Proposed new requirements for gender balance on company boards

The Norwegian Minister of Trade and Industry has advocated the value that equality and diversity in business can bring: identifying the promotion of innovation, an enhanced working environment, improved and smarter decision making and increased value creation, as areas of benefit. Unlike public limited companies, there are currently no binding rules imposing gender equality requirements on Norwegian private companies. Just 20% of board members in Norwegian private companies are currently women, with that number increasing by just a modest 5% over the last 20 years. The proposals aim to bring renewed momentum to this progress and increase the proportion of female board members in Norwegian private companies.

The government's proposal would require boards of companies with three or more board members to have no more than 50 – 67% of members of the same gender. The percentage will depend on the total number of board members. For example:

• If the board has three or four members, a maximum of two board members can be of the same gender;
• If the board has five or six members, a maximum of three board members can be of the same gender;
• If the board has seven members, a maximum of four board members can be of the same gender.

Additionally, there will be separate requirements for deputy board members, as well as employee representatives.

The following companies will be subject to the proposed new rules:

• All companies which are already subject to gender quotas under currently applicable law, such as public limited liability companies and state-owned enterprises;
• Private limited companies, co-operatives (SAs) and housing co-operatives which have either (i) more than NOK 50 million in total operating and financial income; or (ii) more than 30 employees. The same applies to General partnerships (ANS/DA) which only have legal persons as partners;
• Co-operatives (SAs) and housing co-operatives with more than 500 members;
• Commercial foundations, foundations with a distribution purpose, and foundations where a public authority elects at least one board member.

The government's intention is to introduce the new requirements in 5 steps starting as early as 2024 for the first requirements with the fifth and final step targeted for introduction during 2028:

1. Step 1 will be implemented by 31 December 2024 and will apply to businesses with more than NOK 100 million in total operating and financial income. These businesses constitute the around 8,100 largest private companies in Norway.
2. Step 2 will be implemented by 30 June 2025 and will cover (i) businesses with more than 50 employees; (ii) co-operatives (Sas) and housing co-operatives with more than 500 members or shareholders; and (iii) commercial foundations, foundations with a distribution purpose, and foundations where a public authority elects at least one board member.
3. Step 3 will be implemented by 30 June 2026 and will cover businesses with more than 30 employees.
4. Step 4 will be implemented by 30 June 2027 and will cover businesses with more than NOK 70 million in total operating and financial income.
5. Step 5 will be implemented by 30 June 2028 and will cover businesses with more than NOK 50 million in total operating and financial income.

By 1 July 2028, around 20,000 businesses are expected to be subject to the new requirements.

The long-term effects of the new requirements will show over time. Once implemented, the increased diversity in businesses is expected to promote innovation, a good working environment, smarter decision making and increased value creation. However, the degree to which each business will benefit from the new regulations depends on the business' consciousness in respect of the board's role, its composition and how the business structures their board to work. It can't be ruled out that, in certain cases, requirements for gender balance may work against an optimal composition of the board, because such requirements can lead to well-qualified candidates being disqualified from sitting on the relevant board.

The new rules will require many businesses to make changes in their board composition. The government has estimated that around 13,000 new board members will need to be recruited within 2028 and as many as 6,600 new board members during 2024. Most of these are estimated to be women. The amount of work related to such changes varies for different businesses depending on, inter alia, how often each business normally makes changes to their board, which competence is required for board members and how large their network to source potential candidates is. Moreover, businesses may need to hire external board members in order to comply with the new requirements, which is likely to involve financial compensation for the external board members.

The new requirements may also result in a need for new, or amendments of existing, shareholders' agreements for businesses in which the shareholders have included clauses concerning election of board members. The implementation of the new requirements may inevitably prevent compliance with such clauses. For example, a company may be owned by three persons of the same gender, and they may have agreed through a shareholders' agreement that all three shareholders shall have a seat on the board. This board composition will breach the new requirements. Similar issues may arise in relation to a business' articles of association.

Overall, the new rules will require increased consciousness in respect of the board composition and election of board members. Many businesses will be required to make changes in their board composition as well as election procedures. These changes may involve a more time-consuming procedure (particularly where external recruitment is required) and companies will need to start considering the potential impact of the rules on their business in good time.