The EU Quota for Women on Boards

After a decade-long stagnation, the European Parliament and member states' negotiators agreed on a bill to increase the proportion of women on corporate boards. Germany, like many other European countries, started down the path toward female quotas years ago.

The European Union plans on a mandatory quota for female representation in management positions of listed companies. By 2026, they are to choose between two models. Either at least 40 percent of nonexecutive supervisory board members must be women or supervisory and executive boards must consist of an average of 33 percent women. Those who fail to recruit accordingly will have to pay a fine. By way of comparison, according to statistics from the European Institute for Gender Equality, 31.6 percent of supervisory board members and only 8 percent of executive board members in the EU are female.

This decision has been a long time coming. Ten years ago, in 2012, the European Commission (EC) tried in vain to establish female quotas. At that time, Germany in particular stood in the way of the respective legislation, under the leadership of the first female chancellor, Angela Merkel. The head of the EC, Germany's Ursula von der Leyen, seized the opportunity of the recent change of government and put the matter on the EU's agenda again. France also supported the initiative.

Germany, the former European frontrunner in terms of the gender pay gap, is now positioned in the lower midfield with 19.2 percent, but still below the European average. This despite the fact that women in Germany, as in many other European countries, are on average better educated than their male colleagues. It should be noted, however, that many believe that unequal pay is based on other significant factors than structural inequality, such as women's poorer performance in salary negotiations compared to men.

Nevertheless, even after the EU's initiative, Germany does not see itself under increased pressure to act. This is because the Second Leadership Positions Act (FüPoG II), following the First Leadership Positions Act (FüPoG) dated 2015, has tightened the male to female ratio requirements for executive and supervisory boards of German companies since August 2021. Every quarter, the federal government proudly reports the success of these laws, despite its generally poor position by European comparison. Since 2015, women on supervisory boards of listed and joint-control companies, which have to meet a fixed female quota of 30 percent, have increased by 13.3 percent growth to 35.2 percent.

However, these are only a few companies in Germany. For companies either listed or joint-control, the quota was initially voluntary. They were only obliged to set targets for increasing the female quota on their corporate boards as well as upper management levels. In fact, they were free to even set a zero quota. The 30 percent-hurdle was not reached voluntarily. The proportion of women on the supervisory boards of such companies amounts to 14.4 percent and 7.8 percent on executive boards, in the first and second management levels below the executive board 14.3 percent and 18.5 percent. It seems that it was too much to ask to bring about a cultural rethink through purely inspirational quota regulations alone. Newly, with the FüPoG II, it is still possible to set a target of zero, but this must now—at least—be clearly and reasonably justified.

Are Quotas Needed?

While local politicians see themselves as being on the best way to realizing the German constitution, Article 3 of which stipulates equal rights for men and women, one question arises. Is such approach any good at all?

From a purely pragmatic point of view, compulsory quotas lead to results, as can be seen in the case of listed joint-control companies. The initial reason for the historical male to female disproportion in corporate boards might be that men, who clearly dominate the management level, used to tend to prefer hiring another man. Now they cannot anymore. Also by quotas, women are breaking the well-known "glass ceiling." This ceiling is a social barrier that women—despite high qualifications—are often confronted with, once they want to advance to upper management, while male colleagues with comparable qualifications usually succeed in doing so.

Further, one could agree that female quotas force companies to become economically stronger. Women are supposed to bring new perspectives and skills to the table. A healthy mix of stereotypical male aggressiveness and female sensitivity is said to give rise to a true cooperation in management ranks. More profits, more discipline from employees, higher satisfaction and trust from shareholders are said to result. Lastly, for the image of a company, a few women in the press photos are not wrong either, as diversity topics fortunately become more important in the business world.

However, this does not convince everyone. In some people's opinion, the political objective is to favor women over men—discrimination against men in favor of women, so to speak. The question of how to conciliate female quotas and the German General Equal Treatment Act (AGG) is particularly interesting at this point. According to this law, companies are not allowed to discriminate against employees and job candidates on the basis of gender. Members of executive bodies can also invoke this law if it affects their access to employment or their career advancement. A job advertisement aimed specifically at women? This will make some German labor lawyers' stomachs turn. However, on the principle of the unity of the legal system and the positivity of the measure, such entrepreneurial action is reportedly legally justified.

The most convincing counterargument is probably that the qualifications of a job candidate should always be the decisive factor in filling a position. Parallel to this, critics complain that quotas certainly do not eliminate the causes of gender-specific inequality. The key point here is the ability to reconcile family and career. At least from a statistical point of view, it cannot be due to women's lack of qualifications that very few make it to the top. The fact is that mothers still take care of their children more often than fathers, even if both parents work. House, dog, children and a full-time management position still sound unrealistic to many, even though some glowing reports of women in business tell it differently. And quotas do not change that.

This is certainly only a brief outline of the many pro and con arguments being discussed with regard to the topic. Whether the advantages of female quotas outweigh the disadvantages for one personally does not change the fact that companies seated in Europe might soon have to deal with the mandatory policy. This could be bothersome for countries that in the past have tended to rely on incentives to promote women (for example, Spain), but equally affirming to those that have implemented mandatory quota regulations much earlier (very successfully, for example, Norway).

Lea Christ is a dispute resolution associate with DWF LLP in Munich. © 2022 DWF LLP. All rights reserved. Reposted with permission of Lexology.