Do EU Directives on Women on Boards and on Pay Transparency Reduce Gender Gaps?

Research shows that when legislative initiatives to reduce gender gaps are implemented, their impact becomes visible
Number: 24
Year: 2023
Author(s): Paola Profeta

The EU directives on Women on Boards and on Pay Transparency have a clear objective: to reduce gender gaps in European countries. Assessing their effectiveness requires a thorough understanding of the outcomes of similar policies based on research.

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Gender equality is a fundamental value in EU countries. Despite the significant achievements reached so far, the process is still ongoing, and many challenges persist. In recent years data indicates modest advancements in gender equality (EIGE, 2022 with some notable declines observed for the first time since 2010.  

While the decline is mainly due to an uneven impact of the pandemic on women’s participation in work, the lack of substantial progress has attracted considerable attention.  

The progress towards gender equality has stalled even in the top performer countries, such as Sweden and Denmark. To fully implement the EU gender equality strategy 2020-2025 legislative action is imperative.  

Two recent EU directives align with this objective. They address women’s representation on corporate boards and the gender pay gap.   

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Two recent EU directives address women’s representation on corporate boards and the gender pay gap   

Women on Boards 

After ten years of discussion, last November 2022 the “Women on Board” directive was approved. It requires that by 2026 companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors.  

Several EU countries have already adopted board gender quotas and successfully reached this target.  

Quotas are a way to accelerate and ensure gender balance representation in decision-making positions. However, they remain a controversial measure, primarily due to concerns about potential efficiency costs if they lead to the appointment of less-qualified individuals who may underperform.  

Nevertheless, the fundamental question persists: Does gender-balanced representation truly matter for economic outcomes? Recent research provides a positive answer. 

The first piece of evidence comes from the introduction of board gender quotas in Italy, which dates back to 2011 (Ferrari, G., Ferraro, V., Profeta, P., and Pronzato, C. Do board gender quotas matter? Selection, performance, and stock market returns, Management Science 68(8):5618-5643). The study shows that the introduction of board gender quotas not only promotes women's empowerment but, by attracting highly qualified women and intensifying the competition for board positions, it improves the selection process of both men and women and stimulates a positive restructuring of the board, which does not entail any efficiency cost.  

The analysis is based on the collection of 4627 CVs of board members (males and females) in the period 2007-2014 of the 245 companies listed on the Italian stock market and subject to the gender quota requirements.  

By taking advantage of staggered board elections, the analysis examines the changes within firms in terms of board members’ characteristics, such as gender, age, education level, and field of education, both before and after the implementation of gender quotas.  

Results show that, when gender quotas are enforced, firms show a higher share of women directors (often surpassing the mandated threshold), higher average education levels of all members of the board, and lower ages than before the quotas.  

There is no increase in board members belonging to the same family, nor a clear increase in the average number of positions held by each board member. By comparing the characteristics of new, retained, and exiting members, it appears that gender quotas trigger a process of better selection of the entire board: after the quotas, new members are more qualified than those who exit.  

When it comes to performance evaluation, the analysis incorporates firm-level data, encompassing various aspects such as the number of employees, production, profits, share of short-term and long-term debts, ROA, Tobin's Q, and assets.  

Importantly, the gender quota reform is exogenous to firms’ decisions and can be used as an instrumental variable to assess the causal impact of gender diversity on a firm’s performance. The analysis shows that gender quotas do not adversely affect firm performance or the stock market and seem to contribute to greater stability of stock prices.  

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For the same level of inflation, a higher share of women on the central bank board is associated with a higher interest rate

The second evidence comes from a study on women in central banks (Masciandaro, D., Profeta, P. and Romelli, D. Women and Governance: Central Bank Boards and Monetary Policy, American Law and Economics Review forthcoming). The study shows that the gender composition of monetary policy committees of central banks can have an impact on monetary policy decisions.  

More precisely, consistently with the general result that women are more risk-averse than men and take more conservative decisions, the study finds that women in central banks have a more hawkish attitude. 

The study builds a new dataset on the presence of women on central bank monetary policy committees for 103 countries, over the period 2002-2016. In spite of a general upward trend, women are still scarce: in around 20% of the countries considered, monetary policy committees have never included a woman.  

