a range of experience, a range of different people, together. Good boards tend to have members with different points of view and with all sorts of different characteristics. All the hard research shows that that is what promotes a good board both for economic and business purposes and for social reasons, as the right hon. Gentleman highlights.
Mr Jonathan Djanogly (Huntingdon) (Con)
I recognise this as an important issue and I recognise also that the number of women on boards has increased, which is welcome. Is not the question: why is the European Union dealing with this? Is this not a matter for the Financial Reporting Council, the UK Listing Authority and the Department? Why are we discussing it in the context of the European Union?
Matthew Hancock
We are discussing it because the EU has put forward a proposal. Whether we think it is right that it should do so is exactly what we are debating. I have an awful lot of sympathy with what my hon. Friend says. In fact, I think I agree with all of it, although I am always cautious about saying that I agree with all of anything in case I missed something or misunderstood.
Matthew Hancock
May I make a little progress? I shall come to some of these points in detail.
The Government are committed to increasing the number of women on boards. In the coalition agreement we pledged to promote gender equality on the boards of listed companies, and we did so for a good reason. Historically, the proportion of women on boards has been too low. In 1999 women made up just 6.2% of the boards of FTSE 100 companies. By 2004, that was 9.4% and in 2010 it was 12.5%. In 2010 there were only five female chief executive officers of FTSE 100 companies.
As the House will know, we published the review by Lord Davies of Abersoch in 2011 and have been working to implement the recommendations. The Davies review identified several barriers preventing women from reaching senior roles in business. The research shows that people have an unconscious bias to reward and promote people who are like themselves. Davies found that informal networks are highly influential in determining board selections and that a lack of transparency over selection criteria continues to be an obstacle to progress. Davies also suggests that differences in the way men and women are mentored could be giving men the edge over their female peers, for the clear reason that there are fewer women in senior roles to act as mentors and role models for female colleagues.
Meg Munn (Sheffield, Heeley) (Lab/Co-op)
I very much welcome what the Minister is saying and the issues he is describing. Will he say something about the differences between non-executive, as opposed to executive, women board members? We know that significant progress has been made in respect of non-executive roles, but executive positions are enormously important because they are about the day-to-day running of businesses and what is happening within businesses.
Matthew Hancock
It is true that progress has been slower in executive appointments, but it is also true that where legislation has been passed to increase the number of women on boards—for example, in Norway—the increase has come almost entirely in non-executive roles, which shows that legislation is not a panacea. The Davies review recommended a business-led strategy to bring about the necessary change, and we have been working with business to implement the strategy.
I pay tribute to the 30% Club and Helena Morrissey. They are both pragmatic and passionate about reaching their target of 30% representation on boards. Their approach is one of persuasion and moral suasion to change the culture of business from business, and so far it has been highly effective. The figures clearly show that we are moving in the right direction.
Since Lord Davies’s work was started, we have had a near 50% increase in the number of female non-executives in the FTSE 350. Now, 17.3% of FTSE 100 board directors are female and, importantly, 38% of newly appointed FTSE 100 directors and 36% of newly appointed FTSE 250 directors since March last year have been women. Research by Cranfield School of Management shows that should the current pace of change be maintained, we are on a trajectory to reach 37% of women on FTSE 100 boards by 2020, just shy of the 40% proposed by the commission. We think that that business-led voluntary approach is the right one for the UK and that it is making progress. Central to it is a change in culture at the heart of business, and that is the only way in which progress will be sustainable and long term.
Julian Smith (Skipton and Ripon) (Con)
Has my hon. Friend come to any conclusion about why the Labour party failed so dismally to achieve better results on this issue in its 13 years in government?
Matthew Hancock
I have not specifically done any research into that, but it is certainly true that since 2010 there has been a big increase in the numbers. However, I do not think that this is a particularly partisan issue because there is cross-government and cross-party work on trying to make it happen. Crucially, we are following a voluntary business-led approach, because the research shows that diverse boards are better boards.
That brings me to the broader point that was made by the right hon. Member for Leicester East (Keith Vaz). The best boards have a diversity of human behaviour and experience and there is no bigger determinant of an individual’s behaviour than their sex. On average, companies with the most balanced boards out-perform companies with no female board members by an average of 56%, and companies with three or more women on their boards have achieved a return on equity about 45% higher than the average company. Research suggests that just one female director on a board cuts a company’s risk of insolvency by around 20%.
