TABLE OF CONTENT

1 Procedural Issues and Consultation of Interested Parties. 2

1.1. Procedural issues. 2

1.2. Recommendation of the Impact Assessment Board. 3

2 Policy context 4

2.1 CSR, Corporate Governance and Non-Financial Information. 4

2.2 Existing legislation and international frameworks. 5

2.3 On-going EU Initiatives. 7

3 Problem definition and Subsidiarity. 7

3.1 Problem 1: Inadequate Transparency of Non-Financial Information. 10

3.2 Problem 2: Insufficient board diversity. 12

3.3 Which stakeholders are affected and how?. 17

3.4 Baseline Scenario: How will the problem evolve without action?. 21

3.5 The EU's right to act 22

4 Objectives. 23

5 Policy Options - description and analysis. 24

5.1 Options relating to Increasing Transparency of Non-Financial Information. 24

5.2 Options relating to Enhancing boards diversity. 31

5.3 Choice of instrument 34

5.4 Scope of Application. 35

6 Cumulative Impacts of the preferred options. 37

6.1 Expected Primary Impacts. 37

6.2 Other impacts. 40

7 Monitoring and Evaluation. 42

7.1 Monitoring. 43

7.2 Evaluation. 43

Annex I - Summary of Public Consultations. 44

Annex II- Relevant Provisions of the Accounting Directives. 46

Annex III- Recent developments in some EU Member States. 49

Annex IV - International frameworks. 55

Annex V - Other EU Initiatives on Diversity. 58

Annex VI - Non-Financial Transparency: Detailed Analysis of Policy Options. 60

Annex VII - Increasing Board Diversity: Detailed Analysis of Broad Policy Options. 73

Annex VIII - Estimation of Administrative burden of broad policy options. 82

Annex IX - Definitions. 87

Annex X - Bilateral meetings with stakeholders. 88

Introduction

This Impact Assessment considers the case of improving the disclosure of non-financial information by EU companies as part of a broader set of EU initiatives on corporate governance and Corporate Social Responsibility (CSR) aimed at creating a highly competitive social market economy.

Non-financial information is generally seen as environmental, social and governance (ESG) information. This can be disclosed in the form of a statement in the annual report, or a separate corporate governance statement, a separate report, or published on company websites, etc. The Accounting Directives[1] already address the formal disclosure of employee-related and environmental information by EU companies. However, the need to improve transparency in this field has been highlighted by the Commission in the Single Market Act (hereinafter SMA)[2]. The SMA aims at, inter alia, enhancing new, greener and more inclusive growth. In this context, companies' non-financial transparency has attracted attention as a "smart lever" to strengthen citizen and consumer trust and confidence in the Single Market and to encourage sustainable economic growth.

Governance information concerns specifically information on how companies are governed. With the publication of a Green Paper in 2011[3], the Commission has initiated a review of the current EU corporate governance framework. Taking action to improve companies' transparency on their board diversity policy and risk management is one of the first steps of this review. Other initiatives in the field of corporate governance were announced in a Communication presenting an Action Plan on Company Law and Corporate Governance adopted in December 2012[4]. In general terms, information concerning board's diversity and risk management can be considered as part of the broad set of non-financial information that a company may disclose. Increasing transparency in this field has thus the potential to enhance boards' diversity and improve risk management arrangements. It has therefore been deemed appropriate to deal with problems concerning both (i) the lack of transparency of non-financial information and (ii) insufficient diversity in the boards into one Impact Assessment. Nevertheless, as diversity-related issues may go beyond transparency considerations as such, in some sections they are analysed separately. The results of this Impact Assessment show that it is preferable to address the identified problems through one legislative proposal modifying the existing Accounting Directives.

1 Procedural Issues and Consultation of Interested Parties

1.1. Procedural issues

The initiative on non-financial reporting was included in the Commission's 2012 Work Programme. This Impact Assessment, led by DG Internal Market and Services, was guided and monitored by an Inter-Services Steering Group (IASG). The Group has held six meetings on 27 May, 19 July and 26 October 2011, and on 20 January, 10 February and 26 April 2012. The following Directorates General were invited to participate: Secretariat-General, Legal Service, Health and Consumers Protection, Enterprise and Industry, Eurostat, Employment and Social Affairs, Trade, Environment, Development Cooperation, Energy, Research, Justice, Home Affairs., External Action Service. The Minutes of the last meeting of the IASG were provided to the Impact Assessment Board.

1.2. Recommendation of the Impact Assessment Board

The Impact Assessment Board meeting took place on 20 June 2012. The present document takes account of the comments received by the Board on the draft impact assessment. The report needed to establish more clearly the scope and the scale of the identified problems, and better demonstrate the evidence between the problems and their consequences. Secondly, it needed to better present the content of the options, the differences between them, and provide additional information on the added value of the preferred option vis-à-vis the baseline scenario. Thirdly, the report needed to better consider the impacts of the policy options, by better comparing the advantages and disadvantages of each option.

1.3. External expertise and consultation of interested parties

1.3.1. Public Consultations

Stakeholders have been consulted through various means in order to obtain their views on how to improve non-financial disclosure requirements and practices. A public consultation on disclosure of non-financial information by companies was conducted between November 2010 and January 2011[5]. A summary of the consultation's results is attached to this Impact Assessment (see Annex 1).

Between September 2009 and March 2010 the Commission hosted a series of multistakeholder roundtables on this issue[6]. Consultations with stakeholders also took place through a number of other instruments and fora, including the Member States High-Level Group on CSR, the Multi-stakeholders forum coordination committee[7], or the Accounting Regulatory Committee. The Commission services have also contributed to the work of the Laboratory on Valuing Non-Financial Performance[8]. Moreover, since 2010 the Commission services had a series of bilateral meetings with stakeholders.

As regards board's diversity and risk management, a general consultation on the EU corporate governance framework, was held between April and August 2011[9]. The summary of the consultation results is attached to this Impact Assessment (see Annex 1)[10].

1.3.2. Expert Group

An ad-hoc Expert Group was established with a mandate to provide expert advice to the European Commission on the Impact Assessment. The group included individuals with relevant knowledge and proven experience representing companies, investors, consumer organisations, trade unions, auditors, international guidelines-setting organisations and academia. The experts met four times between July 2011 and January 2012 and discussed questions concerning specific policy proposals, the scope and nature of a potential legislative requirement, the role that non-financial information could play in promoting companies' performance, accountability and efficiency of capital markets. The summaries of these meetings, together with all relevant documents, are available at: http://ec.europa.eu/internal_market/accounting/committees/disclosure_en.htm

1.3.3. External Study

The Centre for Strategy and Evaluation Services (CSES) was contracted to produce a study on "Disclosure of Non-Financial Information by Companies". This research paper includes a qualitative analysis of current non-financial reporting practices as well as a cost/benefit assessment based on a survey. The sample covered 71 EU companies of all sizes established in eight different Member States[11], covering sectors such as food, consumer products, banking and financial services, manufacturing, utilities and mining. The final report is available at http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm

2 Policy context

2.1 CSR, Corporate Governance and Non-Financial Information

In the follow up to the SMA, and building on the "EU 2020 Agenda", the Commission has put forward a package of measures (the "Responsible Business Package") to support entrepreneurship and responsible business. The package includes legislative proposals to revise the Accounting Directives and the Transparency Directive, with the aim of improving transparency and promoting sustainable business, and simplifying accounting rules for SMEs, along with two Communications on the "Social Business Initiative" and "A renewed strategy 2011 – 2014 for Corporate Social Responsibility" (hereinafter CSR Communication)

CSR is thereby defined as "the responsibility of enterprises for their impacts on society"[12]. A strategic approach to CSR is increasingly important for competitiveness, as it can bring benefits in terms of risk management, cost savings, access to capital, customer relationships, human resource management and innovation capacity. In order to fully meet their social responsibility, enterprises should therefore have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in collaboration with their stakeholders. The aim of such a process is twofold: first, to maximise the creation of shared value, able to generate returns on investment for the company's owners/shareholders at the same time as ensuring benefits for other stakeholders. Second, to identify, prevent and mitigate possible adverse impacts which companies may have on society.

Corporate governance is traditionally defined as the system by which companies are directed and controlled[13] and as a set of relationships between a company’s management, its board, its shareholders and its other stakeholders[14]. A boards' composition, and in particular the diversity of members' profiles, is an integral element in the overall corporate governance of a company. A greater diversity gives the board a wider range of values, views and sets of competences, while reflecting the diversity of the population in Europe. It helps to tackle the phenomenon of "group think", thus enabling the board to perform better in their role of oversight of management decisions.

