Increasing gender equality on board level through stay-on-board regulations

A. Maternity protection for board members under European Union law

Maternity leave is an instrument that offers working mothers paid or unpaid time off to care for their newborn children. Art. 8 of the Council Directive 92/85/EEC ¹ provides for mandatory maternity leave within the European Union of at least two weeks with a goal of fourteen weeks, national laws may provide for longer periods. These rules are valid only for employees. In the decision of the European Court of Justice as of 11 November 2010, ² the court decided in the case of a pregnant managing director in a Latvian company that under Latvian labour law, dismissals during pregnancy are prohibited, whereas, under Latvian commercial law, a managing director may be dismissed at any time. In the Danosa decision, the European Court of Justice developed rules to check if a board member is to be seen as an employee, the most important characteristic is subordination with sub-criteria that ask for the scope and content of instructions from the company owner(s), the framework within which the tasks are to be performed, the nature of the duties that are delegated to the board member, and so on.

For executive board members of stock corporations, maternity leave under the employee definition of the European Union, is in a two-tier system not applicable, as the board members of a two-tier system company are independent of any instructions. Therefore, such a board member has no right to ask for maternity leave. Independent from that, maternity protection would only be for a restricted time and does not cover the time after maternity leave, which is known as parental leave. The European Union legislation is also not applicable for other private circumstances which would require a mandate pause, such as care leave or an absence for a board member’s convalescence.

B. Binding gender quota in the European Union

Legally enforceable rules on gender quotas will be imposed on all Member States of the European Union to boost the number of women serving on the executive and supervisory boards of publicly traded companies. The necessary qualified majority for the proposed EU directive on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures has been attained. The French Council Presidency told the Employment and Social Affairs Council (EPSCO Council) in Luxembourg on 16 June 2022 that the outcomes of the trialogue with the European Parliament on 15 June 2022 had been approved. ³ With this directive, each Member State is obliged to implement binding rules until 30 June 2026 that either 40% of the supervisory board members or 33% of the supervisory board members and the executive board members must be female. ⁴ The gender quota will be applicable for all companies with seat in a Member State, stock-listed on a regulated market, and no small or medium-sized company with less than 250 employees and revenue less than €50 million or a balance sum of €43 million maximum. ⁵

C. Work-life balance and ‘stay-on-board’ in the European Union

On the European Union level, the Directive (EU) 2019/1158 on work-life balance for parents and carers (the ‘Work-Life Balance Directive’) was adopted on 13 June 2019, and the Member States were required to transpose it into national law by 2 August 2022. ⁶ The directive aims to ensure equality in labour market participation by encouraging equal sharing of care responsibilities between parents. The main content of the Directive is that there is a minimum entitlement for working fathers in the amount of at least 10 working days of paternity leave at the time of the child’s birth with payment at least equal to sick pay. Furthermore, each parent is entitled to at least four months of parental leave, with two months paid and non-transferable. Parents may request flexible leave, either full-time, part-time or in separate segments. All employees who care for or support a relative or someone living in the same household are entitled to at least five working days of care leave per year. All working parents with children up to eight years and all family carers have the right to request reduced work hours, flexible work schedules and workplace flexibility. The directive is applicable to employees only. ⁷

The underlying idea of the Directive to improve gender equality is an important step, yet the Directive is not valid for all persons not being ‘employees’. Regulations that allow a mandate pause for board members exist in some European Union Member States, examples are according to Jacobi and Hartanger regulations in the Netherlands, Denmark and Belgium at least for parental leave. ⁸ In the aforementioned countries, which served as an example for Jacobi and Hartanger, there are rules beyond maternity protection that allow parents to be absent after the parental leave period. In the Netherlands, this absence is called ‘ouderschapsverlof’, meaning ‘parental leave’, which is applicable for parents who live or work in the Netherlands and are members of the state insurance, no distinction is made between employees and board members. ⁹ A European Union Member State that lacks maternity protection or regulations for mandate pauses for executive board members is Austria. Austrian law does not include any specific provisions, resulting in the absence of legal entitlements for release from official duties or the right to return to a previous position as a board member. ¹⁰ The establishment of such an arrangement necessitates a mutual agreement through a formal resolution and contractual agreement during the appointment process. According to Austrian law, it is possible to address a temporary dismissal, such as one that occurs concurrently with a resolved reappointment, after the statutory maternity leave has expired. ¹¹ However, it should be noted that a disadvantage of this approach is the absence of a legal obligation for the supervisory board to accept this course of action. It is important to acknowledge that within the European Union, there exists a lack of legally established mechanisms for board members to formally request a mandate pause. This concept is recognized in certain European Union Member States, but lacks harmonization at the European level, despite the explicit responsibility of the European Union to harmonize laws and regulations among its Member States. One potential way for initial exploration of the aforementioned considerations may involve an examination of the comprehensive German regulations, which will be described in the subsequent chapter.

