FüPoG II - The gender quota on the Executive Board

FüPoG II - The gender quota on the Executive Board

July 27, 2022, Covington Alert

From August 1, 2022, the new provisions of the German Second Leadership Positions Act, or FüPoG II (“Act to Supplement and Amend the Regulations for the Equal Participation of Women in Management Positions in the Private Sector and the Public Sector”; available here) will take effect. Every appointment of board members must meet the gender quota from August 1, 2022. The predecessor regulation, the First Leadership Positions Act ("Act for the Equal Participation of Women and Men in Leadership Positions in the Private and Public Sector"), or FüPoG I, already introduced such a quota for supervisory boards. Although the intentions of FüPoG I have largely been fulfilled, the legislator still saw a need for action, particularly in those areas where the quota was voluntary.

What you need to know

FüPoG I

FüPoG I came into force in 2015. It established a fixed quota of at least 30% of both genders for supervisory board members of listed companies and companies with equal codetermination. Since then, vacancies must be filled by the underrepresented gender. In the case of listed companies or companies with equal codetermination, flexible quotas, so-called target figures, of women on supervisory boards, management bodies and the top two management levels below the executive board must also be set. The law does not provide for sanctions in the event of failure to meet the specified target.  In practice, therefore, the setting of a target of "zero" is unfortunately not uncommon.

FüPoG II

Minimum participation of women and men

The German government has now passed FüPoG II, which came into force on August 12, 2021, and supplements FüPoG I. FüPoG II focuses on executive boards: listed companies that are subject to the Codetermination Act, i.e. have more than 2,000 employees, must fill one position with a woman and one with a man on their executive and administrative boards with more than three members. This provision applies to stock corporations (AG) as well as to European Companies (SE) (Section 76 (3a) AktG). The minimum participation must be observed for new appointments from August 1, 2022. An appointment contrary to this "staffing rule" is void.

Disclosure of the proportion of women

In addition to the already applicable disclosure regarding flexible targets from FüPoG I for the proportion of women in management positions and the disclosure regarding compliance with the fixed gender quota on supervisory boards, there are further obligations for the companies concerned: listed companies or companies with equal codetermination must publish targets for the proportion of women for the two management levels below the executive board (Section 76 (4) AktG) and co-determined limited liability companies must publish targets for the proportion of women for the two management levels below the management board (Section 36 p. 2 GmbHG). The targets must describe the targeted proportion of women at the respective management level and, if expressed as a percentage, must correspond to full numbers of persons.

Obligation to justify the "zero" target value

If companies plan not to hire any women at one of the management levels, they must justify the setting of this "zero" target. The justification must set out in detail the considerations on which the decision is based (Section 76 (4) sentence 4 AktG). If the proportion of women is below 30% when the targets are set, the targets may no longer fall below the proportion achieved in each case. Companies must also set deadlines for achieving the targets. These may not be longer than five years in each case. Companies which do not set a target or set a target of "zero" without justification may be sanctioned pursuant to Section 334 HGB (breach of Section 289f HGB). These regulations apply to supervisory boards and management boards (in the case of a GmbH) or executive boards (in the case of an AG) as well as the two management levels below management or the management board.

In the event of a breach of the reporting obligation or the obligation to substantiate the reasons, fines of up to € 10 million or 5% of total annual turnover may be imposed. Substantial sums are therefore at stake for the companies concerned.

Changes to the corporate governance statement (Section 289f HGB)

Companies covered by the FüPoG regulations are subject to extended reporting obligations as part of their corporate social responsibility, which also relate to ESG criteria. FüPoG legislation can be classified as "gender law" under "S" of ESG. Pursuant to Section 289f (2) No. 5 of the German Commercial Code (HGB), listed companies or companies with equal codetermination are required to include information on the flexible targets for the proportion of women in management positions and on compliance with the fixed gender quota on the supervisory board in their corporate governance statement. They must report on the extent to which they comply with the requirements for the mandatory gender quota for the management board.

In addition to this reporting obligation, these companies are also required to justify the determination of the "zero" target for companies that do not bring a woman on board (No. 4). The extension of the reporting obligation relates to the participation of women on supervisory boards, management boards and the two management levels below the management board. The expansion is to be welcomed and is consistent with the general trend to promote women on their way into management positions. ESG in general is - rightly - gaining in importance. It is therefore not surprising that, according to recent studies (e.g. by Odgers Berndtson), in particular those companies that have been committed to ESG criteria for some time have initiated the path to more diversity in top management. However, ESG criteria are not only applied by such companies in the composition of their management, but increasingly also in the composition of the teams (diversity!) of commissioned external consultants. This is a positive and definitely the right trend.

This applies all the more as the new regulations are unfortunately not immune to "circumvention" and provide corresponding room to maneuver. Higher quotas for women do not automatically mean more co-determination rights for this group. In 2022, for example, the size of executive boards fell for the first time to an average of five people, which would lead to an increase in the proportion of women from just under 17 to 21 percent in a company with one female board member. However, this is obviously not necessarily associated with a corresponding increase in responsibility.

The following development is therefore also to be welcomed: The EU (the Council and the European Parliament) also decided in June 2022 to introduce gender quotas in management bodies of listed companies. From 2026, companies will be obliged to comply with the quotas. At 33% and 40% respectively, the quotas are higher than those introduced in Germany. Member states are to have a choice in implementation: If member states decide to include both executive and non-executive management bodies, the quota is to be 33%. If only non-executive management bodies are included, the quota is to be 40%.

The clear aim is to create a stronger focus in the public debate on the issue of the advancement of women and to promote a long-term change in corporate culture towards more women in management positions. Companies should do more to ensure equal participation of women and men in management positions.

Voluntary quotas set by the companies themselves have not been effective. By contrast, the quota in supervisory boards introduced in Germany in 2015 has now resulted in a 34.9% share of women in DAX40 companies (as of March 1, 2022). And the quota on management boards introduced in 2021 is also having an impact: on March 1 of this year, the proportion of women on DAX management boards was 14.3%, higher than ever before (source: Allbright Foundation).

In addition, the results of the rigid quotas on supervisory boards introduced in 2015 are extremely positive: Mixed management levels are more successful, which has been proven by studies. Due to different approaches, work cultures and the different crisis management of men and women, better decisions are being made and corporate goals are better achieved. This results in a win-win situation, which also suggests that the right trend will continue.

It is true that only around 70 companies in Germany are affected by FüPoG II. But it is to be hoped that these 70 large companies will act as role models for smaller companies with regard to diversity at management level. Incidentally, it is to be expected that legislative efforts to significantly increase the proportion of women in management positions will expand in the coming years.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Employment practice.