Corporate governance and CSR can therefore be seen as two distinct yet complementary concepts, as the way a company is directed and controlled is intrinsically linked with its impact on society. A strategic approach to both CSR and corporate governance is increasingly important for competitiveness[15], as it involves crucial aspects for long-term performance. By supporting and promoting these policies, the Commission aims therefore at creating conditions favourable to a full exploitation of the Single Market potential for sustainable growth and employment, based on responsible business behaviour and lasting job creation for the medium and long-term. In order to achieve this broad objective, the CSR Communication proposes a number of actions for the period 2011–2014 including, in particular, a reiteration of the proposal to improve transparency in the field of non-financial information. Non-financial transparency represents a key element of a CSR policy as it is linked to the capacity of companies to measure their non-financial performance, and thus their impact on society. Since 2006 the European Parliament has called on the Commission to put forward initiatives in order to strengthen the EU legal framework on social and environmental reporting.

2.2 Existing legislation and international frameworks

The disclosure of non-financial information is currently addressed in EU legislation via the Accounting Directives[16], requiring companies and groups to include where appropriate and to the extent necessary for an understanding of the company's development, performance or position, environmental and employee-related information in their annual or consolidated annual report. Member States, may exempt small and medium-sized companies from this obligation (See Annex 2). Some Member States (including the UK, Sweden, Spain, Denmark and France) have recently introduced national disclosure requirements going beyond this obligation. More details on key developments in EU Member States are given in Annex 3. Overall, this development is part of an international trend away from purely voluntary disclosure[17]. The US, China, India and South Africa, among others, have recently been strengthening regulation in this field[18].

At the global level, several initiatives provide generally accepted, non-legally binding guidance for companies on CSR and sustainability aspects. These include the Ten Principles of the UN Global Compact, the OECD Guidelines for Multinational Enterprises, the ILO Tri-partite declaration of Principles on Multinational Enterprises and Social Policy, the ISO 26000 standard on social responsibility and the UN Guiding Principles on Business and Human Rights. As far as reporting frameworks are concerned, the Global Reporting Initiative (GRI) appears at the moment to be the most widely adopted initiative[19]. Finally, the recently established International Integrated Reporting Council (IIRC)[20] aims at defining a global framework for Integrated Reporting that would bring together financial, environmental, social and governance information in one report. More details on such initiatives are provided in Annex 4.

While the issue of social and environmental disclosure has been on the EU agenda for a decade, a regulatory debate on boards' diversity has only recently been established. In this regard it is important to note that there are no rules at EU level relating specifically to diversity of companies' boards[21]. Current provisions in the field of company law and corporate governance only require the disclosure of some general information relating to boards. In particular, the Accounting Directive requires listed companies and groups to provide a corporate governance statement, which will include, inter alia, information on the composition and operation of the administrative, management and supervisory bodies and their committees[22] (see also Annex 2). At Member State level, the approach towards diversity in the boardroom varies considerably, in particular with regard to gender aspects, which is often regarded as a key aspect of diversity[23]. In order to correct the imbalances, several Member States have taken measures to ensure a stronger proportion of women on boards (e.g. binding or indicative quotas for listed or state owned companies have been introduced in Spain, France, Belgium, Italy and the Netherlands). In certain countries quotas apply only to state owned companies (e.g. in Austria, Finland or Greece). Other countries prefer more flexible measures implemented in the national Corporate Governance Codes or similar acts, such as voluntary targets (Denmark, Austria) or reinforced disclosure on the diversity policy (Finland, Sweden and UK). For more information on the situation in Member States, see Annex 3.

At international level, the GRI Guidelines recommend reporting on the composition of the highest governance body in terms of its diversity, including gender, age group and minority aspects[24]. It also recommends reporting about the process for determining the composition of this body, including considerations of gender and other aspects of diversity[25]. In the US the Securities Exchange Commission rules on Proxy Disclosure Enhancement[26] require companies to provide information regarding "the consideration of diversity in the process by which candidates for director are considered for nomination".

2.3 On-going and recent EU Initiatives

Besides the above-mentioned initiatives, other EU frameworks address specific topical issues, in particular concerning the environmental area. This includes, for instance, the EMAS scheme[27], where sectorial reference documents and KPIs are developed and suggested. On 10 April 2013 the Commission has adopted the Single Market for Green Products package[28] . As part of this package, the use of the Organization Environmental Footprint (OEF) methodology for reporting, improving and incentivizing environmental performance is also envisaged[29]. Such initiative refers in particular to the quantification and reporting of environmental information, while this Impact Assessment deals with a broader set of aspects related to disclosure of non-financial information. In addition the ICT industry has developed a standard to measure the energy and carbon footprint of its organisations following Key Action 12 in the European Commission's Digital Agenda for Europe[30]. This methodology could be used as a basis for company reporting and is currently being piloted by the industry under the auspices of the European Commission[31]. The work on these initiatives is running in parallel, and they are considered complementary.

Further, the Commission has proposed legislation with the aim of attaining a 40 % objective of the under-represented sex in non-executive board-member positions in publicly listed companies[32] . However, while the proposed gender balance Directive would only contribute to enhancing gender diversity, the present initiative would be more general, aiming at increasing overall diversity. The scope of the two initiatives would therefore be complementary. Indeed, setting objectives does not, for the time being, seem to be the right policy to address broader diversity aspects, such as educational and professional background, age or nationality. Enhanced disclosure of the diversity policy of corporate boards, and a more efficient monitoring of the implementation of the policy, may be likely to contribute to the implementation of the quantitative targets set by companies themselves.

Finally, a political agreement has been reached recently on measures aimed at enhancing diversity on boards of banks and investment firms in the framework of the Capital Requirements Directive IV[33]. Indeed, diversity in board composition should contribute to effective risk oversight by boards of banks, providing for a broader range of views and opinion and therefore avoiding the phenomenon of group think. CRD IV therefore introduces a number of requirements, in particular as regards gender balance. More information on these and on other parallel initiatives can be found in Annex 5.

3 Problem definition and Subsidiarity

This section outlines the problems associated with the current non-financial disclosure practices by EU companies and with the lack of diversity in boards, which have led to calls for initiatives in these fields. It also explores their drivers and consequences, which will inform the policy objectives discussion following later in this Impact Assessment.

The Commission services have identified two main issues concerning the inadequate transparency of non-financial information (Problem 1) as well as the insufficient diversity in the boards (Problem 2). Such problems are analysed separately in sections 3.1 and 3.2 below, as they respond to different drivers: the lack of diversity in boards is in particular a matter of corporate governance processes, and the analysis of this problem may go beyond the issues strictly related to transparency. Section 3.3 further analyses the prejudice that such problems pose to specific stakeholders groups, concerning in particular preparers (companies) and users (investors, NGOs, civil society organisations) of information. The drivers and consequences of the above-mentioned problems are depicted in the following problem tree:

3.1 Problem 1: Inadequate Transparency of Non-Financial Information

The environmental and social impacts of business have been the subject of public debates for at least three decades, as some serious incidents, allegedly caused by the business' failure to properly manage their environmental and social risks received significant public attention and media coverage. Market and social pressures on business have grown over the last few years and sustainability has moved up the corporate agenda. In parallel, non-financial performance appears to be considered increasingly important for investment strategies, particularly in the long term, as demand for non-financial information by both Socially Responsible Investors (SRIs) and mainstream investors shows a growing trend[34]. The proliferation of sustainability ratings and indexes could also be brought as additional evidence in this respect[35].

An increasing number of companies has been responding to this pressure by disclosing non-financial information in the Annual Reports, or stand-alone reports. According to recent statistics, the global number of reports per year increased from almost zero in 1992 to ~ 4000 in 2010[36], almost 80% of the world's 250 largest companies report on their sustainability[37], and the number of EU companies publishing sustainability reports using the GRI guidelines increased from 270 in 2006 to over 850 in 2011[38]. However, the analysis and the public consultations conducted by the Commission's services highlighted that, despite such uptake, the pace of progress towards more transparent disclosure practices remains slow, and a majority of users (including in particular investors, NGOs and other civil society organisations) consider the current level of transparency in this field as unable to meet their needs[39]. Specific issues have been highlighted with regard to both quantity and quality of information available.

In terms of quantity, it is estimated that the total number of EU large companies disclosing non-financial information through the Annual Report or a stand-alone report on a yearly basis amounts to ~2500[40]. It follows that 94% of the total ~ 42000 EU large companies currently do not disclose non-financial information. More than 50% of the reports are published by companies established in four Member States only (UK, DE, ES and FR)[41]. A recent study[42] confirmed that only 36% of companies surveyed have issued at least one sustainability report in the last 3 years, and while 19% are planning to do so in the short term, 38% still have no plans to set up any reporting mechanism.

Specific issues were also underlined as regards the quality of the information currently disclosed. Overall, a majority of users considered that information is often not sufficiently material, balanced, accurate, timely and comparable.[43] The following specific information gaps were highlighted in this respect:

- Companies tend to focus only on their positive performances; reports are often inconsistent over time, or information is not disclosed on a yearly basis; performance-related information is not reported; material negative externalities are often not disclosed.

- Disclosures do not cover aspects of significant relevance for both internal and external stakeholders, particularly as regards risk-management aspects, human rights, and corruption matters.

