Germany: Germany Introduces Rules on Female Quota for Supervisory Boards

Last Updated: 16 March 2015
Article by Dr. Ulrike Binder and Guido Zeppenfeld, LLM

Germany introduces a statutory minimum quota for female representatives on supervisory boards of co-determined (50/50), listed companies. In addition, the new law obligates numerous companies to observe rules regarding the composition of their supervisory boards and leadership positions. On 6 March 2015 the German parliament (Bundestag) passed the "Act on Equal Participation of Women and Men regarding Leadership Positions within the Sectors of Private Economy and Public Service" ("Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst").

The Act introduces a legally binding quota in Germany for the first time. At least 30% of the members of supervisory boards of publicly listed companies with 50/50 co-determined supervisory boards, i.e. supervisory boards in which half of the members are employee representatives, will need to be female.

Additionally, both, publicly listed companies and companies that have co-determined supervisory boards — either as 50/50 co-determined boards or as third-participation boards — will have to set their own targets for the composition of the managing board, the supervisory board and leadership positions. These targets, deadlines and information on target achievement, plus the reasons for any failure, have to be publicly disclosed.

These rules also apply to European Stock Corporations (Societas Europaea - SE) whose supervisory or administrative board has equal representation of shareholder and employee representatives due to the applicable co-determination agreement or applicable laws.

Fixed Quota Requirement

The fixed 30% quota for supervisory boards of publicly listed companies that have a 50/50 co-determined supervisory board generally must be met by the supervisory board as a body (Joint Fulfillment). It therefore does not matter whether the shareholder and employee representatives reach the quota individually as long as the overall proportion of women reaches 30% or more. However, both sides can object against the system of Joint Fulfillment prior to every election of the supervisory board. If one side exercises this right, both sides, the shareholder and the employee representatives, need to achieve the 30% quota separately (Separate Fulfillment).

The quota comes into force and must be observed for new supervisory board positions from 1 January 2016. In order to enforce the obligation to comply with the quota, the Act contains a so-called "empty chair" doctrine. Under this doctrine, an election that violates the quota will be deemed null and void and the relevant seats will remain vacant. In case of an election of individual supervisory board members in a shareholders' meeting, the chronological order of the elections shall decide for which elected member the election is null and void. If the supervisory board is elected as a whole, the entire election will be deemed void with respect to the gender which is overrepresented; the election of candidates of the underrepresented gender, however, is valid. The chairman of the general meeting will not have the right to put a nomination to vote which, if successful, would not be in line with the quota.

As regards the employee representatives, new provisions will be introduced to the German Co-Determination Act concerning a special quota requirement of employee and trade union representatives in case of Separate Fulfillment. In this regard, an "empty chair" doctrine will also apply. This "empty chair" can then be filled by judicial appointment.

Equality Concept for Managers and Managerial Staff

Publicly listed companies and companies that are subject to (parity and one-third) co-determination must give themselves rules for a concept of equal participation within leading positions. According to estimates of the Federal Ministries involved, about 3,500 large and medium sized companies are affected.

Scope of Application and Responsibility

Targets for quotas have to be determined for legal representative bodies, supervisory boards and the two top management levels below executive management. The management board, respectively the managing directors, have to set quota targets for the upper management. The supervisory board or, in one-third co-determined companies the shareholders' meeting is responsible for the determination of quota targets for the supervisory board (unless the fixed quota applies) and for the management board, respectively for the managing directors.

Targets and Deadlines

A minimum quota regarding the proportion of women has not been defined by the Act. However, the Act aims for equal representation and intends to avoid a decline in the status quo. Therefore, if, by the time the targets are set, the actual proportion of women on the relevant hierarchy levels is less than 30%, the targets set must not fall below the current proportion. If the proportion of women on the relevant hierarchy levels is more than 30% by the time the targets are determined, the set targets may also be lower than the quota that has already been reached.

The obligation to set targets will be triggered on the day the Act comes into force. First targets must be set by 30 September 2015, with a deadline to reach these targets no later than 30 June 2017. Subsequent deadlines must not exceed a period of five years.

Publication Obligation

Targets and deadlines must be published in the management report (Lagebericht). This also applies to information as to whether targets have been met and, in case of failure, reasons for failure. Companies that are not under a statutory obligation to publish a management report must publish this information on their websites. Information on target achievement must be published after the relevant deadline has expired.

Consequences of Missed Targets or Breach of Publication Requirements

The Act does not stipulate any sanctions where targets are not reached. However, if targets are not met, the company must publish clear information about its efforts to reach the targets and the reasons why the targets have been failed. This approach shall incentivize companies to set high targets under public awareness and avoid that companies set low targets in view of severe sanctions.

Inaccurate or incomplete information in status reports may qualify as a misdemeanor for which a fine of up to EUR 50,000.00 may be imposed.

Practical Consequences

The current composition of supervisory boards is not affected by the new quota requirements. In relation to future elections, companies must ensure that the fixed quota will be gradually achieved from 1 January 2016. Replacements must be made with representatives of the underrepresented gender until the fixed quota is met.

With regard to the provisions on the concept of equal participation, affected companies, in a first step, need to analyze the status quo on their boards and management. Thereafter, management and supervisory board (or shareholders' meeting) need to agree on and set quota targets. These targets will obviously be different in different industries.

For companies that do not reach the 30% quota on a relevant hierarchy level, the status quo sets the minimum threshold. We recommend that affected companies start looking into these issues as soon as possible. The self-imposed targets should be realistic in order for companies to be able to achieve them within the first two years.

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