ADVISORY OPINION. I. Content of the gender-specific passages of the CSR Directive

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1 Deutscher Juristinnenbund e.v. Associations of Lawyers, Economists and Business Administrators Berlin, 20 October 2015 ADVISORY OPINION Geschäftsstelle / Office: Anklamer Straße 38 D Berlin Tel.: Fax: geschaeftsstelle@djb.de on the concept of the Federal Ministry of Justice and Consumer Protection regarding the transposition of the CSR Directive Reform of the management report dated 27 April 2015 The German Women Lawyers Association (Deutsche Juristinnenbund e.v., djb) is grateful for the opportunity of offering its advisory opinion. djb is an association of female lawyers and economists. Its objective is to foster the further development of law. It is independent and not linked to a political or religious organisation. djb fosters the further development of law, in particular with regard to equal rights and equality for women in all areas of society, on a national, European and international level. It is of particular importance to the djb to support and comment on the transposition of European legislation with regard to gender equality objectives, so as to ensure and indeed achieve effective measures in relation to gender equality. This also applies to the transposition of the corresponding passages of Directive 2014/95/EU (CSR Directive). I. Content of the gender-specific passages of the CSR Directive Within the framework of the legislation regarding the CSR Directive, the European Union (EU) has imposed comprehensive reporting requirements on certain large undertakings. The CSR Directive supplements Directive 2013/34/EU (Accounting Directive) on the annual financial statements with details regarding non-financial and diversity-related information. Besides the introduction of a non-financial statement, the CSR Directive also contains amending provisions to Art. 20 of the Accounting Directive, according to which the corporate governance statement is supplemented with details regarding the diversity policy pursued by the undertakings in question. The diversity policy information therefore also includes gender-specific information.

2 2/12 The obligation to disclose diversity concepts relates solely to listed undertakings. Small and medium-sized undertakings are explicitly excluded here (Art. 1 No. 2 (c) and (d) of the CSR Directive), Art. 20 (4) and (5) of the Accounting Directive). Based on their duty of due care, the CSR Directive requires the affected undertakings, to include a description of their concept as applied to the administrative, management and supervisory bodies. The content should, in addition to the various objectives of the diversity policy, include such aspects such as age, gender, educational and professional backgrounds in how the policy has been concretely implemented, and the results in the reporting period should be disclosed (Art. 1 No. 2 (a) of the CSR Directive, Art. 20 (1) (g) of the Accounting Directive). This does not therefore entail an obligation to introduce a diversity policy. However, companies that do not pursue a diversity policy should provide reasons as to why this is the case ( comply or explain ). There is no review of the gender-specific statements made. The audit is merely restricted to checking whether the above information has been provided at all (Art. 1 No. 2 (b) of the CSR Directive, Art. 20 (3) of the Accounting Directive). The right to stipulate sanctions, in the event of infringements of reporting requirements, continues to be reserved for the Member States as before, according to Art. 51 of the Accounting Directive. The deadline to transpose the CSR Directive in the national laws of the Member States shall expire on 6 December The transposition provisions should become effective for the first time in financial years starting on or after 1 January The CSR Directive does not make provision for active requirements to take appropriate account of women in executive bodies. Such regulation shall follow separately on the basis of the so-called Gender balance on corporate boards (Directive) 1. II. Current legal situation in Germany HGB (German Commercial Code) According to 285 clause 10 HGB (German Commercial Code), the mandatory information that must be provided in the notes to the financial statements includes all members of the 1 Proposal for a Directive of the European Parliament and of the Council on improving the gender balance among nonexecutive directors of companies listed on stock exchanges and related measures, hereinafter: Gender balance on corporate boards Directive(Aufsichtsrätinnen-Richtlinie). Online: < (accessed: 19/10/2015), see here djb Advisory Opinion dated 19/05/2014. Online: < (accessed: 19/10/2015) as well as djb Advisory Opinion regarding the compromise proposal of the Italian President of the Council (Council document 16300/14) dated 17/09/2015. Online: < (accessed: 19/10/2015). Regarding legislation status: European Parliament Legislative Observatory OEIL. Online: < (accessed: 19/10/2015) and the European Commission Database, EuR-Lex. Online: < (accessed: 19/10/2015).