- The use of Key Performance Indicators (KPIs) is considered "poor" by most users,[44],

- Reports are often not subject to independent verification, with prejudice for the reliability of the information[45].

Existing research supports the claim that the level of quality of information does not meet the users' needs. A report published by UNCTAD in 2010[46] underlines, for example, significant inconsistencies amongst reports, with prejudice for the comparability of the information disclosed.[47]. Significant reporting weaknesses include the provision of irrelevant or missing data, unsubstantiated claims and inaccurate figures.[48]. According to another research[49], for instance, out of 20,000 publicly listed companies recently reviewed through Bloomberg’s database, less than 25% publicly reported on a single piece of quantitative data concerning environmental, social or governance issues. As regards human rights in particular, a study conducted by the University of Edinburgh found that information is in most cases isolated and anecdotal[50].

Drivers of the Problem

The inadequate level of transparency determined by the insufficient quantity and quality of non-financial information appears to be caused by both a market and a regulatory failure:

A) Market Failure. Despite the progress mentioned above, there is evidence that companies have not been able to provide an appropriate response to users' and societal demand for non-financial transparency. The reason for such failure is to be found in the insufficient and uneven incentives provided by the market: on the one hand, the cost of transparency is certain, measurable and short term, particularly as regards externalities. On the other hand, the benefits related to increased non-financial transparency are often perceived as uncertain, long-term, or external to the company. Such asymmetry determines that companies don’t have sufficient incentives to disclose non-financial information. One could assume that if their non-financial impacts are not known to stakeholders, companies will have little incentive to adjust their behaviour and to take due account of non-financial externalities into their decision-making. As a consequence, investors' and societal demand remains unmet.

B) Regulatory Failure: as explained in section 2.2 above, regulators have already tried to address this failure both at EU and at Member States' level.

- At EU level, an overall majority of stakeholders consulted considers the obligation introduced by the Modernisation Directive as ineffective, mainly due to design weaknesses. In particular, it appears that the filters provided in the current wording (information to be disclosed only "where appropriate" and "to the extent necessary for an understanding of the company's development, performance or position ") fail to provide a clear legal obligation. This has led the majority of companies to consider the current reporting regime as purely "voluntary".

- Some Member States have implemented legislation going beyond this obligation. However, such requirements vary to a great extent in terms of content and scope. In Denmark, for instance, companies are asked to state whether or not they have a CSR policy, and if they do, to describe its implementation and results. In France, on the other hand, legislation defines a detailed set of indicators that listed and non-listed companies must report on, and requires third-party verification. A majority of the users consulted indicated that the current situation translates into a fragmentation of legal frameworks leading to considerable difficulties, in particular for analysts and investors who are not able to compare or benchmark companies across the Internal Market, or even within the same Member State.

The lack of non-financial transparency may affect specific stakeholders groups, in particular preparers (companies) and users of information (investors, NGOs, public authorities). This relates in particular to the impact it may have in terms of companies performance (as companies may not fully integrate non-financial risks and opportunities into their business operations and strategies), accountability (as companies do not meet information demands from civil society, and thus are not always perceived as sufficiently accountable), and efficiency of capital markets (as investors may fail to build relevant non-financial information into their decision-making processes). Such problems are further analysed in section 3.3 below.

3.2 Problem 2: Insufficient board diversity leading to the lack of challenge of the management decisions by the board

Nature and scale of the problem

Boards of directors[51] play a key role in the company, as their composition, dynamics and decisions are in general fundamental for a company's viability and success. The role of the board is in fact to lead the company on behalf of the shareholders by setting the strategic aims and direction, by overseeing the management, by taking account of the risks of the company, etc. An effective oversight of the management leads to a successful governance of the company. In this respect, sufficient diversity of competences and views of the board's members, which facilitates a good understanding of the business organisation and affairs, enables the board to exercise an objective and constructive challenge of the management's decisions. Diverse boards "provide a better reflection of a firm's customer base and promote a positive corporate image and greater credibility in the eyes of the public"[52].

Although the fragmentation of data makes it difficult to precisely assess the scale of the problem, it appears that the diversity of European company boards is rather limited. A Report from 2011[53] maintains that, considering a board of 12 members, the current profile of the average European company board would be composed of only 1.5 women, 2 European non-nationals and 1 non-European with an average of 5 CEOs or former CEOs. The average age would be 58.4 years.

Yet, boards with members that have a similar educational and professional background, nationality, age or gender may be dominated by a narrow group-think. This can have a negative impact on the proper checks by the board on the plausibility of information presented to it and can lead to more risk taking, as well as to a suboptimal allocation of capital. Group-think contributed, in many cases, to the failure of an effective challenge of management decisions[54]. Lack of diverse views, values and competences may lead to less debate, ideas and challenge in the boardroom. In this regard, a recent survey among directors[55] calls for more constructive board discussions: along with more time for board work, a better mix of skills and backgrounds of the members leading to tougher and more constructive discussions could contribute to improving corporate governance. Diversity of views can bring to the board innovative and creative thinking, openness and flexibility to respond to the current economic and social challenges, conferring on the company a forward-looking approach. It creates better stakeholder representation and encourages sustainable performance[56]. Research illustrates that more diverse boards have positive impact on corporate governance and explains why more diverse board perform better in their role of management monitors and advisors[57]. Literature points out that more diverse boards are more creative and include different perspectives: people from different backgrounds and with different life experiences are likely to approach similar problems in different ways. More diverse groups are also more creative and produce a greater range of perspectives and solutions to problems[58]. Board diversity can also increase board independence because people with different gender, ethnicity or cultural background might ask questions that would not come from directors with more traditional backgrounds[59]. Boards with diverse members have also access to different resources and connections (e.g. directors with financial industry experience can help firms gain access to specific investors). Firms in which institutional investors comprise a larger fraction of their shareholder bases may surrender to investors’ demands for board diversity[60].

Some studies also mention potential negative impacts of diversity, such as in particular possibility of conflicts, lack of cooperation, and insufficient communication between different groups of directors or danger of choosing directors with little experience, inadequate qualifications, or who are present in too many boards because of their diversity characteristics (e.g. they are women)[61]. A recent study also shows, with respect to top management teams' decision-making outcomes, that in stable environments homogeneous groups make better decisions. In contrast, in turbulent situations like the financial crisis, heterogeneous groups perform better[62]. More details on the impact of diversity on companies are provided in section 3.3 below.

A well-functioning board is in general composed on the basis of a broad set of criteria, such as professional diversity, international diversity or gender diversity. A variety of professional backgrounds helps the board to understand the complexities of the global markets, the company's financial objectives and the impact of business on different stakeholders. In this regard, it is becoming more and more crucial for boards to have directors with specific industry or functional knowledge. This can facilitate their understanding of complex situations (or of the needs of expert advice) and make them be more effective board members. However, it appears for example that 48% of the European boards have no director with a sales or marketing profile, 28% no director with legal expertise and 28% of audit committees (of which boards are increasingly making use of) do not include a chief financial officer (current or former).[63]

In addition, international experience has become a necessity of the business operations worldwide, reflecting the diversity of the customers, suppliers, investors and the overall context. Presence of non-national board members with an international or regional experience brings a different culture and mind set to the board, enhancing the understanding of local markets and improving the decision-making process[64]. Geographical experience is particularly important for companies that want to expand their activities at the international level. At the European level, research[65] indicates that the European average of non-national directors on the board is 24%, with great disparities across the EU. While in some Member States non-nationals are better represented in the board, for instance in the Netherlands, UK, where non-nationals account for at least 40% of board members, in other (e.g. Poland, Austria, Germany, Spain and Italy) non-national directors account only for 10-15% of the board members[66].

Lack of gender diversity appears to be particularly problematic. The proportion of women members of the board is of 13,7% across the EU, while that of women chairing a board is of 3%[67]. This is still the case despite an increasing number of reports that indicate a positive correlation between gender diversity and companies’ performance[68]. Research[69] suggests that the more gender diverse boards are, the more likely to hold CEOs accountable. Women attend more meetings, they improve the attendance behaviour of male directors and are more likely to be assigned to monitoring-related committees than men. This has a positive impact on the monitoring intensity of the board[70]. For instance, research conducted on over 500 European companies with a market cap over 150 million euro illustrated a greater profitability of companies with a higher proportion of women executives and board directors[71]. Another recent report found that gender-balanced companies had a 17% higher stock price growth between 2005 and 2007 compared to the industry average and that their average operating profit was almost double than the industry average between 2003 and 2005[72]. Looking at 290 publicly listed companies, a study[73] found that the earnings of those with at least one woman on board were significantly higher than in those with no female board members. Other research[74] indicated that a company led by a female CEO is on average slightly more profitable than a corresponding company led by a male CEO. The share of female board members also has a similar positive impact. It appears that in general having more women may strengthen the boards in terms of internal and external relations (women would know better customers' needs and represent them better), leading to a better decision making. The existing studies may not prove causality, but the positive correlation between gender diversity and company's performance make a good case for the need of gender balance in the boards.