A. Initiation of the ‘stay-on-board’ regulations

The ‘stay-on-board’ regulation was prompted by the case of Delia Lachance. Lachance was a co-founder and board member of the company Westwing Group AG. Lachance addressed a request for a break from the mandate due to maternity leave to the supervisory board of the company. Such a mandate pause was not provided for in the former version of the German Stock Corporation Act (Aktiengesetz (AktG)). The supervisory board revoked Lachance’s appointment as a member of the executive board of Westwing Group AG with reference to the applicable legal framework. ¹² Lachance’s case made waves. The German news magazine Der Spiegel published an online article stating that there was a gap in the law as the corporate law had at that time no regulations on how to deal with pregnant board members. ¹³ The gap in the law had practical relevance when board members were absent for a longer time, not only for maternity leave, but also for parental leave, long-term illness or when caring for relatives. In such cases, board members were effectively forced to resign their mandate, as the alternatives given by the then-valid law seemed not to be sufficient. Under former law, the supervisory board and the executive board member had the possibility to decide on a mutual suspension of the mandate for a limited period. As the suspension in the cases discussed had no practical relevance so far, another possibility was to terminate the appointment and, at the same time, to agree to re-appoint the board member. ¹⁴ If the mandate was not terminated (or suspended), the alternative for a board member was therefore to accept that the responsibilities of the board member continued to exist during the absence, and there was a substantial risk of liability, in particular, because monitoring responsibilities cannot be properly performed.

As a response, the #stayonboard initiative was established to solve the problem of anti-family boardroom law in Germany. The initiative was founded by Verena Pausder and other initiators, who published a position paper ¹⁵ and finally succeeded in getting the legislature to address the issue. The federal government’s draft bill on the German Second Leadership Position Act (Zweites Führungspositionen-Gesetz (FüPoG II)) ¹⁶ did not initially contain a regulation on the mandate pause, which was added on the initiative of the Committee for Families, Senior Citizens, Women and Youth during the legislative process, a decision which was strongly influenced by the contributors to the #stayonboard initiative. The proposal was carried over into the final version of the bill without any modifications being made. By the way: Lachance came back to Westwing, but without being appointed again as a member of the board. ¹⁷

What are the main factors that made the initiative #stayonboard a success? Jacobi and Hartanger ¹⁸ see the reason for the success in the socio-political change. Work-life balance, a greater diversity of life models and gender quotas have all been topics of conversation in recent years. Non-binding rules for gender quotas were not sufficient to become a success. Since the German First Leadership Position Act (Erstes Führungspositionen-Gesetz (FüPoG I)) and the implementation in the German Stock Corporation Act came into force in 2015, companies had to set targets for future participation of women in top management level positions, which means the supervisory board and the executive board and the first and second level management. Often, the target was zero. In the study Women-on-Board-Index 185, FidAR (Frauen in die Aufsichtsräte (FidAR) e.V.) analyses the 160 companies listed in the German stock indices DAX, MDAX and SDAX and the 20 fully co-determined companies listed in the regulated market. ¹⁹ The study enables a comparison of the development of the companies that are subject to the fixed quota with that of the DAX-listed groups not subject to the quota. The study shows that in Spring 2015, 104 companies set a target of zero for women on boards and thus ignored the voluntary commitment for more equal participation in the boardroom. The number of companies decreased to 44 as of January 2022 and 22 as of May 2023, because of pressure that has been built up on such companies. ²⁰

The German Second Leadership Position Act is seen to be the game-changer to avoid women-free boardrooms in the companies affected by the law: besides the ‘stay-on-board’ regulations, it provides for a binding gender quota for listed companies and companies with equal codetermination with an executive board consisting of more than three members, which need to be staffed by at least one woman and at least one man. This new requirement will strongly support the socio-political change that is necessary for ‘stay-on-board’ to become a permanent success.