3 3/12 managerial body and supervisory board, even if they have resigned during the course of the financial year in question or at a later date, along with the family name and at least one complete first name, including the exercised profession and, for listed undertakings, any membership of supervisory boards and other supervisory bodies within the meaning of 125 para. 1 (5) AktG (German Stock Corporation Act). The chairman of a supervisory board, his/her deputy and any chairman of the supervisory body must be identified as such. To date, there has not been any transparency regarding the composition of the workforce beneath the corporate management level clause 7 HGB (German Commercial Code) merely stipulates that the average number of workers employed during the course of the financial year needs to be stated by group. The wording does not stipulate any classification by gender. This is not done on a comprehensive basis in practice and, even when it is done, then it is not in a manner that would facilitate a comparison between different undertakings or in the development of a particular undertaking para. 3 HGB (German Commercial Code) Large companies with share capital 4 must, in accordance with 289 para. 3 HGB (German Commercial Code), include non-financial key performance indicators, such as information relating to employee matters, insofar as such information is of importance to understanding business performance or the overall situation, in the analysis of their management report. 289 para. 3 HGB (German Commercial Code) leads a shadowy existence. 5 Schmidt 6, in taking into account the statutory obligation under European Union law and constitutional law to promote actual equality between men and women at all levels of operational and commercial hierarchies, came to the conclusion that it can be argued that the proportion of women employed in the various hierarchical and managerial levels constitutes employee matters in accordance with 289 para. 3 HGB (German Commercial Code), and for which information must be provided on a regular basis, as such information is of importance to understanding business performance or the overall situation. In actual fact, the management reports issued by the majority of undertakings do not contain any such statement. 7 2 Schmidt: BMFSFJ, Aktionärinnen fordern Gleichberechtigung Erhöhung des Frauenanteils in Führungspositionen (Female shareholders demand equal rights increase in the share of women in leadership positions), Berlin 2010, p See footnote 2 4 In accordance with 267 para. 3 HGB (German Commercial Code) (achievement of two of the following three characteristics: (1) > EUR 19,250,000 total assets, after deducting a deficit reported on the asset side, (2) > EUR 38,500,000 sales revenue in the twelve months prior to the reporting date, (3) > 250 employees on average during the course of the year. 5 Schmidt, loc.cit., p Schmidt, loc.cit., p. 69f. 7 Schmidt, loc. cit., p. 70; VW provides positive examples for the report about the proportion of women in three managerial levels in the management report, Telekom shows such examples for two levels.

4 4/ a HGB (German Commercial Code) It is already the case that listed undertakings and certain other companies with share capital have to submit a corporate governance statement according to 289a HGB (German Commercial Code), either as a separate section in the management report or on the undertaking s website, with a reference to such a statement in the management report. The corporate governance statement is used to make accessible information regarding corporate governance practices, corporate governance tools and the declaration of compliance according to 161 AktG (German Stock Corporation Act). Since the Law for the Equal Participation of Women and Men in Leadership Positions in the Private Sector and the Public Sector (Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst) came into effect on 1 January 2015, the corporate governance statement must also contain gender-specific information in relation to the composition of leadership positions. The objective of the law is to significantly increase the proportion of women in management bodies in both the private and public sectors in Germany. It primarily foresees the following provisions for the private sector: With effect from 30 September 2015, undertakings subject to employee participation or listed undertakings must, for the first time, specify targets themselves for the proportion of women in the management board, supervisory board and the two most senior management levels (so-called flexi-quota). The initial targets should be met by 30 June The base periods for any subsequent targets may then total up to five years. There is a fixed gender quota of 30 percent in place for the supervisory boards of undertakings who are listed and are subject to equal representation in terms of employee participation. This must be observed on a step-by-step basis with effect from 1 January 2016 with regard to the new appointment of the supervisory board. The reporting requirements for gender-specific information are laid down in 289a para. 2 Nos. 4 and 5 HGB (German Commercial Code). Within the framework of the corporate governance statement, the undertakings in question must in future report on how and indeed to what extent they have observed the specified statutory provisions: The reporting requirements for targets defined internally shall apply for the first time to management reports in annual financial statements, whose financial year ends after 30 September Once the period set internally to achieve the targets has expired, a report must be compiled stating whether the targets have been achieved and/or the reasons why the targets had not been achieved. Prior to the expiry of the target period, it shall suffice to merely repeat the statements contained in the annual

