12 March 2015

The women's quota is here to stay

1. Introduction

The most important achievement since the introduction of women's suffrage says the German Federal Minister of Justice; merely a political gesture say others. On 6 March 2015, German parliament, the Bundestag, passed a law for the equal participation of women and men in positions of leadership in the private and public sectors.  The law is aimed at increasing the proportion of women at management level by introducing a minimum quota and targets to which the affected companies commit. 

A mandatory women's quota for supervisory boards in Germany will be introduced for the first time under this law. From 2016, large listed companies must increase the proportion of women on their supervisory board to 30%. By the end of September 2015, medium-sized companies must stipulate binding targets for increasing the proportion of women at management level. What does this mean for companies? 

2. Minimum quota on the supervisory board

From 1 January 2016, there will be a fixed 30% women's quota for new appointments to the supervisory board of listed companies which are subject to the co-determination with equal participation regime (paritätische Mitbestimmung) under the German Co-determination Act (Mitbestimmungsgesetz). The quota therefore applies to public limited companies (Aktiengesellschaft) and partnerships limited by shares (Kommanditgesellschaft auf Aktien), usually with more than 2,000 employees, as well as to European Companies (SE) if they are subject to co-determination under the German Act governing the Participation of Employees in a European Company (SE-Beteiligungsgesetz). Around 100 companies are thus affected by the women's quota.

The supervisory board must comprise a proportion of at least 30% women. It is irrelevant whether the majority of women is on the shareholder's side or on the employee's side as only the total number of women counts. 

Only ballots that are initiated after 1 January 2016 are affected by the minimum quota. Elections of employee representatives are based on existing law if the electoral process ends before 31 December 2015. Existing supervisory board appointments remain in place until their scheduled termination beyond the date of entry into force of the new regulations.

Companies are under an obligation to provide information regarding the achievement of the quota as well as the reasons for any failure to achieve such quota. If the quota is not met, any election that does not take the quota into account is void. The seats set aside for the under-represented sex remain vacant by law (the "principle of the empty chair"). Both employees and shareholders will therefore seek compliance with the quota in order not to endanger parity on the supervisory board.

3. Targets for the governing body and the two top management levels

Companies that are either listed or subject to co-determination but that do not meet both of these conditions are, however, only required to set specific targets for the proportion of women on executive boards, supervisory boards and the top two management levels below the board of directors as well as time limits within which the targets are to be achieved. 

This affects companies in the form of a public limited company (Aktiengesellschaft – AG), a partnership limited by shares (Kommanditgesellschaft auf Aktien – KGaA), a registered cooperative (eingetragene Genossenschaft – eG), a mutual insurance association (Versicherungsverein auf Gegenseitigkeit – VVaG), a limited company (Gesellschaft mit beschränkter Haftung – GmbH) and a European Company (Societas Europaea – SE) usually with more than 500 employess. This currently affects about 3,500 companies. Those companies which fall into the fixed women's quota on the supervisory board are, in addition, subject to the targets for the respective governing body (e.g. the executive board) and the two top management levels.

Companies must publish the targets and their attainment. The law does not stipulate a minimum target. It does, however, include a prohibition on imposing worse conditions (Verschlechterungsverbot): if the proportion of women on one management level is below 30%, the target may not be lower than the status quo. Companies must also set deadlines for reaching the targets; the first deadline, to be set no later than by 30 September 2015, may not exceed 30 June 2017. Any deadlines thereafter may last up to five years.

The targets and deadlines, the achievement of targets within the deadlines and any failure to achieve them as well as the reasons for such failure must be published. 

The law does not lay down any sanctions in the event that the company does not achieve the target specified within the given deadline. The company must simply set out the steps taken to achieve the target and the reasons for its failure to comply with it.

4. Conclusion

Although the law has been passed by parliament without any dissenting votes, it is highly controversial both politically and socially. It is no surprise that the constitutionality of the law is often questioned – the encroachment upon entrepreneurial freedom is seen as being too severe. It remains to be seen whether a constitutional challenge will succeed. In the meantime, companies will have to play by the new rules.

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