There is, however, high heterogeneity across countries: the average share of women on the board is 14%, with a maximum of 60% in Canada, Sweden, Serbia, and Bulgaria. To isolate the effects of gender heterogeneity on policy decisions, the authors estimate a forward-looking Taylor rule that relates the target policy rate to deviations of expected inflation and output and augment it to include the share of women board members and its interaction with the inflation rate.  

Results show that, for the same level of inflation, a higher share of women on the central bank board is associated with a higher interest rate. In terms of magnitude, an increase of one percentage point in inflation results in an interest rate that is 30 basis points higher in a central bank with a 50% share of women members compared to the rate with a 10% share of women. 

This suggests that women in central banks have a more hawkish attitude, i.e. they are more aggressive in fighting inflation. The result is confirmed in a more granular analysis, based on the detailed voting behaviour of members of the executive board of the Sverige Riksbank during the period 2000-2017.  

Gender Pay Gap and Pay Transparency 

More recently, on 24 April 2023, the European Council approved the new EU pay transparency directive. To implement the principle of equal pay for equal work between men and women, EU companies with more than 250 employees are required to report annually their gender pay gap. In case this exceeds 5%, an action is required, which includes compensation to workers who have suffered gender pay discrimination. EU countries have up to three years to transpose the directive into national laws.  

The commencement of the debate on pay transparency marks a significant step toward addressing the gender pay gap.  

Pay transparency is expected to reduce gender pay gaps: companies will intensify their efforts to adopt fair pay practices and remove gender-based discrimination. Workers will have access to information on the average pay levels within the company, disaggregated by gender and job categories and on the criteria used to determine pay and career progression, which must be objective and gender neutral. This will increase workers’ understanding of their potential and attract new talents.  

Existing research shows that gender pay transparency reforms are an effective policy to reduce gender pay gaps (Bennedsen, M., Larsen, B., & Wei, J. (2023). Gender Wage Transparency and The Gender Pay Gap: A Survey. Journal of Economic Surveys, 00, 1–35). Nevertheless, it remains somewhat uncertain whether the decrease in gender pay gaps is driven by a decline in male wages or an increase of female ones – a crucial distinction in our context. More research on the final impact of pay transparency on gender pay gaps in Europe is therefore expected. 

The survey conducted by Bennedsen et al. (2023) provides insights into the gender impact of pay transparency reforms across various countries. It shows a significant reduction in the gender pay gap in all countries that have implemented such reforms, with one exception where no effect is observed.  

To illustrate the magnitude of the effects, let’s examine findings from two specific studies. The 2006 Danish legislation of pay transparency required to private firms with more than 35 employees resulted in a reduction of the gender pay gap by 2 percentage points (a decrease of 13% relative to the pre-legislation average).  

This decrease did not have any adverse impact on firms’ profitability (Bennedsen, M., Simintzi, E. Tsoutsoura, M. and Wonfelzon, D. (2022), Do Firms Respond to Gender Pay Gap Transparency? The Journal of Finance, 77: 2051-2091).  

The introduction of laws in Canada that mandated the disclosure of public university faculty salaries (starting in 1996) reduced the gender pay gap between men and women by approximately 20-40 percent (Baker, M., Yosh Halberstam, K. Kroft, A. Mas, and D. Messacar, 2019, Pay transparency and the gender gap, Working Paper No. 25834, National Bureau of Economic Research). Interestingly, both studies show that the reduction of gender pay gaps is driven by a reduction in the growth rate of male income more than by an increase in women's pay. This result opens new questions about the desirability of a reduction of salaries. It will be necessary to monitor the evolution of the trends.  

Through the implementation and enforcement of legislation addressing women on boards and pay transparency, the EU is taking proactive steps toward gender equality. As noted by EIGE (European Institute for Gender Equality), when legislative initiatives to reduce gender gaps are implemented, their impact becomes visible. 

 Ongoing research and assessment will remain crucial to monitor and evaluate the effectiveness of these initiatives over time. The ultimate objective is to significantly reduce gender gaps to enhance economic growth and social inclusion.  


IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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