5 5/12 corporate governance statement. A content-based interim report regarding the current achievement of targets prior to the end of the target period is not required. The reporting requirement to observe the fixed minimum gender proportion shall apply for the first time to management reports in annual financial statements, whose financial year ends after 31 December After this date, the undertakings in question must specify each year in the corporate governance statements whether they have observed the quota regarding the staffing of the supervisory board during the course of the financial year in question and/or the reasons why the minimum quota had not been observed. Undertakings that do not have to compile a management report, but which are subject to the requirements to set targets and deadlines to increase the proportion of women, must compile a separate corporate governance statement and publish it on their website, 289a para. 2 No. 4, para. 4 HGB (German Commercial Code). According to 317 para. 2 clause 3 HGB (German Commercial Code), the corporate governance statement forming part of the management report is not subject to any contentbased checks by the auditor. The auditor merely has to check whether the management report contains the mandatory components specified according to 289a para. 2 HGB (German Commercial Code) or not. If the corporate governance statement is incomplete, then the auditor may restrict or indeed refuse to issue the audit certificate. III. Transposition requirement of the CSR Directive 1. Non-financial aspects of the undertaking s commercial activity ( 285 clause 7, 289 para. 3 HGB (German Commercial Code)) The existing reporting requirements do not lead to the provision of comprehensive and comparable information in the notes to the financial statements or in the management report, regarding the managerial situation of women at the various hierarchical levels in the undertakings; this also applies to the average salaries of male and female employees. 8 Insofar as information is provided on a voluntary basis, this information does not satisfy the requirements of the CSR Directive regarding gender-specific information, which require additional provisions in the German Commercial Code. A mandatory supplement is shown here in 285 clause 7 HGB (German Commercial Code) which leads to uniform reporting. Furthermore, additional components of the reporting requirement must be laid down in 289 Abs. 3 HGB (German Commercial Code). 8 Schmidt, loc.cit., p. 70.

6 6/12 2. Diversity in the composition of supervisory, management and governance bodies in an undertaking ( 285 clause 10, 289a para. 2 Nos. 4 and 5 HGB (German Commercial Code)) The existing applicable reporting requirements, regarding targets and compliance with the minimum quota and the requirements of the CSR Directive regarding gender-specific information, overlap each other partially, but are not congruent. The information regarding diversity in corporate bodies required according to HGB (German Commercial Code) must therefore be supplemented. The provisions of the CSR Directive, insofar as they relate to gender diversity, cannot be harmonised with the existing national reporting requirements according to the Law for the Equal Participation of Women and Men in Leadership Positions in the Private Sector and the Public Sector (Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst) to a sufficient extent to prevent duplicate reporting requirements in their entirety: On the one hand, there are different temporal demands on reporting requirements. It is indeed the case that the undertaking subject to a minimum quota in the supervisory board must submit a report each year, which states whether this quota has been observed and/or the reasons why this is not the case. However, the deadlines set internally to achieve the targets for the proportion of women in leadership positions may total up to five years. Given that an interim report is not necessary, a corresponding reporting requirement results on whether the respective target was achieved and/or the reasons why the target was not achieved; this only applies every five years in the best case scenario for the undertaking. However, according to the CSR Directive, a report must be issued each year, within the framework of diversity reporting requirements, regarding the diversity of staff on a gender basis along with any targets and measures pursued by the undertaking. An enhanced duplicate reporting requirement merely occurs in the year in which the undertaking has to report on the achievement of the targets it has set. In terms of content, the existing reporting requirements according to HGB (German Commercial Code) also differ from those according to the CSR Directive. While the applicable reporting requirements primarily stipulate numerical information about the gender distribution in leadership positions, the description of a diversity policy in accordance with the CSR Directive also includes a description of the diversity strategy targets, measures to implement such targets and the indication of (interim) results. Transposing the CSR Directive will inevitably result in increased reporting requirements. However, the associated effort and expense required is reasonable. Assuming the undertakings observe the minimum quota and achieve their targets, then the reporting requirements according to 289a para. 2 Nos. 4 and 5 HGB (German Commercial Code) are restricted to such information. Greater reporting

