Spain: The challenge of parity in senior management for family businesses

Since Organic Law 2/2024, of 1 August, on equal representation and balanced presence of women and men, was published and entered into force last August, family businesses that fall within the scope of application of the regulation have a new challenge that directly affects the highest management bodies of the company.

The law not only transposes Directive (EU) 2022/2381 of the European Parliament and of the Council of November 23, 2022, on a better gender balance among directors of listed companies but also chooses to establish additional obligations not provided for in the directive in relation to parity in management positions.

Listed companies and public-interest entities are included in the scope of application of the law, in the latter case from the year following the one in which the two requirements provided for in the regulation are met: average number of employees greater than 250 and net annual turnover greater than 50 million euros or total assets of more than 43 million euros.

The essential purpose of the law is to ensure that the board of directors of said companies has at least 40% of people of the underrepresented sex. However, in the case of public-interest entities controlled directly or indirectly by a family, executive directors and proprietary directors may be excluded from the calculation, at the company's discretion.

But beyond the composition of the board of directors, the law also provides, without exception for family businesses, that the companies in question must ensure that the senior management has a composition that ensures the presence of at least 40% of people of the under-represented sex.

In addition, the regulation provides that the company must detail in the annual accounts compliance with this principle and, where the percentage of members of the under-represented sex does not reach 40%, it will have to provide an explanation of the reasons and the measures adopted to reach that minimum percentage in the immediately following and subsequent financial years.

Deadlines to be considered

First, the deadlines that the obligated companies have to prepare for compliance with this rule are to be considered, since they are longer than those initially proposed in the bill. Specifically, the dates already established for the indicated companies to comply with these new obligations are as follows:

• June 30, 2026 is the date that the law sets for the 35 listed companies with the highest market capitalization value, considering the closing price on the day the law enters into force, that is, August 22, 2024.
• On June 30, 2027, the rest of the listed companies will be incorporated.
• For public-interest entities, it will be applied gradually with respect to boards of directors and senior management, and should reach 33% by 30 June 2026 and 40% by 30 June 2029.

What is "senior management"?

Having made these initial clarifications, another fundamental question that has been raised is what should be understood by "senior management".

In this regard, it should be remembered that in Spain the regulation that, in the field of labor law, defines what should be understood by senior management personnel is Royal Decree 1382/1985, of August 1, which regulates the special employment relationship of senior management personnel. This royal decree includes within the concept of "senior management personnel" exclusively those employees who exercise powers inherent to the legal ownership of the company, and related to its general objectives, with autonomy and full responsibility only limited by the criteria and direct instructions emanating from the person or the higher governing and administrative bodies of the entity that respectively occupies that ownership.

There are many interpretative doubts generated by the joint vision of both regulations. And this is not a new issue, since already in 2009, with the publication of the General Accounting Plan (Royal Decree 1514/2007, of 16 November), the Institute of Chartered Accountants issued a technical note (Circular E-26 2009) in which it gave guidelines on how to address the requirements of specific information, which were included in the annual accounts, for operations carried out with "senior management".

It should be borne in mind that the mention discussed in this article is not the only one contained in the current version of the Capital Companies Act, but that this regulation contains other references to "senior management", indicating, for example, that the annual accounts report must contain, among other information, the distribution by sex of the staff including senior managers,  the amount of remuneration of senior management staff, pension obligations or the payment of insurance premiums contracted with senior management staff, as well as the amount of advances and credits granted to such staff.

These generic references to "senior management personnel" have led some listed companies to include in the reports prepared in recent years the details and explanations of what they understand by senior management personnel for these purposes, which personnel has been included within that concept and, even, the safeguard that this internal classification should not be taken as an interpretative or evaluative element with respect to the concept of senior management provided for in Royal Decree 1382/1985.

This detailed explanation of what the company understands as senior management for the purposes of information reporting will become even more necessary in the coming years and, especially, for those companies that have to prepare sustainability reports in accordance with the requirements of the CSRD Directive  and the Sustainability Information Reporting Standards (NEIS), which in their current version provide that when preparing information on gender diversity in "senior management", companies should consider "one and two levels below the management and supervisory bodies, unless this concept has already been defined with the company's operations and differs from the previous description". In the latter case, it is envisaged that the company may use its own definition but is required to disclose it.

Explanations in case of not reaching the percentage

The third fundamental element that must be assessed to comply with the cited obligation is the explanation that the rule requires if the percentage of members of the under-represented sex in "senior management" does not reach forty per cent. As we indicated, if this percentage is not reached, it is required that the annual accounts report explain the reasons and the measures adopted to reach this minimum percentage in the immediately following and subsequent financial years.

In this aspect, which is of particular importance for family businesses, it is essential to have an overview of the rules that establish obligations for companies in terms of diversity and, in particular, and taking into account that the objective of the regulation is to address the underrepresentation of women in management positions, in terms of gender equality in the company's workforce. This joint vision will avoid duplication and contradictions in the actions of society and in the information that is published.

We are referring, for example, to the equality plans that must be implemented in Spain by companies with 50 or more employees and that are also public.

In the preparation and negotiation of these equality plans, we address issues such as selection and recruitment processes, training, career advancement and measures to address female underrepresentation. Undoubtedly, the measures that have been addressed within the framework of the equality plans can and should be the reference if, on the dates referred to at the beginning, a company has not reached the parity threshold indicated in the law.

It is also important that in the equality plans that are negotiated in the coming years, family businesses consider the new requirements set out by the Parity Law, to guarantee the coherence of the measures applied, with those that will be reported in the coming years.

Finally, it should also be borne in mind that the Parity Law itself, underestimating the possibilities of promotion of its own staff, sometimes more in line with the values of the family business, refers to measures to be adopted in the selection process by companies that do not achieve the parity objectives provided for by the regulation in the field of the board of directors. Specifically, in such cases, the company is required to:

• Adjust the selection processes for members of the board of directors to achieve the objectives of the standard.
• Establish a procedure that allows for the comparative assessment of the competences and abilities of each candidate. It is insisted that such a system should be designed based on clear, neutral and unambiguous criteria, ensuring a non-discriminatory process throughout all the selection phases, from the preparation of announcements to the creation of selection groups, through the pre-selection phases or preparation of a restricted list.
• Establish the criteria that must govern the selection prior to the start of the selection process.
• And, with some exceptions, preference should be given to the candidate of the under-represented sex if several candidates are equally qualified from the point of view of competence, professional performance and aptitude.

Many of these measures have already been implemented by many companies for their workforce, through equality plans, without the need for a regulation that specifically imposes the obligation on them in such a detailed way. A different matter is the period that the application of measures such as those indicated requires to bear fruit, which, without a doubt, in all companies and, especially, in family businesses, can extend beyond the demanding deadlines imposed by the regulation.