As far as age is concerned, most boards need to have some spread in age – while the older group can provide experience, wisdom, and usually the economic resources, the middle group carries the major positions of active responsibilities in corporations and in society, whereas the younger group has the energy and drive to succeed and plan ahead for the future[75]. However, traditionally boards are made up of very senior people. The average director in Europe is currently 58.4 years old[76]. The national averages range from 55.2 in Sweden to 60 or more in France and Netherlands. Some larger companies encourage senior executives to take up directorships somewhat earlier in their careers, but there is no rapid trend towards reduction in average age.

While the above mentioned criteria of diversity seem of particular importance for the board members' understanding of business, the list is not exhaustive and other aspects of diversity can be regarded as relevant and useful, depending on the situation of the company[77].

Drivers of the problem

A) Market Failure: The insufficient board diversity is linked above all with insufficient market incentives for companies to change the situation. In this respect, inadequate recruitment practices for board members contribute to perpetuating the selection of members with similar profiles. The selection often draws on a too narrow pool of people, non-executive directors are still often recruited through an “old boys' network” from among business and personal contacts of current board members[78] and often the chair or a board member may influence the board invitation. Companies may not always be willing to change these practices. Yet, the lack of transparency around the selection process, as the company does not necessarily advertise the positions available, nor uses a recruitment agency, can represent an important barrier to more diverse board members. Doubts arise therefore as to the incentives to use the wide pool of available talent and expertise for board appointments.

The particular impact that the pipeline for recruiting has for example on gender diversity has been illustrated by different reports[79]. It has been underlined that it is difficult for women to have access to these informal networks of recruitment. Moreover, executive search firms also play a relevant role in providing boards with suitable, but also diverse candidates. A recent report claimed[80], on a more general level, that executive search firms may have a certain image of the company, which will determine their opinion about the person having most chances to be successfully recruited by the company. This means that it is very likely that they will propose candidates similar to the current personnel of the company, not necessarily responding to the diversity needs and challenges of the company, unless diversity requirements are clearly specified.

Furthermore, there is also a lack of tradition of reporting on such issues, given to for instance how the selection usually takes place, i.e. through the "old boys' network". A review[81] of 298 UK FTSE 350 companies points out that disclosure of the nomination committee[82] work remains poor, compared for instance to audit and remuneration committees. According to this review only 37% (2010: 31%) provide enough information to properly explain nomination committee activity, with eight companies providing no insight at all.

In addition, the problem is also reinforced by an inadequate transparency on diversity, As mentioned in section 2.2 above, listed companies are already required to disclose information about the composition and operation of the administrative, management and supervisory bodies and their committees. However, the level of information and the extent to which this information is available to public at large depends very much on a case by case basis. Diversity is a relatively new issue obliging companies to learn as they go and they may not always see the need to communicate on it. In any case, such information does not reveal the board's approach in the selection process, the objectives envisaged or how they have been reached. Research shows that companies across the EU do not provide sufficient information on the composition of their boards[83]. Only in 9 out of 33 countries[84] covered, all companies openly reported on their websites about the composition of the board; numerous companies provided the information in the majority of countries, but with different level of disclosure, i.e. many companies provide only the list of board members, without additional details. For instance less than 40% of companies in Czech Republic, Germany, Cyprus, Latvia, Lithuania, Malta, Romania, Slovenia, Slovakia give additional details (e.g. CV), while 100% of them do so in Sweden.

As far as diversity policy as such is concerned, available data[85] for the UK for instance suggests that more than half of the FTSE 100 companies and 35% of the FTSE 250 companies reported having a diversity policy. Only 38% made specific reference to gender diversity. The report underlines the widespread lack of transparency regarding the policies put in place by FTSE 350 companies in order to address diversity on their boards. However, another study[86] maintains that only 19.1% of FTSE 100 and 6.6% of FTSE 250 companies provide a material statement on board diversity. It found also that some companies in the UK limit themselves to stating that the benefits of diversity on the board, including gender, have been taken into account when making appointments. According to it, such simple statements do not provide any insight into the board approach, the steps taken to achieve diversity in the boardroom or the challenges and opportunities the company faces.

B) Regulatory Failure: The market failures highlighted above have not been sufficiently corrected by appropriate regulation. As illustrated in previous sections, there are currently no rules regarding specifically board diversity at EU level. Although some Member States have adopted certain provisions, in particular to increase gender diversity, there are considerable differences between their approaches, while other aspects of diversity are in general not covered.

3.3 Which stakeholders are affected and how?

The impact that insufficient non-financial transparency and board diversity may have on different stakeholders groups is further analysed below:

(i) Preparers: Non-financial and Financial Performance

"Only what gets measured gets managed" is an expression commonly used in respect to financial information. Extending such reasoning to non-financial information, evidence suggests that the lack of transparency has a direct impact on non-financial performance: if non-financial aspects are not measured, they cannot be properly managed.[87] The lack of transparency on risk-management aspects appears particularly important in this respect, since if material information is not communicated to boards or to the annual assembly of shareholders, boards may not effectively perform their oversight duty on risk management[88]. However, this information is often not disclosed, or when it is disclosed, significant differences are found in risk assessments made by companies, even within the same sector[89]. The CSES study shows, for instance, that only a small minority of companies includes any reference to their sustainability performance in the context of their Annual General Meeting (AGM), and that some companies do not have any feedback mechanisms to boards or senior management on non-financial issues[90].

Moreover, a growing body of academic research indicates a positive correlation between better non-financial and financial performance, indicating that front-running companies on sustainability issues tend to outperform their competitors in financial terms, particularly over the medium (3-5 years) to long term (5-10 years). Such findings indicate, for instance, that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity, and are generally considered as lower risk than competitors; higher sustainability performance offers a competitive advantage in attracting, motivating and retaining talented employees; positive CSR performance fosters consumer loyalty; failure to adequately manage relationships with stakeholders can result in operational delays, higher costs of insurance and security, problematic relations with governments and local communities, and reputational damage. Overall, evidence suggests therefore that limited non-financial transparency may contribute to negatively affect the performance of companies[91].

With regard to insufficient diversity in the boardroom, as already described in the previous sections, there is growing consensus that a board made up of individuals with a limited variety of skills and experiences may have a negative effect on corporate performance. Insufficient diversity limits the range of perspectives and can decrease board's capacity to mitigate risks and overseeing company strategy.

Some studies show a correlation between the diversity on board and financial performance – companies with more diverse board have better financial results. A recent study examined the relationship between board diversity and firm value for Fortune 1000 firms and found "significant positive relationships between the fraction of women or minorities on the board and firm value"[92]. Another study examined the relationship between demographic diversity on boards of directors with firm financial performance, using 1993 and 1998 financial performance data (return on asset and investment) and the percentage of women and minorities on boards of directors for 127 large US companies. Correlation and regression analyses indicated that board diversity is positively associated with these financial indicators of firm performance[93]. A report commissioned by the California Public Employees' Retirement System (CalPERS) for example, found that companies that have diverse boards perform better than boards without diversity[94]. The report stated that companies without ethnic minorities and women on their boards eventually may be at a competitive disadvantage and have an under-performing share value. On the other hand, other studies show more nuanced results[95].

(ii) Users (NGOs, Public Authorities): Accountability

According to most NGOs and other civil society organisations consulted, insufficient transparency translates into many large companies not being perceived as sufficiently accountable to society at large, or to local communities which may be affected by their operations. If information is not available, companies cannot be held fully accountable for their impact on society. This case is made in particular with regard to some EU companies having operations in developing countries, where national legal frameworks may include weak or no legal obligations to disclose information. Although some evidence suggests, for instance, that the largest European companies are more likely to have a human rights policy than their competitors in other developed countries[96], some NGOs have referred to cases[97] of alleged negative impacts EU companies may have on human rights and the environment in their operations in developing countries. In this framework, insufficient transparency is considered as an important factor inhibiting corporate accountability and responsible behaviour, and it is alleged that non-financial reports often neglect negative environmental and human rights impacts, while choosing to focus on less controversial issues[98]. The CSES study[99] also shows, for instance, that in the great majority of cases no contact information details or feedback mechanisms are disclosed to stakeholders.

This may also have an impact on the level of consumers' trust, as consumers may question, for instance, whether suppliers of products and services respect applicable rules and regulations, and whether consumer protection considerations are effectively taken into account in a company's strategy. According to a recent report on consumer markets in the EU, for instance, "trust" gets the lowest rating of all key components analysed[100].

(iii) Users (investors): less efficient capital markets

Most of the investors consulted suggest that the current situation constitutes a significant constraint to their capacity to build relevant non-financial information into their valuation models. Such remark is made with regard both to the quantity and the quality of the information available.

