Gender balance quotas: The key to gender equality?

Dr Björn Otto
CMS, Cologne
bjoern.otto@cms-hs.com

Dr Ricarda Müller
CMS, Cologne
ricarda.mueller@cms-hs.com

Introduction

‘[…] by her life within the home, woman gives to the State a support without which the common good cannot be achieved.’ Although this sentence seems to be out of date from today’s perspective, it is still part of the Irish Constitution. However, the facts show that gender equality in modern Ireland has evolved beyond the values of the 1937 Act. With 74.3 out of 100 points, Ireland ranks seventh in the EU on the current Gender Equality Index, a score of 5.7 points above the EU’s average.[1] In particular, this includes the share of women on corporate boards, which is rising faster in Ireland than in many other European countries.[2]

The benefits of female leadership

Increasing the number of women in management positions may not only have a positive impact on a company’s image, but may also be beneficial from an economic point of view. Thus, the EU legislator also acknowledges that the ‘presence of women on boards improves corporate governance, as team performance and the quality of decision-making are enhanced by a more diverse and collective mind-set incorporating a wider range of perspectives.’[3] Indeed, there are numerous studies showing that diversity leads to more balanced decisions and enhanced professional standards by boards and that there is a positive relationship between gender diversity at top management level and a company’s financial performance and profitability, resulting in substantial long-term sustainable growth.[4]

The current situation

Despite these benefits, women continue to be vastly underrepresented in the highest decision-making bodies of companies; particularly, the proportion of women in top positions remains low. According to a study by the European Institute for Gender Equality (EIGE) published in October 2021, although the share of women on the boards of the largest listed companies registered in the EU has risen to 30.6 per cent, fewer than one in ten of these companies have a woman chair (8.5 per cent) or CEO (7.8 per cent).[5]

Furthermore, the EIGE observed significant differences among the EU’s 27 Member States. While the boards of the largest listed companies in France have nearly reached gender parity (45.3 per cent women), the share of women on boards in Hungary, Estonia and Cyprus remains under ten per cent.

The ‘Women on boards’ Directive (EU) 2022/2381

With the adoption of Directive (EU) 2022/2381[6] in November 2022, commonly referred to as the ‘Women on Boards Directive’, the EU legislator intends to establish minimum requirements in the form of binding measures to improve the gender composition of boards throughout the EU and, thus, to rectify existing imbalances. However, its provisions only apply to listed companies with at least 250 employees, which are regarded as ‘role models’ due to their size and economic importance.

Targets

The central element of the ‘Women on Boards Directive’ is the provision in Art. 5 (1), which obliges Member States either to ensure that:

• members of the underrepresented sex hold at least 40 per cent of non-executive director positions; or
• members of the underrepresented sex hold at least 33 per cent of all director positions, including both executive and non-executive directors.

According to the EU legislator, these targets should become a reality among the boards of all listed companies within the scope of application, by 30 June 2026.

Target achievement measures

1. Selection of director positions

One of the key instruments to achieve these goals, as derived from Art. 6 in connection with Recital 22 of Directive (EU) 2022/2381, is the implementation of clear and transparent selection processes for candidates to be appointed or elected to director positions. In particular, Member States must ensure that boards are established on the basis of neutral and unambiguous criteria, such as candidates’ qualifications, knowledge and skills, and that these criteria are defined in advance of the selection process.

Additionally, it must be ensured that, when choosing between candidates who are equally qualified in terms of suitability, competence and professional performance, priority is given to the candidate of the underrepresented sex (provided that none of the exceptions listed in Art. 6 (2) Directive (EU) 2022/2381 apply).

2. Reporting requirements

Furthermore, there are various reporting requirements stemming from Art. 7 Directive (EU) 2022/2381, which stipulate that (inter alia) listed companies must provide information to the competent authorities once a year regarding the gender representation on their boards and the measures taken to achieve the applicable objectives laid down in Article 5 (1) (EU) 2022/2381.

3. Setting of individual quantitative objectives

Member States that choose the first option from Art. 5 (1) Directive (EU) 2022/2381 (which only refers to non-executive director positions), also have to make sure that listed companies set individual quantitative objectives with a view to improving the gender balance among executive directors (Art. 5 (2) Directive (EU) 2022/2381).

Implementation of Directive (EU) 2022/2381 into national law

The Directive’s (minimum) requirements must be transposed into national law by 28 December 2024. However, as already indicated above , the need for transposition is expected to vary greatly among the EU members. While some (eg, Cyprus, Estonia, Hungary, Malta, Romania, Slovenia and Greece) still have a long way to go to meet the EU’s targets on the proportion of women on boards, the need for implementation in other Member States is likely to be much lower or even non-existent.

