Germany

Talya Hutchison, Associate
Paul Hastings (Washington, DC)

In the European Union, mandatory gender quotas for boards of directors are becoming increasingly the norm.  The latest country, and largest economy, to join the ranks of requiring gender diversity on boards is Germany.  After a decade of voluntary suggestions of increasing women’s shares on boards, Germany passed a two-tiered law.  This law applies rigid requirements to approximately 100 of the country’s largest companies, while compelling over 3,500 other companies to set voluntary standards to which they are held accountable.

Germany’s gender quota law has now been in effect for two full years and the numbers are improving.  As the requirements of the law become the norm, Germany hopes to see increased gender diversity in all companies.

Gender Quota Law of 2015

In November 2014, Germany’s coalition government proposed a law that would apply beginning in 2016, and was ultimately passed in 2015.¹  This law requires that large, publicly listed companies subject to employee participation on boards (“co-determination”) have 30% of their supervisory board seats filled by women.²  The law initially faced significant pushback from industry leaders. Companies such as Daimler and Bayer made statements asserting the law did not have support in the workplace and indicated that positions needed to be filled based on experience, not gender.³  Some companies though embraced the legislation.  Deutsche Telkom publicly committed to meet the 30% quota a year early (by 2015) and by the end of 2015 had a Supervisory Board comprised 40% of women.⁴ 

The law persevered and was passed by the German Parliament in March 2015.⁵  In addition to the requirement imposed on over 100 companies that 30% of supervisory board seats must be filled by women, an additional 3,500 companies who are listed or subject to mandatory co-determination were given until September 30, 2015 to submit a business plan to designate a percentage of women in top positions.⁶  The targets set by these additional companies were voluntary, but if the actual percentage of women was less than 30% at the time the standards were set, the company was not permitted to set a standard of less than the then-current percentage.⁷  Unfortunately, several companies who had zero women in board positions set their target to zero percent as that was not technically less than the then-current percentage.⁸

If a company subject to the 30% quota fails to comply with the law, then any vacated board member seat must remain vacant until it is  filled with a woman to achieve the target goal.⁹  If a company that set voluntary targets does not meet its quota, then an administrative fine can be assessed of up to €50,000.¹⁰

Corporate Governance Code

On February 26, 2002 the Government Commission on the German Corporate Governance Code (the “Commission”) adopted the German Corporate Governance Code (the “Code”), enacted under the statutory authority of Article 161 of the Stock Corporate Act as amended by the Transparency and Disclosure Law.¹¹  The Code, which is reviewed annually, is intended to make Germany’s corporate governance rules “transparent and understandable…[and] to promote the trust of international and national investors, customers, employees and the general public in the management and supervision of listed German stock corporations.”¹²

Germany has a dual board system: the Management Board is responsible for managing the business; the Supervisory Board is responsible for appointing, supervising and advising members of the Management Board and is “directly involved in decisions of fundamental importance to the enterprise.”¹³  Pursuant to Article 5 of the Code, the Supervisory Board appoints and dismisses the members of the Management Board of a listed company in Germany. 

The Code has been amended to reflect the 2015 gender quota laws.  The Code reiterates the requirements of the 30% quota and the individual targets for percentage of seats allotted to female directors.¹⁴  The Code also provides that when appointing the Management Board, the Supervisory Board “shall take diversity into account” and it also “determines targets for the share of female Management Board members.”¹⁵  Finally, the Code puts into place measures to increase the share of women included in succession planning. The Code recommends that the Management Board sets targets designed to increase the percentage of women in management two levels below the Management Board.¹⁶

Progress

Although there is a debate over the effectiveness of the 2015 gender quota law¹⁷, the trend of gender diversity on boards is certainly in the right direction.  According to the European Union, in 2010, women only comprised 12.6% of board seats of large, publicly traded companies in Germany.¹⁸  By 2016, that number had risen to 29.5%.¹⁹  This number outpaces the trend of Europe as a whole, which has seen an increase from 11.9% to 23.9% during the same period.²⁰

Numbers of women on management boards not subject to the 2015 quotas are also increasing, although the numbers are still low.²¹  Approximately 10% of management board seats of DAX 30 companies, the largest 30 companies in Germany by market capitalization, are held by women.²²  This number is significant though, when compared to the fact that the figure was only 2% in 2011.²³

However, progress is still slow at companies who are not required to hit the 30% quota.²⁴   Large companies, such as Volkswagen, ThyssenKrupp, and Commerzbank set their 2015 gender quota goals to zero as permitted by the law that requires the percentage of women not be less than the then-current percentage.²⁵  These companies faced no consequences and there has been little public backlash.²⁶

Conclusion

As consideration of the issue of gender parity on corporate boards continues at both the European Union and Member States levels, the discussion regarding gender parity on corporate boards becomes more increasingly focused in Germany.  Both listed companies and the government are actively promoting increased representation of women in upper management and on Supervisory Boards. Though ethnic and racial diversity is not yet explicitly contemplated in German corporate governance, that too may change as a lack of representative diversity in Germany’s latest cabinet has not gone unnoticed.

In June 2012, the Commission held its 11th Corporate Governance Conference which included a discussion by Schröder on “A fair chance for women in good corporate management: On the importance of transparency and competition”.¹  Since that time, a new law has been enacted requiring companies to comply with gender quotas and threatening their board with vacancies if they fail to meet these standards. 

But is that price enough?  Some members of the new coalition government do not think so. Buried in the 177-page agreement to form a new coalition government is a clause that could punish companies who fail to comply with the gender quota by fines up to €10 million.¹  Such sanctions on non-compliant companies could help achieve gender parity in the country, but it remains to be seen what will come of this provision.