The current disclosure practices render thus difficult for investors to benchmark and assess non-financial performance across industries and Member States. Insufficient transparency in this field may consequently affect the most efficient allocation of capital across the Internal Market. Pointing to the need to increase transparency, some stakeholders have also underlined the importance of gaining new momentum in the aftermath of the financial crisis, arguing that the incentive structure of the pre-crisis markets has led to a significant number of market participants to focus excessively on short-term profits, and not sufficiently consider long-term value creation[101]. It has also been argued that the failure of many investors to take adequately account of material non-financial issues when calculating future earnings of investee companies contributes to market volatility and systemic market risk.[102]

Information relating to how diversity is dealt with at the board level is also important as it reflects how differences are considered, valued and managed. It provides information on corporate culture and governance practices that enable investors to take more informed voting and investment decisions[103]. It ensures investors and stakeholders in general that the board members have the right mix of skills and knowledge to best govern the company. In this regard one should consider that investors have different investment strategies and objectives that make them need and require different types of information, i.e. not only relating for example to the long term financial performance of the company, but also to the expertise and competences of the board members. For instance lenders appreciate and recognise the competitive advantage of a credible and respected board, while other stakeholders are more confident when there is evidence of a governance structure relying on the expertise of a well-qualified board. The more diverse the board is, the more likely it is that more competencies and skills are brought in for the benefit of the company. Therefore, by leaving out relevant information relating to the diversity policy and to the objectives and how they are evaluated, companies fail to provide investors with useful information. In this regard, respondents to the 2011 consultation on the EU Corporate Governance Framework [104] indicated that disclosure of diversity policy would enhance transparency and would enable investors to take informed decisions as to the governance practices of the company. It would in addition reduce group think. Investors in particular indicated that, if companies are transparent on their diversity policy, they can judge better the level of ambition of the company and monitor progress. Lack of disclosure means insufficient communication about the needs in terms of qualifications necessary for their particular type of business.

Moreover, according to the 2011 Board of Directors survey[105] there was a strong call for increased transparency essential to regaining confidence and trust in corporate boards and directors. Other reports[106] underline the need for companies to engage in the reporting on diversity matters in order to have an effective prevention of discrimination and a promotion of diversity.

3.4 Baseline Scenario: How will the problem evolve without action?

3.4.1 Transparency of non-financial information

The weaknesses of the current legislation, both at EU and at Member States level, do not provide stakeholders and companies with sufficient clarity on what disclosures should be expected and legal certainty on what information is legally required. It is therefore unlikely that significant improvements on quantity or quality of non-financial information would materialise in the absence of action clarifying this. Potential evolution of international frameworks and voluntary initiatives could possibly contribute to an overall positive evolution. However, the following should be considered in a scenario without action:

– In contrast to financial information, currently there is no generally accepted standard-setter for non-financial information. GRI appears, to date, the only institution providing specific guidance for reporting, but this remains a set of guidelines (rather than a standard) proposed by a private institution and applied only by a limited number of companies on a voluntary basis. Moreover, the pace of the uptake remains very slow and there is no clear indication that a significantly higher number of companies plans to sign up to GRI in the short term.

– Guidance is also provided by other normative frameworks. However, these are also voluntary frameworks and they define principles and guidelines, rather than reporting standards. Their potential impact on the quality and quantity of information is therefore limited. The multiplicity of such frameworks is also brought up by some stakeholders as one of the reasons contributing to poor consistency and comparability.

– The IIRC is also working towards the creation of a generally accepted integrated reporting framework. Although a first discussion paper was published in November 2011[107], such platform is still at a very early stage of development and significant results can only be expected in the medium/long term.

No existing scheme or voluntary disclosure mechanism is therefore expected to yield significant solutions to the identified problems. Non-financial information can also be disclosed in a number of different forms other than formal reporting (i.e. internal communication to employees, informal communication with stakeholders, product or environmental labels). However, informal channels are considered complementary, and no substitute for formal disclosures, and they are not deemed appropriate to respond to the stakeholders' demand for increased transparency, in particular as regards the users' needs.

3.4.2 Boards' diversity

It is difficult to assess to which extent the diversity of boards would improve without any action at EU level, in particular as most of the available data focuses on gender diversity only. In this regard it is important to underline that over the last 8 years the number of women on boards has increased with an average of 0,5% per year[108]. At this rate, it will take another 50 years to reach a more balanced situation, i.e. at least 40% of each sex. The positive correlation between diversity of boards and the performance of companies, as indicated by some studies, has not led to a significant improvement of the composition of boards across the EU.

Some large companies with highly visible public profiles may feel the pressure of scrutiny and react better to public demands for enhanced diversity[109]. However, this is difficult to predict. More companies are becoming aware that greater participation by women in management, including at the highest levels, has a positive impact on the business and have taken measures to foster women’s leadership potential. This includes in particular improving work-life balance or coaching programmes[110]. Nevertheless, most companies do little to facilitate the crucial final stage, i.e. recruitment to board positions.

Social pressure and a culture that supports women may also improve the situation, as it seems to be the case in some Nordic countries (e.g. Sweden, where the board seats held by women increased from 20% in 2004 to 28.7% in 2010[111], despite the fact that there is no quota legislation). Discussions over the value of diversity may lead boards to reflect more on their needs and reflect them better in their recruitment strategies. Yet, the extent and the pace of change cannot be predicted with any degree of certainty. Other aspects of diversity, such as age, nationality or educational and professional background, appear to raise less interest than gender diversity. However, it is left to companies to decide how to take into account the need of a right balance in terms of geographical origin or educational and professional background of board members. A gender diversity initiative at the EU level would obviously have positive impact by increasing the number of women in the boardroom, but the beneficial effects of other aspects of diversity would not be taken into account. In conclusion, without any action at EU level regarding diversity (at large) of the board members, the legal framework risks to remain fragmented.

3.5 The EU's right to act

According to the subsidiarity principle, the EU should act where it can provide better results than intervention at Member State level. In addition, EU action should be limited to what is necessary in order to attain the objectives, and comply with the principle of proportionality. Several policy options are considered in section 5 below. The proportionality of each option has been analysed with regard to its effectiveness and cost-efficiency. In all cases, in order to ensure that companies are subject to the same requirements across the EU, it appears preferable to legislate through EU law rather than at Member State level.

The disclosure of non-financial information is already regulated at EU level by the Accounting Directives. Nevertheless, investors and other users demand a greater level of harmonisation in this field. Moreover, the diverging approaches taken at Member State level could determine even greater differences within the EU Internal Market, as they may lead to further differences in terms of scope, detail or content of the requirements. Different reporting requirements at Member States level could also potentially undermine the level playing-field across the Internal Market. Sustainability-related information also appears, by its own nature, as a cross-national matter.

As regards diversity issues, current initiatives are much fragmented, some Member States being more advanced in their reflections, others only at the beginning. In the absence of an action at EU level, in many Member States there will be no progress or very slow progress in the coming years. Furthermore, current rules of the Accounting Directives already oblige companies to disclose their corporate governance arrangements, in particular regarding the composition and functioning of their boards. EU instruments appear to be more suitable in assuring higher transparency, consistency and comparability of the information disclosed, as well as in bringing about changes relating to diversity in the boardroom. Coordinated action at the EU level is therefore necessary, and this initiative complies with the subsidiarity principle.

Finally, the Treaty on the Functioning of the European Union (art.11) has also reinforced the role of sustainable development as one of the main objectives for the EU, based in particular on a high level of protection and improvement of the quality of the environment. Sustainable development is also affirmed as one of the fundamental objectives of the Union in its relations with third countries. Furthermore, the Treaty (Article 8 and 10) provides that in all its activities the Union shall aim to eliminate inequalities, and to promote equality, between men and women, and to aim to combat discrimination based on sex, racial or ethnic origin, religion or belief, disability, age or sexual orientation.

4 Objectives

The overall policy objective of the proposal is to contribute to the Single Market's potential to create sustainable growth and employment, in line with the objective set out in the EU 2020 agenda of a "smart, sustainable and inclusive growth". As explained above, more transparency for internal and external stakeholders is considered to be of key importance for companies to improve management of risks and deliver better results. Increased transparency (including on diversity in the boardroom) is expected to enhance the trust citizens have in business and in markets and enable a more efficient allocation of capital, as well as provide for a better-informed decision making (e.g. of investors). Enhancing boards' diversity would contribute to make them more effective in their role of management oversight. The specific objectives of the proposal can be summarised as follows:

I. Enhance companies' overall performance through (i) better assessment and greater integration of non-financial risks and opportunities into their business strategies and (ii) improved and more diversified oversight by the board;

II. Enhance companies' accountability and meet broadly-shared demands for more transparency;

III. Enhance efficiency of capital markets by helping investors to integrate material non-financial information into their investment decisions.

