Women on Boards Directive: (Uniform) gender quotas for listed companies throughout Europe?
40 % quota for the supervisory board and 33 % quota for the management board and supervisory board - is there a need for action for listed companies in Germany?
Directive (EU) 2022/2381 of the European Parliament and of the Council of 23 November 2022 on improving the gender balance among directors of listed companies and related measures, the "Women on Boards Directive", was adopted by the European Parliament on 22 November 2022 and published in the Official Journal of the EU on 7 December 2022. It entered into force on 27 December 2022, 20 days after it was published in the Official Journal. Member States have two years from this date to implement the provisions.
Women on Boards Directive: gender quotas for listed companies in the EU
As early as 2012, the European Commission had presented a proposal for a uniform gender quota in management positions across Europe. After almost a decade of being blocked in the Council by various Member States, an agreement was reached between the Parliament and the Council in June 2022: The Women on Boards Directive which has since been adopted requires Member States to ensure that certain gender quotas apply in listed companies by 30 June 2026. Micro-enterprises and small and medium-sized enterprises (SMEs) are excluded from this requirement (Art. 2, 2nd sentence Women on Boards Directive).
At least 40% of the "non-executive directors" - according to Art. 3 no. 5 of the Directive, these are the supervisory board members in a dual board system - or 33% of all directors, which includes both the "executive directors" - according to Art. 3 no. 4 of the Directive these are the board members in a dual board system - and the "non-executive directors", should belong to the underrepresented gender. Directors in this sense also include employees' representatives (Art. 3 no. 3 of the Directive), so they are also taken into account when fulfilling the quota.
[In the following, a dual board system is used as the basis; therefore the corresponding terms "supervisory board" and "management board" are used throughout, whereas the Women on Boards Directive uses a unitary system as its basis and uses the terms "non-executive directors" and executive directors"]
With the adoption of the Federal Equality Act (FüPoG I) and the Second Leadership Positions Act (FüPoG II), the German government has already taken (initial) measures to strengthen gender balance in management positions in listed companies in recent years, see also our articles on the quota for women on the management board and in management positions and on the minimum proportion requirement. Against this background, the question arises as to whether new obligations for listed companies in Germany will result from the Women on Boards Directive.
Objectives with regard to gender balance on boards (Art. 5 Women on Boards Directive)
Member States may choose between two alternative mandatory quotas with regard to gender balance on boards: on the one hand, a quota of at least 40% of the underrepresented gender can be set for the supervisory board of the companies concerned (Art. 5 (1a) Women on Boards Directive). If a Member State chooses this option, individual quantitative objectives for improving the gender balance on the board must also be set (Art. 5 (2) Women on Boards Directive). The Commission's 2012 proposal already provided for the quota of 40%.
The second option, however, is new in comparison to the previous proposal: a Member State can now alternatively choose to pursue a common quota for the supervisory board and the management board of a listed company. With this second option, the underrepresented gender must hold at least 33% of the positions on both boards (Art. 5 (1b) Women on Boards Directive).
Appointments to boards based on a transparent selection process: clear, neutral and unambiguous criteria without discrimination (Art. 6 Women on Boards Directive)
As a means of achieving the objectives, Art. 6 of the Directive states that the selection process carried out by the companies for board appointments should be transparent and carried out according to clear, neutral and unambiguous criteria without discrimination.
According to recital 22, this is one of the most important instruments for implementing the Directive. Possible selection criteria include "professional experience in managerial or supervisory tasks, international experience, multidisciplinarity, leadership, communication skills, networking abilities and knowledge in specific relevant areas such as finance, financial oversight or human resources management" (recital 39 Women on Boards Directive).
Comprehensive reporting obligations to assess the progress of the obligated companies (Art. 7 Women on Boards Directive)
In addition to the companies' obligation to report on their website on the proportion of the genders on their boards, the measures taken and the reasons for not achieving quotas (pursuant to Art. 5 (1) Women on Boards Directive) or individual quantitative objectives (pursuant to Art. 5 (2) Women on Boards Directive), the Women on Boards Directive requires companies to submit corresponding information to the competent national authorities on an annual basis.
In addition, the information should form part of the corporate governance statement. Finally, Member States will be required to disclose, through easily accessible lists, which listed companies have reached the 40% or 33% quota.
Penalties for non-compliance with the Directive (Art. 8 Women on Boards Directive)
The penalties for breaches of the additional individual quantitative objectives for the management board (Art. 5 (2) Women on Boards Directive) if the gender quota is set at at least 40% for the supervisory board (Art. 5 (1) Women on Boards Directive), for breaches against the requirement to provide a transparent selection process and for breaches against the reporting obligations should be effective, proportionate and dissuasive.
The Directive lists fines or the possibility for a judicial body to declare a decision concerning the selection of a member of the supervisory board or management board null and void as possible sanctions. However, failure to meet the gender quota of 40% for the supervisory board or 33% for the management board and the supervisory board as such (Art. 5 (1) Women on Boards Directive) will not be sanctioned (see recital 48 and the wording of Art. 8 (1) Women on Boards Directive).