B. Germany’s ‘stay-on-board’ regulations

With the German Second Leadership Position Act, § 84 (3) German Stock Corporation Act was implemented and gives a right to board members of stock corporations to be revoked and newly appointed in certain situations, such as maternity leave, parental leave, care work, or illness. The overall goal of the German Second Leadership Position Act is to implement a legal framework to ensure compatibility of family and career at the board level, not only to increase the number of women on boards. Therefore, regulations like care work and absence in case of illness were included as well. The new regulation applies to all stock corporations, independent from a stock listing or co-determination. This paper focuses primarily on stock corporations but also includes some supplementary explanations for other types of companies. It is worth mentioning that for companies in the legal form of a Societas Europaea (SE) organized in the one-tier system, similar provisions have been enacted in §40(6) German SE Implementation Act (SE-Ausführungsgesetz (SEAG)). For the German limited liability company (abbreviated ‘GmbH’), §38(3)3 German Limited Liability Companies Act (GmbH-Gesetz (GmbHG)) standardizes the mandate pause also for managing directors of such companies. The prerequisite for the applicability of the ‘stay-on-board’ regulations in German companies is that the board consists of at least two persons.

Should a member of the board make use of the right, the relevant addressee shall revoke the appointment of this board member and promise a reappointment. For a stock corporation and a Societas Europaea organized in the two-tier system, the supervisory board is the addressee, for a Societas Europaea organized in the one-tier system, the board of directors is the addressee and for a limited liability company the shareholders’ meeting or an advisory board, if this task is assigned accordingly. The period of revocation is different in the case of maternity leave on the one hand and revocation due to parental leave, care and illness on the other hand. In the case of maternity leave, a reappointment must be granted within the statutory protection periods of the German Maternity Protection Act (Mutterschutzgesetz), which is six weeks before childbirth and eight weeks after childbirth (12 weeks for multiple births). In the case of maternity leave, the supervisory board may not refuse the right of revocation and reappointment. In the cases of parental leave, nursing care and illness, the supervisory board shall also revoke the appointment of the member of the executive board and grant reappointment for three months. The period may be extended to 12 months. In these cases, however, the supervisory board may refrain from revocation if there is a good cause. According to the explanatory memorandum to the law, ²¹ important reasons can be a revocation at an ‘inopportune moment’, which could be the case if important decisions are pending, for example, an annual financial statement or a sale of a company. The period of revocation will not extend the original period of appointment. The revocation and the reappointment must be entered in the commercial register, as it is important to know which executive board member has the proxy to represent the company.

Since the implementation of the ‘stay-on-board’ regulations, two stock-listed companies used this instrument, Deutsche Euroshop AG in April 2022 ²² and Grenke AG in November 2022. ²³ The reason for the mandate pause was in both cases illness of an executive board member; both executive board members finally left the company. ²⁴

A. Scope of application of ‘stay-on-board” regulations

The scope of the ‘stay-on-board’ regulations is broad compared to laws that provide for gender quotas. Board members of limited liability companies, Societas Europaea and stock corporations are beneficiaries of the ‘stay-on-board’ regulations. The regulations are applicable for all stock corporations, independent from a stock-listing or co-determination. This creates a great difference from the regulations about the gender quota for stock corporations which are only applicable to companies that are stock-listed, co-determined and have an executive board with at least three board members. In such companies, the executive board needs to be composed of at least one female and one male board member. According to the Haufe online editorial team, only about 70 companies are bound by the gender quota. ²⁵ For the ‘stay-on-board’ regulations, the broad scope of application does not require revision.

B. Impact on the employment contract of executive board members

Not all resulting consequences of the ‘stay-on-board’ regulations have been regulated by the legislator. §84(3) German Stock Corporation Act contains no regulation on what consequences arise for the employment contract of the dismissed member of the executive board, especially for remuneration claims. A lot of discussions are made with regard to long-term incentives or stock option plans. ²⁶ The revocation is independent of the employment contract; the executive board member and the company are called upon to draft provisions for the period of revocation in a supplementary agreement to the employment contract.

C. Supervisory board responsibilities

It appears that the legal framework in Germany that provides for a mandate pause is very forward-thinking and innovative, and it represents a step in the direction of increased diversity and a better balance of work and life. A closer look reveals that these goals need appropriate framework conditions. The temporary suspension of the mandate is one piece of the puzzle. More is required of the framework for achieving a better balance between leadership roles and family responsibilities.