In operational terms, the objectives of the proposal can be summarised as follows:

1. Increase the number of companies disclosing non-financial information (quantity of information)

2. Increase the quality, relevance and comparability of the information disclosed.

3. Enhance diversity in the boardroom

In achieving these objectives, avoiding undue administrative burden on companies, especially on the smallest ones, is very important. The objectives are depicted visually in the following objective tree:

5 Policy Options - description and analysis

5.1 Options relating to Increasing Transparency of Non-Financial Information (Objectives 1 and 2)

A wide range of possible policy options can be considered relevant when contemplating initiatives to improve transparency of non-financial information. The analysis carried out by the Commission services took into account the different characteristics that each policy option may entail, including in particular the following issues:

Form of the disclosure: disclosure could take different forms. For instance, information could be disclosed in the form of a statement, to be included in the Annual Report (as currently required by the Accounting Directives). It could also be disclosed in the form of a detailed, stand-alone non-financial report, which could be published as a separate document or annexed to the Annual Report.

Narrative or KPI-based disclosure (Reference): different options could be considered when setting the methodology and detail of the disclosure. Disclosures can be narrative or based on Key Performance Indicators. KPIs may be defined by the company itself, or refer to international frameworks, or be defined at EU level. The latter option would in effect imply the creation of an EU standard for non-financial reporting.

Nature of the requirement: legislation could take the form of a mandatory requirement, or could provide a more flexible framework, such as a "report or explain" requirement. In this case, companies may have to comply with an obligation to report, or provide a reasoned explanation as to why they do not report. The proposed requirement may also include other incentives for companies to disclose information on a voluntary basis.

Content of the disclosure: there is no universally accepted definition of non-financial information. The current text of the Accounting Directives refers to ("..including..") environment and employees-related matters. In general terms, topics considered as most important by stakeholders and covered by existing international frameworks include, inter alia, social, environmental, human rights, and anti-corruption aspects. Such list is not exhaustive, and other areas may be covered, such as aspects relating to product safety, consumer protection, competition, etc. Moreover, non-financial disclosures can also include information on governance, including diversity. Within the above mentioned areas, the disclosure may include, inter alia: a description of a company's policy; its results and performance; risk management aspects, methodology and analysis used to assess performance, etc.

Third-party verification: currently, the Accounting Directives require that the information included in the Annual Report is verified for consistency with the financial statements[112]. This applies to environmental and social information too. Other forms of verification could be considered, such as verification of processes, audit of activities, etc.

Scope and Legal instruments: more details are given in section 5.3 below.

On this basis, several combinations of options have been examined. Those options or combinations of options being prima facie or least effective were discarded, while the packages of options (broad policy options) that were considered most relevant are described and analysed below. The options concerning respectively Objectives 1 and 2 (Increasing quantity and quality of non-financial information) and Objective 3 (enhancing boards' diversity) are described and compared in sections 5.1 and 5.2 below. A more detailed analysis is provided in Annexes 6 and 7.

5.1.1 Description of Broad Policy Options

The Commission services have analysed three main policy options (one of them with three sub-options), plus the "no policy change" scenario, which would leave unchanged the relevant provisions of the Accounting directives (Policy Option 0). The options presented below vary in regard to the form of the disclosure, the reference and the nature of the requirement. As a consequence, they are not all mutually exclusive.

1. Require a statement in the Annual Report (Option 1)

Option 1 considers the possibility of strengthening the existing requirement to disclose a statement on non-financial information in the Annual Report. In order to address the specific information gaps and improve the quantity and quality of information, such option would modify the baseline scenario by requiring that

- material information relating to at least social human rights, anti-corruption and bribery matters is disclosed, in addition to environmental and employees-related matters

- within these areas, the disclosure should include a description of (i) the companies' policies, (ii) performance and (iii) risk-management aspects, relying on existing international frameworks.

As further explained in Annex 6, such elements have been identified by a broad majority of stakeholders as key aspects in order to obtain an overview of the non-financial performance of companies. Most international frameworks require disclosure of information on these topical areas. However, the list provided is not intended to be exhaustive, and other information should be disclosed provided it is material. Those companies that do not have a specific policy in one or more of these topical areas would be at least required to explain why this is the case.

2. Require a Detailed Report (Option 2)

This option considers the possibility of introducing a new requirement to disclose non-financial information in the form of a detailed, stand-alone non-financial report. Such report would have to be drafted in accordance with existing international frameworks. It would consequently be significantly more detailed than a disclosure in the form of a statement, although it should cover at least the same topical areas identified in Option 1, as well as any other issues that the company may consider relevant. Based on the nature of the requirement, three sub-options are considered:

· Option 2.a considers the possibility of requiring companies to provide such a detailed report on a mandatory basis.

· Option 2.b considers the possibility of requiring detailed reporting on a "report or explain basis". This would allow companies to provide a report, or explain why they fail to do so.

· Option 2.c considers the case for voluntary reporting. Companies choosing to disclose a detailed report on a voluntary basis would be exempted from the obligation to disclose non-financial information in other forms, provided that: (i) the report covers the same topics and content identified above, (ii) it makes reference to international frameworks, and (iii) it is annexed to the Annual Report. There would be no mandatory obligation to provide a detailed report, nor to give an explanation if a report is not provided.

3. Set up a mandatory EU Standard (Option 3)

Option 3 deals with the possibility of setting up a mandatory EU Standard, which would constitute a framework for disclosing non-financial information. Rather than relying on existing frameworks, companies would be required to disclose information complying with a set of EU-based KPIs. Such standard would cover at least the same topical areas and elements mentioned in Option 1 above - as such elements have been identified by a broad majority of stakeholders as key aspects in order to obtain an overview of the non-financial performance of companies. This option would consequently require a disclosure in compliance with a detailed set of indicators, with a level of detail at least comparable to Option 2. An overview of the proposed policy options is given in Table 1 below.

Table 1 – Summary of Policy Options

Option || Nature of Requirement || Form || Reference || Topics || Estimated Cost of compliance*

0. No change || Only where appropriate || Statement || Business-relevant KPIs || [including] information relating to environmental and employee matters || 0

1. Require a disclosure in the Annual Report || Mandatory || Statement || Business-relevant KPIs, relying on International Frameworks || Policies, performance and risk-management aspects concerning at least Environmental, Social, Employee, Human rights, Corruption || €600 to 4300

2.Detailed Reporting – || a) Mandatory b) Report or Explain c) Voluntary || Report || Report to be drafted in accordance with International Frameworks || Same topics as Option 1, but more detailed information || a) €33000 to €604000 b) €33000 to €604000 (compliance) or €600/1000 (explanation) c) 0

3. EU Standard || Mandatory || Report || Detailed list of KPIs (Standard) to be defined || Same topics as Option 1, but more detailed information || €33000 to €604000

*The cost of compliance is estimated in terms of administrative burden compared to the current situation. The cost of Option 0 is consequently nil

Verification: The current verification requirements under the Accounting Directives would remain unchanged under all the described options. This means that, as any other aspect of the annual report, non-financial information would have to be checked for consistency with the financial statements. Stakeholders referred to verification costs as significant, a consideration confirmed by the results of the CSES study. Notwithstanding the potential benefits related to verification, the Commission services consider that, by not requiring additional verification of non-financial information, transparency can be improved while keeping the administrative burden low.

In Annex 6, each option is assessed in detail in regards to its effectiveness in meeting the objective of increased transparency (higher quantity and quality of information), as well as on some limiting factors. These include its efficiency (compliance cost), acceptability to stakeholders, effects on competitiveness and coherence with other relevant EU legislation. The administrative burden related to each option is also assessed in Annex 8. A comparative summary of the analysis of the broad policy options is provided below.

5.1.2 Comparative Analysis of broad Policy Options

Enhanced transparency is seen as a desirable objective, since it could bring benefits for preparers (companies) as well as for users (mainly investors, NGOs and other external stakeholders). However, it has to be recognised that providing additional information to stakeholders, in the form of a statement or a detailed report, also has a cost. The main costs include, inter alia, the resources that companies would have to devote to collecting data, drafting the statement or reports, potentially publishing and auditing them, training staff, etc. Broad social and environmental impacts are difficult to quantify and also depend on specific companies' behaviour. It is assumed that such impacts proportionally increase with the effect that the policy option has on the quality and quantity of social and environmental information available.

Option 0 (No change) does not appear to be an effective approach for dealing with the problems. The current reporting requirements and voluntary initiatives by companies have proved to be ineffective in achieving the policy objectives. Despite recent improvements, only approximately 6% of EU large companies are reporting and the quality of the information disclosed is mixed. This failure has a negative economic impact due to the fact that relevant risks and externalities are not fully captured in the accounting practice and investors cannot adequately assess companies' non-financial performance.

Option 1 (Disclosure in the Annual Report) would improve the quantity of information, as it would require concerned companies to disclose material information in the Annual Report. Moreover, the current requirement would be expanded to new topical areas, as information should include social, human rights, anti-corruption and bribery matters in addition to environment and employees-related aspects[113]. Minimum harmonisation would be introduced as regards the content of the disclosure: it is expected that the requirement to include information on policies, performance, and risk-management would benefit the quality and comparability of the disclosure, and improve companies' sustainability awareness. Companies would incur higher compliance costs expected to be in a range between 600 and 4300 euros per year per company (see Annex 9). Overall, economic benefits are expected from better management of risks and allocation of capital, enhanced trust in business and better resources management. However, it is difficult to quantify such long-term benefits and they would depend on how non-financial aspects are integrated in managers and investors' strategies and practices. As regards environmental and social impacts, the option is expected to positively affect businesses' conduct raising reputational costs for misbehaviour and increasing peer pressure.