Keith Vaz
I hope the Minister will agree that the message needs to come from the Government themselves. I had many discussions with previous Prime Ministers about the diversity of their trade delegations to countries such as India. I understand why the Minister wants to go down the voluntary approach route, but will he give the House an undertaking that the Government will also send out a very clear message in the appointments they make to non-government departments and in the delegations that he and other Ministers lead by ensuring that they are representative of our country: more ethnic minority people, more women?
Matthew Hancock
Yes, I do agree, but these things have to be done on merit. As it happens, later this month I am leading a trade delegation to India, and the business side of that trade delegation will be led by a woman. I hope that I have satisfied the right hon. Gentleman.
Matthew Hancock
I will come to the point that, under the principles of subsidiarity in the Lisbon treaty, should there be enough motions in national Parliaments across the Union, that is enough to ensure that the Commission cannot introduce the current draft proposals.
We want a business environment in which woman can and do take their seats at the boardroom table on merit and in which businesses can respond to the varying needs of their sector, size and type of business. We need to tackle those problems without unduly burdening business. That is the substance of the challenge of getting more women on boards. It is clear that the Government have taken a lead on that and things are moving in the right direction, and the current strategy is leading us towards the target that the EU has proposed.
I will now move on to the argument about whether this should be an EU competence at all. The Government’s position is clear: we believe that member states must retain the flexibility to respond to their own individual circumstances. Today’s debate is about allowing Parliament, as distinct from the Government, to express its view on whether this should be an EU competence. The Government are strongly of the view that the principle of subsidiarity should be respected and adhered to. The principle of subsidiarity rests on two tests that a Commission proposal must pass: the necessity test, which is that the objectives of the proposed action cannot be sufficiently achieved by member states acting alone; and the EU added value test, which is that the objectives can be better achieved by action at EU level. Under protocol 2 of the Lisbon treaty, national Parliaments may raise an objection, referred to as a “reasoned opinion”, if they do not believe that a draft proposal is compliant with the principle of subsidiarity.
The Government’s explanatory memorandum, which was sent to the European Scrutiny Committee by the Under-Secretary of State for Women and Equalities, sets out the Government’s assessment of whether the Commission’s proposals meet the principle of subsidiarity. We find that they do not. There is no reason why member states cannot achieve the objectives by acting alone and there is no evidence that value would be added through EU involvement. Indeed, the Commission’s own impact assessment found that the evidence base for demonstrating the need for, and proportionality of, binding EU action was “very weak”, stating that members states had a
“proven ability to act in this area”
and that
“a number of Member States had taken measures which appeared to have achieved significant progress”.
I hope that list includes us.
Meg Munn
One way of making progress on this is through the voluntary approach, but Lord Davies has made it clear in speeches I have heard him make that he feels that there must be progress and that, if progress is not made, we should look at a non-voluntary approach. Is the Minister arguing that the Government would be willing to look at that as something the UK would do, rather than something the EU would do?
Matthew Hancock
For the purposes of today’s debate, the Government are arguing that this does not pass the EU’s subsidiarity test. For those purposes, the Government’s position is clear: we think that the voluntary approach is best. Before becoming a Minister, I wrote a book in which I stated that that needs to happen and that we should hold open the possibility of having legislation, but the Government’s position is clear: we should approach this on a voluntary basis.
Mr Djanogly
I thank the Minister for being so generous in giving way. I wholly support what he has said and the Government’s position. However, he might wish to look at the Financial Reporting Council’s most recent annual report, which basically says, “Over to you, Europe. We’ll see what you have to say and then we’ll deal with it.” I think that the FRC needs to be told that it must look at this, because it is an important issue and we want to deal with it.
Matthew Hancock
It might be that this debate and the decision of Parliament that will follow will be brought to the FRC’s attention. I wonder who might do that.