7 7/12 efforts would only come about if undertakings need to explain why they have not observed the requirements. In this respect, there may be minor overlaps with the diversity policy statement with regard to gender-specific aspects. There is also an transposition requirement with regard to the circle of individuals targeted by the reporting requirements. The CSR Directive applies to large undertakings, who are of public interest, and who had more than 500 employees on average during the course of the financial year (Art. 1 No. 1 of the CSR Directive; Art. 19a para. 1 of the Accounting Directive). This group is not identical to the group of undertakings covered by the reporting requirement according to 289a para. 2 Nos. 4 and 5 HGB (German Commercial Code). However, the sanctions linked to the fulfilment or non-fulfilment of reporting requirements are identical in HGB (German Commercial Code) and the CSR Directive: According to Art. 1 No. 2 (b) of the CSR Directive (Art. 20 para. 3 of the Accounting Directive), the auditor must check whether the corporate governance statement contains the requested information regarding the diversity policy. There is no provision in the CSR Directive for a content-based audit obligation for gender-specific information, as is also the case at present in HGB (German Commercial Code). As a result, there is no transposition requirement in relation to the review of information. IV. Transposition of the gender-specific requirements of the CSR Directive 1. Framework and outlook The CSR Directive and its transposition will mean that the undertakings affected will have to disclose information about non-financial and diversity-related aspects of their workforce and/or the composition of their bodies in their management report and corporate statement. 9 The CSR Directive itself will help to shift the focus onto social employee matters, gender equality and observance of human rights. The equal participation of men and women in the labour market and in corporate management is also something that should be advocated from a financial perspective too. By doing so, undertakings can make use of the full productive potential of the educated and/or economically active population, thus helping to maximise their success. Undertakings that focus on equal opportunities and diversity are more competitive, when viewed against the backdrop of demographic change. Employing people of all genders can help tap into the full array of available talent and creativity, while at the same time improving the attractiveness and image of the undertakings. The benefits of gender equality can lead to increased corporate performance 9 See recitals 7 and 19.

8 8/12 and higher profit margins, something which will not only benefit individuals and undertakings, but also entire regions and nations. Also revealing in this regard was the European Women Shareholders Demand Gender Equality project, which was implemented by djb and funded by the European Commission, whereby up to 100 Annual General Meetings of undertakings belonging to the EUROSTOXX50, BUX, SOFIX and FTSE100 indices were to be visited in eleven EU Member States by September 2015, and questions were to be asked regarding the situation of women in these undertakings. In those Member States in which there are already reporting requirements with gender-specific demands, such as in France, it is not difficult to see, in relation to the under-represented sex, where action is needed and what steps can be taken to combat it. In the majority of other Member States, such as in Germany and Hungary, such information is not disclosed in full and is not comparable either. It is indeed true that certain undertakings do provide gender-specific information, such as in the so-called CSR reports. However, these reports do not follow a uniform template. 2. Transposition proposals djb recommends that particular attention is paid, within the framework of transposing the CSR Directive, to the objective of gender equality laid down in the Directive itself, but also in the legislative proposal of the BMFSFJ regarding equal pay or in the coalition agreement. a) Specification of non-financial key performance indicators in the management report (Art. 1 clause 1 of the CSR Directive, Art. 19 a para. 1 (e) of the Accounting Directive) 289 para. 3 HGB (German Commercial Code), which includes information regarding nonfinancial key performance indicators for large stock corporations, is considered as the place for transposing this information stipulated by the Directive. aa) Affected undertakings To date, information regarding non-financial key performance indicators, in accordance with 289 para. 3 HGB (German Commercial Code), must be provided by large stock corporations, i.e. companies that meet two of the criteria stipulated in 267 para. 2 HGB (German Commercial Code) (EUR 19,250,000 total assets, EUR 38,500,000 sales revenue, 250 employees on average during the course of the year). The CSR Directive also stipulates that this relates to undertakings who are of public interest and have more than 500 employees. As far as the information on gender equality, employee matters as well as human rights are concerned, djb recommends retaining the key criterion of 267 para. 3 HGB (German Commercial Code) and the criterion of 250 employees on average during the course of the year within the framework of transposition. The Directive as a minimum standard enables this procedure, which is explained by the fact that by including

