On 6 March 2015, the German Bundestag passed a law (the Frauenquote) that aims to ensure the equal participation of women and men in the management of businesses and public office. The Frauenquote entered into force on 1 May 2015.

THE CURRENT SITUATION

Women are heavily underrepresented in leading positions in both the German private and public  sectors. At the end of 2014, the proportion of women on the supervisory boards of the top 200 German companies amounted to just 18 per cent, and on their executive boards an even  poorer 5 per cent. These figures are even more striking when compared with the international  situation and the German population.

The proportion of women on boards in other countries is, largely, significantly higher. Finland,  France, Norway and Sweden have much more equal proportional representation, according to Egon  Zehnder’s 2014 European Board Diversity Analysis. In 2003, Norway became the first country in  Europe to legislate boardroom quotas. It was later joined by France, Ireland and Spain, all of  which set their minimums for female representation on boards at 40 per cent. The United States has  also seen female representation grow to up to 21.2 per cent of board seats, even without legislative mandates.

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More than half the German population, and more than half the Germans who graduate from college or university, are female. There is therefore no socio-political explanation for the underrepresentation of women on executive boards in Germany.

This underrepresentation not only reveals a situation inconsistent with the constitutional principle of gender equality as set forth  in Article 3 (2) of the German Constitution (Grundgesetz), it also presents a problem for the German economy, given its existing lack of qualified  professionals. Furthermore, as scientific research has proved that mixed-gender teams achieve better work results than same  gender teams, it is potentially preventing German businesses from achieving their full potential.

Against this background, there is not only strong political interest in taking action  to turn the  constitutional requirement  into reality, but there is also a commercial imperative for increasing  the number of women in leading positions in businesses.

THE QUOTA SYSTEM

Even if the new regulation is commonly referred to a “women’s quota”, (as, in the medium-term it  will likely counteract the underrepresentation of women) the law is legally constructed to ensure  that both genders are represented by as many individuals as necessary to meet the mandatory  statutory minimum quota.   The enactment of the Frauenquote has the two following main effects:

First, the law will require large listed companies to fill 30 per cent of their supervisory board seats with female non- executive  directors. Second, it will require large and medium sized businesses to set self-determined targets  for the proportion of female top managers and supervisory board members.

Mandatory Quotas

As of 1 January 2016, the percentage proportion of women to men on the supervisory boards of listed  companies that are subject to co-determination in accordance with the German Co-Determination Act (Mitbestimmungsgesetz), the Coal, Iron and Steel Co-Determination Act  (Montan-Mitbestimmungsgesetz) or the German Supplementary Co-Determination Act (Mit- bestimmungsergänzungsgesetz), needs to reach each at least 30:70. Roughly speaking, this 30:70  figure will apply   to listed companies employing more than 2,000 employees.

Generally, compliance with the quota is determined taking into account the whole board, i.e., the representatives of both the shareholders and the employees. Only if either the shareholders’ or the employees’  representatives raise a formal objection (Widerspruch), will the “separate compliance” method (Getrennterfüllung) apply, and the number of seats equalling the 30 per cent requirement will be  calculated for each side separately. Formal objections are restricted to special cases, for example if the quota is only met because one of the two sides has more women than it “needs” and the other has less.

Self-Determined Target Quotas

Companies that are either listed or subject to co-determination in accordance with the German One  Third Participation Act (Drittelbeteiligungsgesetz) will set their own target quotas for their executive board, the two  management levels directly below the executive board,  and their supervisory board. Self-  determination will apply to companies employing more than 500, but less than 2,000, employees.

The target quotas of the executive board and the two management levels below the board will be determined by the supervisory board.  The targets for supervisory board will be set by the executive board.

The target quota has to be determined by 30 September 2015 and must not be lower than the actual  current proportion of women at that time, if the actual current proportion is below 30 per cent. There is no minimum target figure if the actual current proportion is already 30 per cent or more.  If that is the case, the target figure can be set freely and consequently be (much) lower than the  status quo and/or 30 per cent. Even a fall to 0 per cent is possible.

Companies to which the rules apply now must reach their self-determined quotas no later than 30  June 2017. Companies that come into existence in the future,   or at some point reach the threshold at which the Frauenquote becomes applicable, must achieve their self- determined quotas within five  years of setting them.

OBLIGATION TO INFORM, PUBLISH AND REPORT

In order to incentivise the implementation of the mandatory quota and the self-determined target quotas, the Frauenquote demands that companies publish their target quotas,  whether or not those quotas have been met (at the end of the set time period) and, in cases of  non-compliance, the reasons for the failure.

SANCTIONS FOR INFRINGEMENTS

Compliance with the Frauenquote is mandatory. If the supervisory boards  of companies falling  within the mandatory quota rule are not awarded as per the statutory 30:70 percentage proportion,  the election of supervisory board member(s) will be void to the extent to which the quota is not  met. As a consequence, the position of the seat filled by the “wrong” gender will be vacated and  will remain empty. In practice, the company’s management has  to request a court to fill the empty chair as it is the management’s duty to make sure a legally and properly established supervisory board is  created. Obviously, the court will also have to strictly comply with the Frauenquote. In the  meantime, the supervisory board can, under certain circumstances, still work effectively.

If the self-determined target quota is not reached, no direct sanctions will be triggered.

START OF A CULTURAL CHANGE?

It is unlikely, that the Frauenquote will promote a dramatic change in German business culture as  only 100 companies in Germany will actually be affected by the mandatory 30 per cent women requirement. Around 3,500 companies will be able to determine  their own quotas and it is unlikely that any will improve on the existing status quo. Moreover, the  new statute only strictly regulates gender parity on supervisory boards and remains rather soft on  management levels.

Finally, it is worth mentioning that, laudable though the Frauenquote is, it does not address the  equally inexplicable gap of, on average, 22 per cent between the salaries of women and men in the same  position, and with the same educational background.