The Gender Balance Proposal for the Boards of Public Companies Needs Refinement

The Ministry of Finance has introduced a draft amendment to the Securities Market Act, aimed at regulating the number of individuals from underrepresented genders that must be included in the management and supervisory boards of public companies. The purpose of the draft is to transpose an EU directive and promote gender balance in publicly listed companies in Estonia.

According to the Chamber of Commerce, the draft needs significant amendments and clarifications, particularly regarding the procedure and timing of its implementation. Additionally, the potential conflicts between certain provisions of the draft and other laws need to be evaluated.

Public Companies Must Set Gender Balance Targets for Their Boards
The draft proposes that the general meeting of a public company must adopt one of the following gender balance targets, which must be met:

• At least 40% of the members of the supervisory board must be from the underrepresented gender, or
• At least 33% of the total members of both the supervisory and management boards must be from the underrepresented gender.

If a company chooses the first goal, i.e., that at least 40% of the supervisory board members must be from the underrepresented gender, the company must also set an individual goal for improving gender balance on the management board.

Clarifications Are Needed on Which Companies Must Apply Gender Balance Rules
The draft states that the gender balance rules do not apply to Estonian stock issuers with fewer than 250 employees, annual revenue below €50 million, or a total balance sheet not exceeding €43 million.

The Chamber of Commerce believes this provision needs further clarification regarding its application. Currently, the draft does not clearly specify the time frame for determining whether a public company must comply with the proposed rules. Moreover, it is unclear whether the number of employees should be based on the end of the financial year or the average for the entire year. There is also a need to clarify what happens if a public company that initially qualifies for the rules later falls outside the scope of the draft.

The Rules for Candidate Selection Procedures Require Clarification
The draft plans to add a new section (§ 1357) to the Securities Market Act, which stipulates that if a public company fails to meet its chosen gender balance target, it must adjust its board member selection procedures to ensure transparency, clarity, and fairness. In the case of equally qualified candidates, preference must be given to the candidate from the underrepresented gender. The deadline for achieving gender balance goals is set for June 30, 2026.

The Chamber of Commerce understands from the draft and its explanatory memorandum that all provisions of § 1357 must be applied by stock issuers if the goals are not met by June 30, 2026, or if, for any reason, the goals are no longer being met after that deadline. However, the draft and the explanatory memorandum are not clear enough on this point, potentially causing confusion for businesses in practice. Specifically, there is ambiguity regarding the application of the rule, as there is no mention of the provision only being applicable after June 30, 2026. If interpreted to mean that the underrepresented gender must always be favored in the case of equally qualified candidates, smaller boards may face a shortage of qualified candidates, as it would be publicly known which gender is to be selected. Furthermore, the draft stipulates that if the candidate from the underrepresented gender is not chosen despite equal qualifications, the board’s decision is void. If a board member’s selection is deemed invalid, all decisions made with the involvement of the wrongfully selected member would also be invalid.

The Chamber of Commerce supports an interpretation of the draft whereby the entire provision applies only after June 30, 2026. Therefore, we have proposed clarifying whether the provision applies in full after this date, and this clarification should be explicitly stated in the explanatory memorandum.

Possible Conflict with Data Protection Rules
The draft imposes an obligation on public companies to provide non-selected candidates, upon request, with information regarding the qualification criteria used in the selection process, a comparative assessment, and the reasons why a candidate from the underrepresented gender was not selected. At the same time, companies must comply with data protection regulations. The Chamber of Commerce noted that companies often collect information about candidates’ qualifications, such as work experience and education. Since there are not many top executives in Estonia, especially in specific fields, a candidate’s identity could be inferred from their qualifications, potentially leading to a violation of data protection laws, with the risk of large fines.

Therefore, the Chamber of Commerce suggests that the drafters further analyze the compatibility of the disclosure requirement with data protection laws and the General Data Protection Regulation (GDPR). The Chamber also recommends limiting the disclosure of such information to legal disputes or establishing confidentiality obligations.

Refusal to Provide Evidence Should Not Be Considered an Admission of Guilt in Legal Disputes
The draft includes a shared burden of proof in legal disputes where a non-selected candidate from the underrepresented gender believes that a public company has violated the obligation to select a candidate from the underrepresented gender in the case of equally qualified candidates. If the company refuses to provide evidence that it did not breach this obligation, the draft states that such refusal will be equated with an admission of guilt.

The Chamber of Commerce believes that equating refusal with an admission of guilt contradicts the Code of Civil Procedure, which stipulates that an admission is an explicit agreement with a factual claim made to the court, either in writing or during a hearing. Therefore, the Chamber suggests amending the draft to eliminate this conflict with the Code of Civil Procedure.

Reporting Procedures for Compliance with Gender Balance Rules Are Confusing
The draft requires public companies to submit information on the fulfillment of their gender balance goals (e.g., which goal was chosen, the gender composition of board members, etc.) to the Financial Supervision Authority within one month after the end of the reporting period (one year), and the authority will publish the data on its website. The directive being transposed requires the reporting to be submitted with the annual report. The draft does not specify whether and how companies can update their submitted data if new board members are elected after the information has been provided. Additionally, companies must also publish the same data on their websites, which they can update at any time. This could lead to a situation where the company's website is updated with new information, but the data on the Financial Supervision Authority’s site is outdated. The draft and its explanatory memorandum also do not indicate when companies must submit the required information to the Financial Supervision Authority for the first time.

The Chamber of Commerce believes that the gender balance reporting should be submitted with the annual report, as required by the directive, and that the first reporting deadline should be clearly specified. The draft should also be amended to allow companies to voluntarily update gender balance data before the end of the reporting period, and the Financial Supervision Authority should be required to update its website accordingly.

There Is No Need for a Public List of Companies That Fail to Meet Gender Balance Goals
The draft mandates that the Financial Supervision Authority must publish a list on its website of companies that do and do not meet gender balance goals. However, the draft and the directive do not require companies to immediately replace board members once the rules take effect; this must be done gradually as contracts expire. According to the Chamber of Commerce, publishing a list of companies that fail to meet the goals will not prompt businesses to replace board members rapidly or exceptionally. A so-called “negative list” could, however, harm the public image of companies and damage their reputation. Furthermore, the directive does not require a negative list, and the Chamber believes there is no need to implement the directive more strictly than necessary. The draft and its explanatory memorandum also do not specify when exactly the Financial Supervision Authority will start publishing the list of companies meeting or failing to meet the goals.