Opting out of the selection process (and fiction of quotas) (Art. 12 Women on Boards Directive)
With a view to the fact that measures have already been taken in some EU Member States - such as Germany through the Federal Equality Act (FüPoG I) and the Second Leadership Positions Act (FüPoG II) - to achieve a more balanced representation of men and women in boards, the Women on Boards Directive provides the possibility to opt out (against the background of the principle of subsidiarity):
Member States may suspend the application of the rules on the selection process under certain conditions. In this respect, there are two alternatives. According to the first alternative (Art. 12 (1a) Women on Boards Directive), the underrepresented gender must already make up at least 30% of the supervisory board members or at least 25% of management board and supervisory board members in listed companies. The second alternative (Art. 12 (1b) Women on Boards Directive), on the other hand, means that national law (i) must require these same quotas (of 30% and 25% respectively), (ii) provide for effective, proportionate and dissuasive enforcement measures in the event of non-compliance with the aforementioned quotas (of 30% and 25% respectively), and (iii) require that all listed companies not covered by that national law set individual quantitative objectives for members of the management board and the supervisory board.
If the "opt-out" is used with regard to the requirements for the selection process, a fiction also applies with regard to the (stricter) quotas of 40% and 33% of the Women on Boards Directive: If a Member State opts out in this sense, the (stricter) quotas of the Women on Boards Directive are deemed to be fulfilled (see Art. 12 (1) 2nd sentence Women on Boards Directive).
Germany can and will make use of the second option to opt out - see also the information on the website of the Federal Ministry for Family Affairs, Senior Citizens, Women and Youth dated 25 November 2022 according to which there is no longer a need for implementation in Germany. This is because Germany already fulfils the three aforementioned conditions of the second option:
- In Germany there are already binding gender quotas for listed companies and companies with parity co-determined boards: section 96 (2) Stock Corporation Act (AktG) stipulates a mandatory gender quota of 30% for supervisory boards (since the Federal Equality Act (FüPoG I)). In addition, section 76 (3a) Stock Corporation Act (AktG), which was recently introduced through the Second Leadership Positions Act (FüPoG II), now stipulates a minimum proportion requirement for management board members. Boards consisting of more than three members must be composed of at least one woman and one man.
- Section 96 (2) Stock Corporation Act (AktG) sanctions a failure to meet this requirement with the nullity of the election or appointment (as, incidentally, does section 76 (3a) Stock Corporation Act (AktG)).
- Furthermore, section 111 (5) Stock Corporation Act (AktG) applies to listed companies that are not subject to parity co-determination and are thus exempt from the aforementioned mandatory gender quotas. This provision stipulates that the supervisory board sets target values for the proportion of women on the supervisory board and the management board.
In Germany, this means that (for the time being) the current gender quotas and the existing requirements for selection process will remain in place.
Opting out of the reporting obligation (Art. 7 (4) Women on Boards Directive)
In addition to the possibility to opt out pursuant to Art. 12 Women on Boards Directive, Art. 7 (4) of the Directive also provides for such a possibility with regard to the comprehensive reporting obligations: For Member States of the EU that
suspended the application of Article 6 pursuant to Article 12
the rule is that they can refrain from transposing the new reporting obligations into national law if the
national law provides for reporting requirements that ensure the regular publication of information regarding the progress made by listed companies towards a more balanced representation of women and men on their boards.
For listed companies in Germany, the obligation to prepare and publish a corporate governance statement in accordance with section 289f Commercial Code (HGB) applies, so Germany can also benefit from the possibility of opting out with regard to the reporting obligations standardised in the Women on Boards Directive. In this respect, the Women on Boards Directive provides for a comprehensive opt out, so companies are not required to disclose information to competent authorities on top of their obligation under section 289f Commercial Code (HGB). There is also no obligation in Germany to disclose in easily accessible lists which listed companies have reached the 40% or 33% quota.
Gender quota: are listed companies the role model for the entire European economy?
The Women on Boards Directive emphasises the particular economic importance and visibility of listed companies and their impact on the market (see recital 27). It states that these companies "set standards for the wider economy" and " their practices can be expected to be followed by other types of companies". It remains to be seen whether listed companies can live up to this strong role model function by, on the one hand, the supervisory boards of listed companies that are not subject to co-determination rights setting ambitious quotas (pursuant to section 111 (5) Stock Corporation Act (AktG)) for management boards and supervisory boards and, on the other hand, the other companies in Germany that do not fall within the scope of application of the Federal Equality Act (FüPoG I) or the Second Leadership Positions Act (FüPoG II) promoting a more balanced representation of the genders in their management bodies through voluntary measures.
It is also interesting to note the new dimension this adds to the proposal often heard from institutional voting advisors to shorten the terms of office for supervisory board members or, at any rate, to only exhaust the statutory maximum term under section 102 (1) Stock Corporation Act (AktG) if appropriate reasons are given - see in this respect, for example, the proposal (on page 6) in the Glass Lewis Proxy Voting Policies Germany for 2023: According to recital 15 of the Women on Boards Directive, it is "necessary to encourage a regular turnover of directors" in order to eliminate the specific obstacles for women as directors. It remains to be seen whether the various "adjustments" can increase the proportion of women in management bodies and - as some studies suggest and as the Women on Boards Directive postulates in recital 16 that it is "widely acknowledged" - have a positive influence on the quality of decisions in companies and that corporate governance as a whole can be positively influenced as a result and whether, in the long term, the growth of the economy can be stimulated and the demographic challenges in Europe can be met.
The authors would like to thank Tabea Schramm, Research Associate, for the assistance in writing this article.
