On 25 February 2021, the German Parliament discussed in its first reading the draft bill introduced by the Federal Government to supplement and amend the regulations for the equal participation of women in leadership positions (so-called Second Leadership Positions Act – “FüPoG II”). The draft aims to further develop the statutory provisions already established in 2015 with the so-called First Leadership Positions Act (“FüPoG I”) in order to increase the proportion of women in leadership positions and to close existing gaps.
FüPoG I introduced a fixed quota for supervisory boards of companies in the private sector, which are both, publicly listed and subject to parity co-determination. Since then, flexible quotas (target sizes) have applied to supervisory boards, management bodies and the top two management levels of publicly listed or co-determined companies.
The current legislative proposal is based in particular on an evaluation of FüPoG I, which revealed that women continue to be largely underrepresented in management positions and that a large number of companies have set themselves a target of zero for the proportion of women in management positions. Although FüPoG I is deemed to have set an important milestone on the road to greater equality, it is nevertheless considered necessary to improve the effectiveness of these measures through further mandatory legal requirements.
“Management Board Quota” in the sense of a minimum participation requirement
The most prominent amendment is the draft provision in Sec. 76 para. 3a sentence 1 of the German Stock Corporation Law (AktG-E), according to which the management board of publicly listed companies (AG and SE) with parity co-determination are required to appoint at least one woman and at least one man, provided that the management board consists of more than three members. Therefore, this proposed provision is not a quota in the true sense, but rather a minimum participation requirement at management board level.
The minimum participation requirement solely applies to companies that are publicly listed and at the same time subject to parity co-determination. Hence, this obligation once again covers the limited group of large companies which are considered to have a special impact on the market and therefore should serve as some kind of “role model”. The Federal Cabinet deliberately refrained from extending the requirement to other types of companies. The flexible quota is to be maintained, in particular with respect to medium-sized companies or family-run limited liability companies, which should have more flexibility regarding the organization of their respective executive bodies.
Corresponding to the fixed quota on the supervisory board under FüPoG I, an appointment in violation of the minimum participation requirement is void (so-called “Leerer Stuhl” (empty chair)). As long as a (more than three-member) management board has not yet had a female member, only a woman can effectively be appointed as a member of the management board. This applies both in case of a reoccupation of an existing position as well as in case of an occupation of a newly created position. In case of an en bloc appointment, the appointment as a whole is void if the minimum participation requirement is not met.
Extended disclosure and justification requirements for target sizes
For companies that are publicly listed or co-determined, the previous flexible quotas for leadership positions continue to apply. However, the draft of FüPoG II tightens the disclosure and justification requirements in this respect.
So far, the statutory provisions have not specified how the target figures are to be described (in practice, usually in percentages). The draft of FüPoG II now requires the specification of both the targeted number and the targeted proportion of women in the respective bodies or at the respective management level.
The determination of a zero target for the management board, the two top management levels below the management board and the supervisory board remains lawful – with the exception of the scope of the fixed quota and the minimum participation requirement. However, the proposed amendments establish the legal requirement that the determination of a target zero needs to be explained. According to the proposed wording of the provision, the decision of the management board or supervisory board must be explained in a clear and comprehensible manner; the reasoning on which the decision is based must be explained in detail in the justification. According to the Federal Government, the statement of reasons should take into account the exceptional nature of the target zero. Hence, the explanation should provide the public with a diligent and plausible decision. As a guideline for the level of detail, the explanatory memorandum of the draft states a length of 100 to 150 words.
Extended reporting requirements
The government draft also provides for a tightening of the reporting requirements under Section 289f of the German Commercial Code (HGB). Accordingly, in particular the justification for setting the target at zero and the compliance with the new minimum participation requirement must be included in the corporate governance statement (Erklärung zur Unternehmensführung) or the management and group management report.
The Federal Government also sees a need for action on the issue of sanctions. The sanction mechanism for violations of reporting obligations in connection with the setting of targets is to be improved and made more effective.
The extended reporting requirements are embedded in the system of sanctions under the German Commercial Code (HGB). Violations of the reporting requirements relating to target figures, deadlines and justifications can be prosecuted as administrative offenses. In this respect, there is a threat of severe fines in the future. In the case of capital market-oriented corporations, a fine of alternatively up to (i) EUR 10 million, (ii) 5% of the total annual turnover or (iii) twice the economic benefit derived from the administrative offense can be imposed. Increased monitoring of compliance with the reporting obligations by the administrative authority can be expected.
Entry into force
The minimum participation requirement for the management board shall apply to appointments of individual or several management board members after a transitional period of eight months following the entry into force of FüPoG II. However, existing mandates may be held until their scheduled termination. The management board positions therefore only have to be successively filled.
By contrast, the extended disclosure and justification requirements for setting target figures shall become effective immediately after FüPoG II comes into force.
The extended reporting requirements under commercial law shall for the first time apply to management reports and group management reports as well as corporate governance statements for the financial year beginning after 31 December 2020.
Whether the government draft of FüPoG II will be implemented in this form remains to be seen.