Legal Aspects of ESG Performance and Gender Diversity in Management of Firms

Recent studies (such as those published by Harvard Law School and the International Labor Organization) show that the presence of women on the management board of companies may lead to more effective and diverse decision-making, risk management, and overall better performance through a more multi-dimensional understanding of the market trends and demands. Despite the numerous positive aspects of women’s participation in decision-making, females are still underrepresented in leadership positions.

With a lack of unified European Union regulation, each member state has developed divergent principles in this regard. According to research by European Women on Board, only 16 out of the 24 member states have taken measures to balance the gender gap. More striking, only six have adopted so-called “hard quota” regulations to increase the proportion of women at the board level. In these countries, the representation of women is more than 35%, whilst the rate is less than 10% in some states that have not introduced such a quota.

To ease this fragmented practice, the European Union adopted Directive (EU) 2022/2381 on November 23, 2022. It states that member states should ensure that the members of the underrepresented gender hold at least 40% of non-executive director positions or at least 33% of all director positions (including both executive and non-executive directors) by June 30, 2026. Member states must implement the directive by December 28, 2024, at the latest.

Hungarian corporate law does not include any rules which would deal with the gender of executive officers (e.g., management board members and supervisory board members). Based on the applicable legal provisions, it is apparent that the rules concerning the eligibility of executive officers are mainly prohibiting (lack of conflict of interest, lack of imprisonment, etc.) Positive requirements are primarily set in terms of the existence of appropriate qualifications and not in terms of gender equality.

Contrary to the lack of mandatory rules in Hungarian company law, specific efforts have been taken by the Budapest Stock Exchange to encourage its listed companies to increase women’s participation in corporate bodies.

According to the Corporate Governance Recommendations of the BSE, “the Company should seek to have both genders represented in the Board of Directors / Governing Board and the Supervisory Board.” The recommendation seems forward-looking; however, it is not compulsory. Accordingly, if a publicly listed company does not comply, it only has to provide a reasonable explanation. We note, however, that certain publicly listed companies have prepared and published a gender equality strategy to ensure that both genders are represented among the candidates during the selection process for members of management bodies.

Based on recent studies, the connection between ESG and board diversity seems advantageous, and we see some efforts being taken by EU member states. Besides narrowing the gap between the genders, the beneficial impact on diversity in management is the main reason the adoption of the new EU directive is more than welcome. As boards continue to raise the number of female members, we anticipate an ongoing focus on ESG for the advantages it brings to business profits, as well as ongoing social development.

This article was first published in the Budapest Business Journal print issue of February 10, 2023.