Shaping the corporate landscape in Germany: The “quota”—promotion of women in leading positions

By Dr. Heike Wagner and Dr. Florian Plagemann, LL.M.
CMS Hasche Sigle, Frankfurt

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On December 11, 2014, the Federal Cabinet came to a decision on the final draft of the “law on equal participation of women and men in leading positions in the private economy and in the public sector” in order to introduce a female quota. The Federal Cabinet’s draft law foresees a quota of 30% of the underrepresented gender, at a minimum, on the supervisory boards of certain companies. Moreover, the draft law includes an obligation to achieve certain target quotas (Zielgrößen) for supervisory boards and several management levels. If adopted, some aspects of the law could enter into force as early as January 1, 2016.

Introduction

From January 1, 2016, the “law on equal participation” may take effect. This legislation aims to introduce a higher degree of diversity in companies that enhances corporate efficiency and success. As an ancillary societal benefit, the female quota is intended to advance the corporate culture in Germany.

Background

The proportion of leading positions held by women in German businesses and within the federal administration is still very low. Women are still underrepresented in high-level roles (such as managing board and upper management positions) to a similar extent as they are underrepresented on supervisory boards. The statistics: 43% of people in the job market are women, with the level of qualification being equal across both genders; 53.3% of all people fulfilling the requirements to study within Germany, and almost 50% of all graduates in higher education are women. At the end of 2013, 4.4% of all members of the managing boards and 15.1% of all members of the supervisory boards of the largest 200 companies in Germany were women.

Statutory rules

A fixed quota of 30% on the supervisory boards of listed stock corporations that are co-determined on a basis of parity.

Scope

All listed stock corporations that are co-determined on a basis of parity shall be affected. The co-determination on a basis of parity is ruled in “Mitbestimmungsgesetz” , “Montan-Mitbestimmungsgesetz” or the “MontanMitbestimmungsergänzungsgesetz”. It should be noted that the requirements for “listed” and “co-determined” are given cumulatively. This will therefore encompass large public companies having the legal structure of a stock corporation (AG) and partnerships limited by shares (KGaA).

Legal consequences

A gender quota of 30% shall apply to for the supervisory boards of such companies from January 1, 2016. This quota will be met successively for all seats on supervisory boards that become vacant from January 1, 2016 onwards. The minimum quota generally applies to the entire supervisory board (Gesamterfüllung). Prior to any appointment the employer or employee side may object the applicability of the Gesamterfüllung, to the chairman of the supervisory board. As a result, each side is responsible for the fulfilment of its share of the quota separately. In the event of non-compliance the whole election/appointment process is null and void. The seats reserved for the underrepresented gender will stay unoccupied (“empty seat”). The “empty seat” shall be by-elected through new elections or replaced by an appointing court (Ersatzbestellung). In such a case, the Ersatzbestellung by the appointing court is likely to be utilized for financial reason. All supervisory board members appointed before January 1, 2016 — that is to say, prematurely — will be eligible to fulfill their terms as foreseen by the appointment. After January 1, 2016, appointment corresponding to the quota is required with respect to the vacated seats of resigning supervisory board members. An obligation to set a binding quota for listed stock corporations and companies, co-determined on a basis of parity.

Scope

Companies that are co-determined on a basis of parity or listed stock corporations shall be affected. This might be a stock corporation (AG), or a partnership limited by shares (KGaA), or a limited liability company (GmbH). Not only companies that are co-determined on a basis of parity, but companies that are co-determined by 33% (Drittelmitbestimmte Unternehmen) shall also be affected. As a general rule, this will encompass companies with more than 500 employees.

Legal consequences

From January 1, 2016, such companies will be required to set targets (Zielgrößen) regarding the quota of women in the supervisory board, managing board, and upper management level. These targets and their achievement or failure need to be announced publically. The supervisory board is obligated to set such targets with respect to the supervisory board and the managing board by resolution. This also applies to smaller corporate bodies (such as a supervisory board with only three members or a managing board with only two managers, for example). A determination of a quota for the supervisory board is not required for companies that are otherwise obligated to meet the 30% quota by law (see above). The managing board is also obligated to set targets for the two levels of management immediately below the managing board. These two levels of management shall not be those broadly defined in business terms (such as top management, middle management and lower management); rather they will correspond to the two tiers immediately below the managing board in established hierarchy of management, as is in place in the given company. A minimum target number is not required. Companies may set their own targets according to their individual needs and resources. However, the company may not set a target figure lower than the actual quota of underrepresented members of the respective body. This stipulation does not apply as soon as the actual quota in the relevant body exceeds 30%. The quota to be determined for the first time in 2016 must also provide a deadline as to when the quota is fulfilled. This deadline for the first determination must not exceed two years. Any deadlines subsequently established shall not exceed five years. As a result, a wide variety of different arrangements are possible: the project planning might foresee a final target that shall be met gradually. Alternatively, step-by-step deadlines would also be conceivable. >> The obligation to meet targets is intended to put pressure on companies by means of public perception. This pressure shall motivate companies to increase the proportion of women in leading positions. << Such fixed targets and deadlines, their achievement or non-achievement within the specified time limits and, where appropriate, the reasons for their nonachievement, are to be published and made wholly transparent. The announcement has to take place in the federal gazette (Bundesanzeiger) that is publicly available via the commercial register. Failure to meet the set target is an undesirable but not inconceivable possibility. In this case, the legislation does not anticipate severe legal consequences or a retroactive decrease of the determined target. However, the management board must justify a failure to meet the set target and must disclose the details of its efforts to meet the determined target.

Practical consequences

The “law on equal participation” is an additional regulation that the respective companies will have to face. Especially in the near future, it is essential to include such obligations in strategic planning regarding the appointment of new members of corporate bodies or the determination of targets. Regarding the mandatory fixed quota in supervisory bodies, we expect to see the following consequences: since all members of supervisory boards appointed before January 1, 2016 will continue until the regular phase out, we expect more appointments of members to supervisory boards within 2015. As a result of this mandatory quota effective from January 1, 2016, the appointment of women may be postponed until the following rounds after this date. In the long term this will not have an impact on the fact that companies will be obligated to appoint more women to their supervisory boards. The “empty seat” (Leerer Stuhl) consequence might be acceptable for a transitional period, but will not be an adequate solution. In practice, we might see a bundling of supervisory board seats to be held by certain women who are sufficiently qualified and well connected. In the long term, companies will not be able to avoid specific training, education, and preparation of female staff in order to encourage and prepare them for future supervisory board positions. The obligation to set targets is intended to put pressure on companies by means of public perception. This pressure shall motivate companies to increase the portion of women in leading positions. Moreover, the increase in mandatory documentation and the potential considerable costs of justifying failure to meet a target will constitute an additional burden. This should deter companies from prematurely setting ambitious targets for reasons of public image/perception. Rather, companies should be interested in creating a realistic and achievable timetable. Companies must also consider that once a certain quota is reached, falling below this quota at a later point in time will also trigger significant documentation and justification requirements. Therefore, it can be assumed that some companies will endeavor to maintain quotas at a relatively low level across all management tiers, in order to shield themselves from later obligations to meet or maintain certain targets. It remains to be seen whether image/public relations issues will create sufficient pressure as to dissuade companies from choosing this destructive option.

heike.wagner@cms-hs.com

florian.plagemann@cms-hs.com

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