Against this background, Art. 12 Directive (EU) 2022/2381 provides for an ‘opt-out’ option that allows Member States in which listed companies have already reached a well-balanced proportion of sexes on boards to suspend the target achievement measures stipulated in Art. 6 and (where relevant) Art. 5 (2) Directive (EU) 2022/2381, as well as the reporting obligations of Art. 7 Directive (EU) 2022/2381. For those countries, the objectives laid down in Art. 5 (1) Directive (EU) 2022/2381 are deemed to have been achieved, meaning that there is no further need for action on their part. The same applies to Member States that have implemented fixed gender balance quotas requiring that members of the underrepresented sex hold at least 30 per cent of non-executive director positions or at least 25 per cent of all director positions in listed companies.

The situation in Germany

One of the Member States intending to make use of the ‘opt-out’ option in Art. 12 Directive (EU) 2022/2381 is Germany. With the so called ‘Management Positions Act I and II’ (Führungspositionengesetz I[7] and II[8], ‘FüPoG I and II’), gender balance quotas have already been introduced into national law in 2015/2021.

Fixed gender balance quotas

According to section 96 (2) of the German Stock Corporation Act (Aktiengesetz, AktG), supervisory board members (corresponding to non-executive directors within the meaning of Directive (EU) 2022/2381) must be at least 30 per cent female and at least 30 per cent male in listed companies that are parity co-determined. Additionally, section 76 (3a) AktG states that if the executive board of such a company consists of more than three directors, at least one of them has to be a woman and at least one of them a man. Appointments of executive directors in violation of this participation requirement are null and void.

Setting individual targets as an alternative to fixed quotas

Given the strict legal requirements (a company must be listed and subject to parity co-determination to fall within the scope of sections 96 (2) and 76 (3a) AktG), a fixed quota is not binding for the majority of companies in Germany. However, this does not mean that these companies are exempt from establishing a gender balance. The obligations introduced by FüPoG I and II are not limited to setting fixed quotas, but also include obligations to determine individual targets for the proportion of women in leading positions applicable to a wider range of entities, in particular to non-listed companies. In this regard, German law even goes beyond the standards of Directive (EU) 2022/2381.

Sections 36, 52 German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG)

Such provisions can be found, for example, in sections 36, 52 GmbHG, which oblige limited liability companies (GmbHs) that are parity co-determined to set individual targets for the proportion of women in the management (Geschäftsführung), on the supervisory board (Aufsichtsrat), and the first two hierarchical levels below management, whereby, according to the explanatory memorandum, the relevant levels are not to be determined by economic definitions, but on the basis of the actual circumstances in the company.

Defining the targets

In principle, it is at the discretion of the relevant company (ie, the shareholders’ meeting or, where this task has been transferred, the supervisory board, for the targets related to the management and supervisory board, and the managing directors for the targets related to the two levels below management) to set targets for the aspired quota of women. There are no minimum targets prescribed by law. However, there are two limitations that need to be observed. First, if the proportion of women is below 30 per cent when the target is set, the targets may not fall short of the existing proportion of women. Furthermore, if a ‘target zero’ (ie, no female members) is chosen, which is generally permissible under sections 36, 52 GmbHG, the law requires companies to provide ‘clear and comprehensible’ reasons for such a decision. Additionally, together with the targets, deadlines not exceeding five years must be set by which the targets are to be achieved.

Reporting and disclosure requirements

The obligations arising from sections 36, 52 GmbHG are accompanied by related reporting and disclosure requirements, a mechanism which can also be found in the ‘Women on Boards Directive’ (see above). In particular, managing directors are obliged to provide information on the defined targets, the deadlines by which the targets are to be achieved and, if applicable, the reasons for setting a ‘target zero’ in the annual management report (Lagebericht) (section 289f German Commercial Code (Handelsgesetzbuch, HGB)), which is published in the Federal Gazette (Bundesanzeiger).

Sanctions

Neither section 36 nor section 52 GmbHG provide for sanctions in the event that a company fails to achieve the targets it has set itself on the proportion of women. However, failure to achieve the targets must also be indicated in the management report and the relevant reasons explained. In other words, based on the principle of ‘naming and shaming’, the legislator assumes that companies have a vested interest in achieving the targets they have set themselves in view of their external perception.

If, on the other hand, managing directors fail to comply with their statutory reporting obligations, this may constitute an administrative offence punishable by a fine or, under certain circumstances, even a criminal offence (sections 331, 334 HGB).

Outlook

In Ireland, a referendum on ‘a woman’s place in the home’ is planned to be held in November 2023. It can be expected that, as a result, the 1937 Constitution will be amended and adapted to a modern understanding of gender equality and non-discrimination. Whether the underrepresentation of women on boards and in top positions across the EU can be eradicated just as significantly remains to be seen.

Since the EIGE’s studies show that government intervention is an appropriate tool to tackle gender imbalances, the adoption of the ‘Women on Boards Directive’ at EU level is certainly a step in the right direction. Even if the failure to achieve the objectives set out in Art 5 (1) Directive (EU) 2022/2381 is not penalised as such, with the reporting obligations and sanctions set out in Art. 7, 8 Directive (EU) 2022/2381, the Directive provides for measures to move companies towards gender parity.

Apart from that, hope is not lost that companies will recognise the economic value of gender diversity in management positions and realise that it might be to their own benefit to implement the measures required by the Directive. It is, after all, no longer 1937.