Of course, we share the Commission’s view that fair opportunities for women in executive and non-executive posts should be promoted and we are happy for the EU to disseminate good practice across member states, but it is up to member states to find their own national approaches. Many member states are considering, or have implemented, various and differing national measures on a voluntary basis to facilitate raising the proportion of women on boards. Some have decided on domestic legislation and some, like us, think that we can get there without it. That multitude of approaches is likely to help us find which one works best and has the most benefits and the fewest unintended consequences. The reasoned opinion is intended to set out the views of Parliament separately from the views of the Government, so I am very much looking forward to contributions on that front from Members in all parts of the House.
Let me turn to a couple of the specific questions from the European Scrutiny Committee. The Committee asked for the Government’s view of the Commission’s projection that only 17% of UK listed companies would have 40% women directors by 2020. It is safe to say that the Commission’s projections are rather out of date, because we already have 17% women directors in the FTSE 100. The Commission’s analysis is based on extrapolating the increase in the number of women on boards in the period 2003 to 2011 and using a linear progression, but, as we have already discussed, the rate of change increased markedly at the back end of the last decade, and we will be within a whisker of reaching the target that the Commission has set by 2020.
The Committee asked whether the Government consider that the measures proposed by the EU would be counter-productive. It is true that legislation can have unintended consequences, and if an objective can be reached without legislation it is usually better to do so.
Finally, the Committee asked about the outcome of the Government’s consultations on the proposed directive and the progress on negotiations. We are discussing the proposals broadly, but negotiations in Brussels have yet to start.
Fiona Mactaggart (Slough) (Lab)
The Minister said—I have some sympathy with this view—that if we can succeed without legislation, that is preferable because there are downsides to legislation. Will he undertake to ensure that we will have an annual report on progress and some suggestions about action that could be taken if the rate of success that he predicts is less than he hopes for?
Matthew Hancock
We have had a report on this. There are constant reports—for instance, I commend to the hon. Lady the 30% Club website, which has a quarterly update of the numbers—and there are many opportunities to debate this in the House. The most important thing is that we should try to get there without legislation, and certainly there does not need to be EU-level legislation, as it is something that this House can perfectly well do on its own. Having more women on boards is right, and it is good business, but it should be the responsibility of this House.
I am grateful for the European Scrutiny Committee’s work. We would argue that legislation is not necessary now. Yes, there is more work to do to promote women on boards, and we and British business are doing it. I commend the motion to the House.
Matthew Hancock
With the leave of the House, Madam Deputy Speaker, I will respond briefly to all the points raised. First, I shall deal with the last one by congratulating my hon. Friend the Member for Skipton and Ripon (Julian Smith). I do so not least because this morning my wife and I attended the three-month scan of our new baby—we did so together, of course. I can understand why the Whips are looking worried about need for paternity leave coming down the track.
I will make three quick points. I think that the whole House has recognised the first of these, but I wish to put it in stark terms. The UK has had the fastest rise in the number of women on boards in the EU, bar three countries. Our rise has been faster than that of Germany, the Netherlands and Spain; we have been faster than all but three of the 27 member states.
On the point about whether it is good business to have women on boards, the evidence is very clear. The Bundesbank evidence was cited and I have read it in detail. It was analysis of the impact on risk, but it omitted the banks that had been rescued because they had been too risky—that is a bit like looking into the risk of the British banking system but omitting RBS. So it is a partial report, but the evidence is incontrovertible.
Finally, I come to the point raised by the Chairman of the European Scrutiny Committee. The rules are clear: if a third of member Parliaments cite a reasoned amendment and reject the proposal, the Commission must consider again. As far as we know, eight member Governments and Parliaments are against, which is just under a third, as there are 27 members, and about a third of member states are yet to be clear in their position. If this motion goes through tonight, that eight will rise to nine. So I have some confidence that he will be happy with the outcome of the process and that we can ask the Commission to look again at this proposal. I commend the motion to the House.
Question put and agreed to.
Resolved,
That this House considers that the draft Directive of the European Parliament and of the Council on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures (European Union Document No. 16433/12 and Addenda 1 to 3) does not comply with the principle of subsidiarity for the reasons set out in Chapter 1 of the Twenty-third Report of the European Scrutiny Committee (HC 86-xxiii); and, in accordance with Article 6 of Protocol No. 2 of the Treaty on the Functioning of the European Union on the application of the principles of subsidiarity and proportionality, instructs the Clerk of the House to forward this reasoned opinion to the Presidents of the European Institutions.