9 9/12 undertakings with 250 employees creates greater transparency and, at the same time, means that sustainable financial benefits can be expected, thanks to gender equality. bb) Non-financial information djb recommends that the non-financial information in the management report also contains information regarding the current status in terms of gender equality and any measures taken to ensure gender equality, whereby the following information must in any case be incorporated into the management report: The existing gender relations with regard to the employees within an undertaking, as well as with regard to the various managerial levels within the undertaking (to be laid down, where applicable, in 285 clause 7 HGB (German Commercial Code)); The existing gender-specific pay situation in relation to the same or similar jobs, and strategies to help achieve equal pay; The specific programs in place to promote the under-represented sex with regard to; Work/life balance; The development and promotion of management; The recruitment and promotion towards future careers, and information regarding how employees can be made aware of such programs; Content and the nature of communications, with regard to positions in senior managerial levels that need to be filled. The reasons for this proposal can be summarised as follows: The Directive itself does not define the non-financial performance to be notified in Art. 19a para. 1 (e) of the Accounting Directive; however, it makes provision for the fact that the most important non-financial key performance indicators must be specified, which are of importance to the business activity in question. According to recital six, the non-financial statement should also contain information regarding environmental, social and employee matters. Recital seven, stated in the introduction, specifies this and relates to information on measures taken to ensure gender equality. The specific information in the management report, regarding gender equality as illustrated above, is therefore necessary against this backdrop. In detail: In addition to disclosing the status quo of existing gender relations, the disclosure of programs promoting the under-represented sex, which are only ever partially applied in the private sector, appear to be especially important.

10 10/12 Especially important appears to be disclosure of programs with regard to work/life balance, the development and promotion of management and the recruitment and promotion towards future careers. This is necessary in order to achieve the long-term commitment of the under-represented sex too, and to develop and promote their potential in the best possible way. Reference could therefore be made to the following programs and circumstances in the rationale behind the new legislative provisions: Programs that offer flexible working time models, either by way of part-time working, also for management, teleworking, home offices, job sharing, long-term accounts, as well as the granting of childcare subsidies (day-care centres and local care services including emergency care for children, elderly services, family recreational facilities, holiday camps). The specific parental leave support also includes programs via which male and female employees can maintain contact with the undertaking during parental leave. Specific support programs for management are also required to increase the underrepresented sex (proportion of women) in leadership positions (e.g.: LEAP- or the SAP Leadership Excellence Acceleration Program: LEAP is an 18-month long program targeting talented women, who either have the potential to undertake leadership duties or already carry out leadership duties but who want to achieve more. The program aims to maximise the individual abilities of the program participants and impart the necessary skills and knowledge. The training sessions include the following: Self-assessment and reflection, career planning and development, mentoring and sponsorship, networking and branding and displaying leadership qualities.) Mentoring programs are an effective tool to help further the careers of women. Mentoring programs can help women, who are in leadership positions or have the potential to undertake leadership duties, to facilitate the exchange of experiences and knowledge, establish contact in more senior managerial levels and expand their network. These programs also provide the opportunity to enhance an individual s leadership and methodical skills. It is also within this context that general programs offering long-term career assistance, which take into account the various life phases as well as programs that promote future careers, can help to increase the proportion of the underrepresented sex. In general, programs regarding training and courses on diversity-aware leadership so as to change the general corporate culture with regard to diversity appear to be advisable too.

