SMEs face trickle-down impacts of new EU gender balance rules

While small firms don't need to comply with new EU Gender Balance on Boards rules, they may still feel the impacts of the reporting obligations of their larger clients

Jillian O’Sullivan, corporate compliance partner at Grant Thornton.

Owners of SMEs risk being at a disadvantage if they fail to keep pace with competitors who track the gender balance reporting obligations of larger firms.

While smaller employers may not be obliged to comply with the EU's new Gender Balance on Boards rules, which come into effect from June 30, it is quite possible that they may be impacted by a trickle-down need to feed into the reporting obligations of the bigger companies to whom they are supplying goods and services.

In this Q&A interview, Jillian O’Sullivan, corporate compliance partner at Grant Thornton, advises business owners, and SMEs in particular, of the possible implications of the new gender reporting rules.

Notably, she points out that those businesses that can demonstrate a commitment to diversity and inclusive leadership may enjoy a competitive advantage when tendering for business with the larger companies they count as clients.

Can you summarise the main points in the new EU regulations relating to gender balance on boards? 

Traditionally many company boards across Europe are made up mostly of men, even though women make up a large part of the workforce and have the skills and experience to lead. The EU's new Gender Balance on Boards rules are designed to address this imbalance. They require certain large, publicly listed companies to ensure that women and men are more equally represented on their boards.

In Ireland, the rules come into effect on 30 June 2026. By that date, affected companies must make sure that at least 40% of their non-executive directors (board members who provide oversight rather than run the business day-to-day) are from the underrepresented sex. Alternatively, at least 33% of all board positions can be held by the underrepresented sex.

Where a company does not meet the required thresholds, it will be required to report to the Minister for Children, Disability and Equality, explaining the reasons for non-compliance and outlining the measures it intends to take to address the shortfall.

The rules only apply directly to larger companies whose shares are traded on stock markets. Most small and medium-sized businesses are exempt. Supporters of the rules argue that diverse boards make better decisions because they bring different experiences and perspectives to the table. Critics worry about quotas. But the overall goal is to create more opportunities for talented people, regardless of gender, and to ensure leadership teams better reflect society and the workforce they serve. 

Will these new gender balance rules impact upon the ability of small firms to compete and trade?

Because SMEs are largely outside the direct scope of the regulations, some business owners may conclude that the new rules are irrelevant to them. That would be a mistake. Where they will see the trickle-down effect is through commercial relationships rather than legal obligations.

While the new regulations technically only apply directly to large listed companies, the impact is likely to be much wider. Large companies increasingly ask suppliers and business partners about issues such as diversity and governance when awarding contracts. This means smaller businesses are likely to increasingly see questions about gender balance feature in procurement processes and will naturally feel the pressure to improve gender balance in leadership roles.

As a result, businesses that can demonstrate a commitment to diversity and inclusive leadership may enjoy a competitive advantage when tendering for business with these larger companies. On the flip side, companies that have made little progress in tackling the gender divide may find it to be a factor in why they fall short in a procurement process.

This does not mean that SMEs will suddenly face mandatory quotas or be excluded from opportunities because they do not meet a particular target. That said, smaller companies need to recognise that diversity is becoming a regular feature in commercial conversations. So business owners should think of it less in terms of compliance and more about competitiveness.

What actions do you advise SMEs to take to protect their business interests?

SMEs should begin by assessing the current makeup of their leadership teams and boards, where they exist. This is not about introducing arbitrary targets. It is about understanding whether the organisation is drawing on the widest possible pool of talent and whether there are barriers that may unintentionally limit progression opportunities internally.

Businesses should also consider their succession planning processes. One of the most effective ways to improve diversity at leadership level is to ensure there is a strong pipeline of future leaders. That means investing in mentoring, leadership development and career progression opportunities for employees across the organisation.

Recruitment practices are another important area. SMEs should examine whether their hiring processes attract a sufficiently broad range of candidates and whether job specifications and promotion criteria narrow appeal to a specific cohort of people.

From a commercial perspective, companies should also prepare for increasing scrutiny from customers and procurement teams. Maintaining basic information on governance structures, diversity and workplace policies can help businesses respond confidently to tender processes.

Importantly, SMEs should avoid treating this as a box-ticking exercise. Diversity is recognised as helping businesses succeed because it helps them attract stronger talent, better understand their customers and bring a range of perspectives into their decision making. Diversity ultimately ensures organisations think differently.

Beyond regulatory considerations, what benefits can Irish small firms take from greater engagement with gender balance?

Looking past regulations as simply looking to meet a quota and thinking in terms of how diversity boosts business performance is where forward looking companies stand to succeed over the long term.

There is a substantial body of international research linking diverse leadership teams with stronger decision-making, improved innovation and better financial outcomes. While diversity alone is not a guarantee of success, organisations that bring together people with different experiences are often better equipped to identify opportunities, better serve customers from different backgrounds, and manage risks. People will often remark that one of the primary factors behind the 2008 financial crisis was that some boards experienced groupthink because they were made up of people from the same pool.

For SMEs in particular, talent is often their most valuable asset. In a highly competitive labour market, businesses that demonstrate a commitment to diversity are typically better positioned to attract and retain skilled employees. This is especially important as younger generations increasingly seek employers whose values align with their own and in an economy like Ireland where there is a talent shortage.

There is also a reputational benefit. Investors, customers and employees are paying greater attention to how organisations approach governance and workplace culture. Businesses that can demonstrate progress in these areas may find it easier to differentiate themselves in the marketplace.