Option 2 (Detailed Reporting) could have an overall greater impact on transparency than Option 1. The increase in the number of companies reporting would be the same for Option 2a (Mandatory), whereas it would be uncertain for Options 2b and 2c. Quality could benefit from a requirement to provide a detailed report drafted in accordance with international frameworks, as information would be more comprehensive and granular, and the use of KPIs could have a positive impact on comparability. On the other hand, it has been pointed out that imposing detailed disclosure requirement may result in a 'tick-the-box' exercise, with only limited impact on real companies' behaviour[114]. The difference in terms of economic, social and environmental benefits compared to Option 1 cannot therefore be precisely assessed, although it is expected that greater transparency would determine higher benefits. However, the administrative burden resulting from a mandatory reporting obligation, at the current level of development of tools, would be significantly higher, particularly in the short term. The annual cost of producing a report is estimated to be between 33000 and 604000 euros per year per company.[115]

Option 2a (mandatory), is not considered cost-effective on the basis of the high administrative burden. In Option 2b (report or explain) the administrative burden would be equal for companies opting to provide the report (and thus bear the same compliance cost as in Option 2a). Companies opting to provide an explanation would at least bear the related costs, estimated to be comparable to the lowest range of the cost estimate given for Option 1 (600/1000 euros)[116]. Overall, the Commission services estimate that it be less effective than Option 2a, although it has the potential to generate peer pressure and provide an effective incentive for companies.

Option 2c (voluntary) intends to recognise and promote best practices of companies reporting on a voluntary basis. Its effectiveness in terms of quantity of information would be uncertain. At the same time, for companies deciding to report, it would guarantee the same improvements in quality as Option 2a and similar economic benefits. Lastly, while the overall impact on society and environment would be weaker than Option 2a, proactive engagement in detailed reporting should not result in a 'tick-the-box' exercise. Such option would carry no additional administrative burden, as the disclosure of a detailed report would remain voluntary.

Option 3 (Mandatory EU Standard) could increase significantly the quantity and quality of disclosed information.. An EU standard designed in a way that is able to meet the needs of preparers and users could also maximise the comparability of the information. Moreover, this option would generate economic benefits resulting from better management and allocation of capital and an overall positive environmental and social impact. However, those positive effects would be subjected to the completion of a long and uncertain process of development and implementation of such standards, including thorough consultation with stakeholders. Moreover, the majority of business associations, experts and most stakeholders underlined the need for sufficient flexibility (also internationally) and the dangers of a 'one-size-fits-all' approach. As regards compliance costs, at the current level of development of tools, option 3 would be comparable to Option 2a in terms of administrative burden, or even higher. Option 3 is therefore not considered cost-effective at this stage.

The table below summarises how each policy option is assessed against the criteria of effectiveness in meeting the objectives; efficiency (compliance costs); competitiveness; and coherence with other EU legislation.

Table 2 – Assessment of the Policy Options

|| Effectiveness || Efficiency (compliance cost) || Competitiveness || Coherence with EU legislation

Quantity || Quality

0. No change || 0 || 0 || 0 || 0 || 0

1. Require a disclosure in the Annual Report || + || + || + || + || +

2.Detailed reporting – || a) Mandatory || ++ || + || -- || +/? || +

b) Report or Explain || +/? || + || - || +/? || +

c) Voluntary || ? || + || + || + || +

3. Set up a mandatory EU standard || ++ || + || -- || ? || +

Magnitude of impact as compared with the baseline scenario (baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable (Commission Services Analysis).

The table below summarises how each category of stakeholders would view the policy options:

Table 3 – Assessment of the Policy Options by Stakeholders Group

|| Preparers || Users/ investors || Users/ NGOs

0. No change || 0 || 0 || 0

1. Require a disclosure in the Annual Report || ≈ || + || +

2. Detailed reporting || a) Mandatory || - - || + || ++

b) Report or Explain || - || + || +

c) Voluntary || ++ || - || - -

3. Set up a mandatory EU standard || -- || + || +

Commission Services Analysis, based on the results of the consultations

5.1.3 Preferred option

Having compared the different options, the preferred policy option appears to be a a smart mix of mandatory (statement) and voluntary (detailed reporting) disclosure requirements (option 1 and option 2c). Companies would be required to disclose material non-financial information in the form of a statement in their Annual Report. Those companies that do not have a specific policy in one or more topical areas would be at least required to explain why this is the case. For companies willing to prepare a detailed report on a voluntary basis, the proposed policy mix would provide an exemption from the disclosure obligation described under Option 1, provided that: (i) the report covers the same topics and content, (ii) it makes reference to international frameworks, and (iii) it is included in the Annual Report. This provision builds on existing practices and provides a limited but useful incentive to improve the quality of those reports. Information would be disclosed in reference to high quality, generally accepted international frameworks, and verified for consistency due to the inclusion in the Annual Report.

More details on the choice of instrument and scope of application are given in sections 5.3 and 5.4 below.

5.2 Options Relating to Enhancing boards diversity (Objective 3)

Different types of measures aiming at enhancing board diversity and based also on techniques other than disclosure can be envisaged, ranging from an improvement of the existing recruitment policies to a more or less binding obligation for companies to enhance their board diversity. A summary and analysis of these different options is outlined below. A more detailed presentation and analysis is provided in Annex 7.

5.2.1 Description of the broad policy options

In the "no policy change "scenario (option 0), any possible action to increase board diversity would have to be taken by individual Member States and/or companies on a voluntary basis. According to the option 1, companies would be required to disclose their board diversity policy with regard to various aspects, including in particular age, gender, nationality or educational and professional background[117]. The disclosure requirement would be part of the corporate governance statement and would be included in the annual report (see section 5.2.3. below). The statement would present the objectives of this policy, its implementation and the results obtained. Companies who do not have a diversity policy would not be obliged to put one in place, but only to explain why this is the case. Option 2 would mandate companies to take into account diversity as one of the criteria for the selection of a board candidate. Companies would be obliged to consider not only the expertise of a given candidate, but also to which extend he/she would make the board as a whole more diverse. Option 3 would put on companies a binding obligation to establish a policy concerning diversity for boards. Companies would have to determine the content of this policy, establish targets and assess their achievement. It should also be noted that the option of introducing quotas has been discarded, as it is the subject of a separate Commission initiative.

5.2.2 Comparative analysis of the broad policy options

Each option has been assessed taking into account its effectiveness in reaching the objective, efficiency (compliance costs), acceptability to stakeholders, effects on competitiveness, coherence with other EU initiatives and impact on fundamental rights. This assessment can be found in Annex 7. On the basis of this appraisal, a comparative analysis of the preliminary policy options has been conducted and it is summarised below.

The preliminary analysis points to enhanced disclosure as the best approach in order to improve the overall diversity of boards. The 'no policy change' scenario/option 0 has been discarded as it does not seem to allow for sufficient improvement of the current situation. The progress would be slow or limited, unless Member States take action, as well as fragmented at the EU level. It would depend very much on the practices of companies and national debates on the issue. In addition, it could be seen as a missed opportunity to propose a complementary measure to the one on gender, in order to enhance diversity in the boardroom.

Option 1 (disclosure of diversity policy) would contribute to enhancing transparency and informing the market of corporate governance practices. Thus it would put indirect pressure on companies to adopt more ambitious diversity policies, while offering a great deal of flexibility. Measures based on disclosure have proved their effectiveness in Member States such as Finland or Sweden.

This measure could also have potential positive social impacts, as a more diversified board would be better placed to take into account concerns of different groups of employees and stakeholders. In addition, it may bring more equality of treatment and opportunities for different groups of people or individuals and this from the top to the bottom.

This approach, unlike in the case of financial institutions, has been considered, at this stage, more appropriate to achieve the pursued objective of diversity in the boardroom. Differences between financial institutions and listed companies in general (e.g. banks generate systemic risks, consequences were borne by governments and population at large, etc.), require stricter rules on the corporate governance of financial institutions, whereas listed companies need more flexibility. The enhanced disclosure requirement would be coherent with other initiatives (e.g. in financial institutions, on gender diversity) and it would be in particular likely to contribute to the implementation of the quantitive targets by companies.

Option 2 (diversity as recruitment criterion) could have a positive impact on diversity, while being consistent with the initiative on gender balance in the boardroom. Similarly, it could also have a positive social impact as described above. However, companies are not always transparent about their recruitment practices and processes. In the absence of a sufficient degree of transparency, the effectiveness of an option addressing recruitment alone would be limited as it would rely mainly on the appreciation by the company.