11 11/12 It is also necessary that undertakings structure their staff recruitment in a transparent manner, particularly at senior managerial levels. It is often the case that the underrepresented sex struggles to gain access to such positions, which are generally publicised via informal networks instead of transparent announcements. As a result of this network dependence, the recruitment of leadership positions at present is often characterised by random events. Furthermore, the disclosure of the remuneration of women and men, who carry out the same or similar activities within the undertaking, plays an important role. The existing differences in pay between men and women in Germany, who have the same formal qualifications and the same personal characteristics, offer a continued indication of the hidden discrimination suffered by women in the labour market. The disclosure of remuneration structures should ensure greater transparency with regard to the remuneration of both sexes. Where existing discrepancies in remuneration do exist, the undertakings are requested to present strategies with the aim of reducing the wage gap in a sustainable manner. b) Diversity policy (Art. 1 clause 2 of the CSR Directive, Art. 20 para 1 (g) of the Accounting Directive) In order to transpose the gender-specific requirements of the CSR Directive, it is worth expanding the reporting requirements in 289a para. 2 HGB (German Commercial Code), since the reporting requirements regarding diversity relate to the corporate governance statement. 289a HGB (German Commercial Code) must be expanded with regard to the scope of statements, so as to regulate the disclosure and reporting requirements in a uniform manner. This can be best achieved by inserting a number 6 in 289a para. 2 HGB (German Commercial Code). An appropriate revision must especially contain the following: Information about the administrative, management and supervisory bodies who are to be reported on (management board, supervisory board and/or administrative board); A list of content-based minimum requirements, which must at least be reported on, including the description of the diversity strategy, the disclosure of the objectives of this diversity strategy, an illustration of how the diversity policy is implemented and information in terms of what results have been achieved during the reporting period; A list of so-called diversity dimensions, which can lie at the base of the diversity policy within the undertaking. These include the dimensions of age, gender, educational and professional backgrounds of the board members, as already specified in the CSR Directive. This might involve supplementing these criteria to

12 12/12 include, for example, the language and origin and/or internationality of board members; and The duty to provide an explanation, if the undertaking does not pursue a diversity strategy ( comply or explain ). djb demands the inclusion of both managerial levels below the management board. Particular value is placed on the disclosure of the selection and recruitment processes, as it is often the case that the under-represented sex struggles to gain access to such positions, which are often publicised via networks as opposed to transparent announcements. Even communicating the job profile makes it easier for the under-represented sex to apply. There should also be a disclosure of programs for more flexible, family-friendly working time structures in the supervisory board and management board, either by allowing so-called part-time supervisory boards or dividing up mandates. V. Conclusion and Outlook At first glance, the reporting requirements appear to be a real burden. However, the French example shows that comprehensive reporting requirements are indeed worthwhile. They create transparency and increase competition. The management report ( rapport de gestion ) compiled by the management board/supervisory board is approved and audited by an external auditor. It contains detailed information regarding the situation faced by women in the respective undertakings and is available to anyone and everyone upon request. In France, the combination of reporting requirements and quota obligations with sanctions has meant that French undertakings have assumed a leading role in relation to gender equality, as demonstrated at the managerial level. An appropriate transposition of the CSR Directive, which takes into account the proposals put forward by djb, is therefore an important and meaningful enhancement of the provisions that are already in place, and will help to promote gender equality within the private sector even further. Ramona Pisal President Sabine Overkämping Chair of the Commission Public Law, European and International Law