The function of the supervisory board is one of the most important. Committees within the supervisory board are responsible for the preliminary work that is done to recruit new executive board members. Committees dealing with personnel decisions might be the nomination committee or the personnel committee. The committee works on creating a profile for the candidates, hiring a recruitment agency and checking their own business networks which may consist of colleagues as well as other business contacts or connections formed through formal memberships in industry associations or during trainings, conferences or other type of business meetings. In addition, the committee is responsible for conducting the initial sorting as well as interviews and presenting the shortlist to the supervisory board. The recourse to the own business network is a crucial step because men and women typically tend to have different business networks and relationships. The following studies have shown that men are more likely to know other men than women, while women are more likely to know other women: the research from Rastetter and Cornils ²⁷ shows that women have low access opportunities to male-dominated business networks. Seidel ²⁸ emphasizes that women need to be involved in heterogeneous business networks to gain an advantage in their careers. A mandatory quota for the committee is something that is currently not available, but needs to be worked on. The regulation to have a quota in committees could be like the EU regulation for the gender quota in executive boards or supervisory boards.

A mandatory quota for committees is also important for prolongation decisions. Imagine a case where a person already used the mandate pause for parental leave – how can this person be sure that, when it comes to a prolongation of the time-limited contract, the supervisory board will decide to make an offer, even if the supervisory board knows that the person may use an additional mandate pause if the private circumstances are appropriate? Unconscious bias can play a role in the decisions made by supervisory boards and stereotypes exist. An Australian study conducted by Evans and Maley ²⁹ concluded that unconscious bias ‘remains a significant obstacle to women reaching top leadership positions’. Filut et al. ³⁰ conclude in their study that ‘unconscious gender bias is ubiquitous’ and that elimination is rather unlikely because stereotypic assumptions are maintained. As a conclusion, it will be simpler for a woman to ask for a mandate pause if the responsible committee and the supervisory board as a whole are composed of a balanced number of men and women or at least a significant percentage of woman.

Another point to consider is that the supervisory board should demand that the executive board provides a succession plan for the company’s leadership that includes women who are qualified to serve on the board at some point in the future. In addition to the board itself, the leadership team that works under the board must also be diverse. A quota for the leadership team is part of the compulsory quota, but not binding. A goal of zero for the number of women in positions of decisive leadership is unacceptable, and the same is true for a goal of zero for board roles.

D. Company culture

The culture of the company is a fact that needs to be taken into consideration as well. The creation of family-friendly workplaces is a collaborative effort between companies and legislators. Even if the ‘stay-on-board’ regulation is in place, interested and qualified leaders may choose not to apply for board mandates if they learn from their own experiences that being pregnant or leaving for maternity leave, paternity leave, for care work and so on leads to disadvantages in their career. This is the case even if they are aware of the existence of the regulation. Since the regulation is relatively recent, those who benefit from it and the companies that make use of it should be encouraged to discuss it. The commercial register provides some degree of publicity, but in addition to that, the supervisory board is required to inform the shareholders in its report about the decisions made regarding ‘stay-on-board’. There are certainly some reasons that are not for the public, at the very least not with details, such as when a board member pauses the mandate because of illness or because they are providing care for a member of their own family. If companies actively promote the way they deal with mandate-pausing board members, this might be a benefit for the company’s reputation as well.

E. Socio-political factors

Circumstances that exist outside of the company also need to be taken into consideration. If a board member is aware that the mandate pause will only last three months and that there will be no kindergarten or appropriate childcare offerings available after that, then the board member will not exercise the option to ‘stay-on-board’ and will instead choose to resign from their position with the company. The same principle applies to the various other scenarios in which a board member might be required to pause the mandate. The right is only valid for a certain amount of time, and there must be alternatives available after that point.

F. Protective regulations

No provision in German law prevents or mitigates the risk of disadvantages for the career because of making use of ‘stay-on-board’ provisions. There does not appear to be a simple and straightforward solution to this problem. According to German law, an executive board member does not have the right to claim a contract extension, and therefore no right exists to initiate legal proceedings about the legality of a refusal to offer a contract prolongation. If one would like to allow legal proceedings, the legislator would have to define a mandatory prolongation of executive board appointments, which would be in opposition to the German Stock Corporation Act.