Option 3 (establish a diversity policy), although also effective, could be perceived as too prescriptive as it would simply oblige companies to put in place a policy, without giving them the choice to justify the absence of such policy on a "comply or explain" basis. It may thus be less accepted by stakeholders and may be less consistent with the on-going initiative on gender diversity that may require quantitative targets. It would have positive social impacts in terms of equality and opportunities for different categories of people (gender, age, etc.). It could indirectly have an impact on the reconciliation between private/family and professional life, as the promotion of more women in key positions for example (who have in general more family related responsibilities) would potentially bring about more flexible policies in this regard.

In the light of the assessment of the abovementioned policy options, it appears that the most appropriate option at this stage would be option 1 (disclosure of diversity policy). It is also better accepted by most stakeholders compared with a compulsory diversity policy or to an action focusing only on recruitment policy. Moreover, it is complementary to the separate Commission initiative relating to the possible introduction of quantitative targets for gender balance on boards, as the enhanced disclosure would probably contribute to a better implementation of these quantitative objectives. A detailed comparison of options is to be found in Annex 7.

Table 4 – Assessment of the Policy Options

|| Effectiveness || Efficiency (Compliance Cost) || Competitiveness || Coherence with EU initiatives || Estimated costs per company

0. No policy change || 0 || 0 || 0 || 0 || 0

1. Disclosure of internal policy on diversity in the annual report || + || + || + || ++ || €600/1000

2 Diversity must be one of the criteria of Board composition || +/? || -/? || +/? || +/? || ? possible costs linked to remuneration of HR specialists

3. Requirement to establish a policy with regard to diversity || + || - || - || -/? || ? linked to remuneration of HR specialists and possible increase of board members

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable

Table 5 – Assessment of the Policy Options by Stakeholders Group

|| Companies || Investors || Other (NGOs, civil society, etc.)

0. No change || 0 || 0 || 0

1. Disclosure of internal policy on diversity in the annual report || + || ++ || ++

2 Diversity must be one of the criteria of Board composition || +/? || +/? || +

3. Requirement to establish a policy with regard to diversity || - || +/? || +

5.2.3 Preferred option (enhanced disclosure of the board diversity policy)

The present section refines the preferred option which aims at enhancing board diversity, by taking into account the disclosure criteria mentioned at the beginning of the present chapter: the form and content of the disclosure and the nature of the requirement.

As regards the form of the disclosure, it appears that a statement in the annual report describing the company's diversity policy for the board is the most appropriate approach. In this regard it is important to recall that, as already mentioned in section 2.2., according to the current provisions of the Fourth Directive, all listed companies are required to provide a corporate governance statement, which shall include, inter alia, information on the composition and operation of the administrative, management and supervisory bodies and their committees. Thus, information on board diversity policy should be a part of the corporate governance statement, which appears to be a sufficient instrument for ensuring transparency. A separate report does not seem necessary, especially given that, the disclosure of board diversity policy covers only a limited group of people (European boards consist on average of 12 members[118]). The proposed provisions regarding board diversity would therefore complement the current provisions laid down in Article 46a of the Fourth Accounting Directive, by adding a new requirement for diversity disclosure

As regards the topics and the content of the disclosure, companies should be required to describe their diversity policy with regard to various aspects, including age, gender, nationality and educational and professional background. These aspects are particularly important, as shown in the description of this problem. However, companies would also be able to include other aspects of diversity which they consider relevant and material. In addition to the description of the diversity policy, its objectives, implementation and results should be also included. As the main objective of increasing diversity is to enhance the supervision of the management, the information specified should be provided in the first place regarding supervisory boards and the non-executive directors. However as the preferred option would not place on companies any concrete obligation going beyond disclosure and as enhanced transparency regarding both management/executive directors and supervisory/non executives would be beneficial for the company, the new requirement should therefore concern the same bodies as currently foreseen by the Accounting Directives for the information on "the composition and operation of the administrative, management and supervisory bodies".

Regarding the basis for disclosure on board diversity, although initiatives such as GRI include diversity indicators in their reporting framework, it is preferable to leave companies free to choose the most appropriate reference for the disclosure.

As regards the nature of the requirement, the preferred option aims at bringing about positive change in the boardroom by creating more visibility around the issue. Yet, it would not put a binding obligation on the company to have a diversity policy. A 'comply or explain' approach seems thus the most appropriate solution. Companies would therefore be required to report on their board diversity policy or, if they don't have one, explain why this is the case.

To conclude, the preferred option would require companies to disclose their board diversity policy, in particular as regards age, gender, nationality, professional and educational background. Companies would have to describe the objectives of this policy, its implementation and its results. The disclosure would be part of the corporate governance statement, which is contained in the annual report. Companies that do not have a diversity policy would be required to provide reasons for that.

5.3 Choice of instrument

In principle, a number of instruments could be used to approach the problem, including, self- and co-regulation, new legislation (directive or regulation) or modification of existing legislation. The following points are relevant when considering the case for amending the existing Accounting Directives (AD):

· The general scope of the AD is EU registered companies both listed and non-listed. As far as non-financial information is concerned, several arguments support having transparency requirements for both listed and non-listed companies: first, non-listed companies are subject to the same demands of transparency and accountability as listed companies; second, having the same regime on listed and non-listed companies would maintain a level playing field.

· On the other hand, specific provisions of the Accounting Directives relating to corporate governance disclosure only apply to listed companies. The disclosure of board diversity policy could be added as a new topic to the existing corporate governance statement.

· Moreover, the relevant requirements of the Accounting Directives would also be applicable to the Transparency Directive, by means of a cross-reference[119]. The scope of the TD covers all companies listed on EU regulated markets (including companies incorporated outside the EEA but listed on EU regulated markets). Should new articles be added to the Accounting Directives, an amendment of the Transparency Directive may therefore also be necessary.

· A proposal to revise the TD and of the AD was adopted by the Commission on 25 October 2011, and negotiations are currently on-going[120].

An alternative instrument would be a new Regulation, which would have the advantage of being directly applicable and would not need to be transposed into national law. However the creation of a separate Regulation to deal with this single policy objective alone does not appear proportionate, when the policy could be legislated for within separate sections of the AD. Moreover, a Regulation would not seem an appropriate instrument in light of the existing non-financial disclosure practice, which is based on principles and objectives rather than detailed standards.

It could also be argued that a specific, measurable, achievable and timely commitment by the industry itself (i.e. Self- or co-regulation), appropriately supported by EU policies, could possibly deliver significant results. However, self- or co-regulation are not considered as effective options because, despite the growing demand from stakeholders (mainly users of information, such as investors and NGOs) throughout the years, still only a minority of large companies are disclosing non-financial information on a voluntary basis. Moreover, this instrument would not address the problems of lack of minimum harmonisation stemming from the diverse approaches taken by some Member States.

In the light of the above considerations the inclusion of a series of provisions within the Accounting Directives is the preferred choice.

5.4 Scope of Application

As far as non-financial information is concerned, the Commission services conclude that only large companies and groups, whether listed or not, should fall within the scope of application of the new rules. Requiring only large companies to provide disclosures would be in line with the Commission's policy of making administrative burden proportionate. Smaller business would spend proportionally more time and resources dealing with administrative tasks than their larger counterparts[121]. Having in mind the objective of avoiding undue burden and taking into account the input from stakeholders and national authorities, only companies having more than 500 employees would be subject to new requirements. It is estimated that this would cover approximately 18,000 large companies operating in the EU. This threshold is higher than the one currently applied within the Accounting Directives for certain obligations (i.e.: 250 employees), which limits the burden of the proposed measure.

Companies that are subsidiaries within a group could also be exempted from the disclosure requirement to the extent that their relevant information is integrated in the consolidated report of the parent company.

As regards board diversity, it is important to maintain coherence with existing requirements in the field of corporate governance disclosure. The existing EU corporate governance rules only cover listed companies[122]. According to the current provisions of the Accounting Directives listed companies are required to provide a corporate governance statement in their annual report and to disclose certain topics (see Annex 2). The scope of disclosure of the diversity topic should therefore be the same as the scope of disclosure of other corporate governance topics. Respondents to the Green Paper on the EU corporate governance framework clearly pronounced themselves against the extension of the EU corporate governance rules to unlisted companies. Furthermore, whereas the need to ensure the same level of transparency on non-financial disclosure for both listed and non-listed companies was highlighted above, the situation is different for disclosure of diversity policy. Corporate governance arrangements regulate the internal functioning of a company and as a consequence disclosure is crucial in case of listed companies with external shareholders who are directly concerned by it and less important in case of non-listed companies[123]. The scope of the disclosure on board diversity and on other non-financial matters will thus not be identical. As explained in 5.3 above, such difference already exists in the current provisions of the Accounting Directives. Thus, only listed companies should be covered. However, best corporate governance practices of unlisted companies can be encouraged on voluntary basis.

Finally, as to the size of companies concerned, it should be pointed out that including board diversity policy disclosure as a new topic in the corporate governance statement should not create any considerable administrative burden. As far as SMEs are concerned, listed ones are already required to produce a corporate governance statement, includi