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Board Diversity in Germany & the UK – What Works

Fideolio - Board Diversity in Germany & the UK
FIDELIO OVERTURE

INTRODUCTION

The benefits of Board diversity are well known. Despite this progress is disappointing.

Fidelio is committed to increasing diversity and enhancing Board effectiveness. Practically, we support Boards in moving the dial on diversity through Search, Evaluation and Development, as well as very simply shining a light on what works.

To this end Fidelio was pleased to co-host with CMS in Stuttgart the fourth in our series ‘Die Frauenquote – An Update on Diversity in German and UK Boards’. In particular we asked what could be learned from these two major European economies about increasing the diversity and effectiveness at the top of their major companies.

After previous debates in London and Frankfurt, Stuttgart represented a significant location as an industrial powerhouse in Germany. We were pleased to welcome guests from across Germany, and a panel that included influential voices within German business:

▪ Ilse Henne, Member of the Executive Board, Thyssenkrupp Materials Services GmbH ▪ Angelika Huber-Strasser, Head of Corporates, KPMG
▪ Elke Benning-Rohnke, Vice President, Fidar e.V
▪ Dr Philine Erfurt Sandhu, Academic Director, Strategic Competence for Women on

Supervisory Boards Certification Programme, University of Applied Sciences Berlin
▪ Dr Viktoria Kickinger, Founder and Managing Director, Directors Academy Hamburg

The debate was moderated by Martina Schmid, Partner, CMS, combining a business and legal perspective; and also by Gillian Karran-Cumberlege, drawing upon the UK perspective where Fidelio has been twice accredited for our contribution to diversity by the Hampton- Alexander Review.

The panel in Stuttgart made practical recommendations for Boards committed to building a strong and more diverse pipeline. In this Overture we summarise the findings.

(SLOW) PROGRESS TO DATE

GERMANY – TURNING TO THE LAW

Germany, for all its industrial strength and track record in electing female political leaders, has lagged behind other leading European economies in gender diversity.

With German business making little progress, the political response was to pass legislation. The purpose was to drive change in the often strikingly non-diverse Management and Supervisory Boards. The relevant law was passed in 2015 and applies to quoted companies as well as those subject to 50% worker representation on the Supervisory Board. It mandates a minimum of 30% female representation on the Supervisory Board and also requires companies to set targets for women in the Management Board, as well as two executive levels below.

The legal requirement of 30% for Supervisory Boards was first reached in 2018. Progress here has been made easier for larger companies by generally better gender balance in the union representatives who typically make up 50% of the Supervisory Board.

But when it comes to the requirement for targets, companies have been permitted – rather bafflingly – to adopt a so-called ‘Zero Quota’ which effectively maintains the status quo. As a consequence, progress in diversifying the pipeline has been slower than expected and at Management Board level female representation remains very low. Even at major quoted companies, which have a better track record here, the percentage of women in the Management Board is only just over 9%.

Women on Boards – DAX, MDAX, SDAX & TecDAX

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THE UK APPROACH – “NAME AND SHAME”

In contrast to the legally binding approach in Germany, the UK has opted for voluntary targets with government-sponsored reviews publishing data on gender diversity in the FTSE 350. These started in 2011 with the Davies Review, and since 2016 the initiative has been driven by the Hampton-Alexander Review which has set a target of 33% for female representation on FTSE 350 Boards and leadership teams (Executive Committees and their direct reports) by 2020. There has been significant progress with the FTSE 100 reaching 30% female representation at Board level by 2018 and the FTSE 350 reaching 30% in 2019.

Two important drivers assisted in this development:

  • ▪  The introduction in 2016 of the nine-year limit on tenure as an independent Board Member.
  • ▪  The requirement from 2017 for all businesses with more than 250 employees to publish data on the Gender Pay Gap.But despite overall progress towards voluntary targets, in the UK diversity has also remained stubbornly low in key roles:
  • ▪  At Executive, and in particular CEO, level – there are just 13 female CEOs in the FTSE 350.
  • ▪  At Chair level – there is evidently a pipeline now, but female Chair appointments are not coming through. The chart below shows how stark this lag effect is.Women on Boards – FTSE 350

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POOR GRADES
GERMANY – EBBING MOMENTUM AND DURABLE GLASS CEILING

As part of the Stuttgart ‘Die Frauenquote’ seminar we put our panellists on the spot and asked them to award marks out of 10 for progress in Germany to date towards increasing gender diversity in Board and leadership roles.

Speaker

Score out of ten

Speaker A

5.50

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Speaker B

3.00

Speaker C

page4image191032112

3.75

Speaker D

1.75

Speaker E

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3.00

page4image191051680

Average

3.40

When asked the same question last year our panellists awarded 3.75 for progress towards greater gender diversity in Germany and 6 in the UK. Disappointing on both scores but highly concerning that against this crude metric Germany appears to be slipping. Indeed, some of the speakers distinguished between Supervisory Board and Management Board with progress at the Management Board level judged to be significantly worse.

It was argued that since the 30% Supervisory Board target had been reached, the momentum for change had ebbed away and that the 30% was being viewed almost as a limit rather than a first important step.

Initial media interest in lack of progress has now waned and there is growing concern at how difficult it is proving to break this glass ceiling.

Our speakers noted that of 1,750 companies covered by the ‘Die Frauenquote’ 81% either have a ‘Zero Quota’ for women in the ‘Vorstand’ (Management Board) or no target at all. Of 160 quoted companies, fully 64% are ‘woman-free zones’ at Management Board level; there are only 10 female Chairs in Germany’s 185 largest companies; and women are poorly represented in Supervisory Board Committees.

By contrast, many of those companies that have established greater gender diversity in the Supervisory Board have noted a change in dynamic and indeed effectiveness. This simply needs to be replicated in much greater numbers.

PRACTICAL STEPS TO DRIVE DIVERSITY

Practically, how can Germany and the UK increase female representation in corporate leadership? At our recent ‘Die Frauenquote’ seminar we prompted our panellists to provide practical steps that will move the dial. We set out below seven recommendations principally for the German market, a number of which are also relevant for the UK:

  • ▪  Increase Female Visibility – Women need to be visible, particularly in the appointment and selection processes. One aspect is women being prepared to speak out in favour of other women in senior roles; another is a preparedness on the part of female candidates to put their hat in the ring and be counted. Some of our panellists argued that occupying niches is tremendously important. Others were wary of women settling for anything but the mainstream P&L roles upon which successful Board careers are typically built.
  • ▪  Address the Culture – Admittedly much easier said than done but culture clearly plays a major role and in Germany there is still frequently a presumption that women will be dropping out of high-pressured careers, in particular to care for children. Celebrating working mothers was a simple solution posited by one of our panellists. In previous Frauenquote seminars Fidelio has identified the power of the working mother role model for both daughters and sons.
  • ▪  Coherent Legislation – Again not easy for the individual or company to address. Countries that have made progress on diversity have done so not simply by introducing a quota, but also by ensuring a framework is in place to enable more women to flourish in the workplace. This requires, for example, a close look at the tax code and also all aspects of shared parental leave and ongoing childcare.
  • ▪  International Diversity – We all stand to learn and across Europe there are countries that have adopted a range of innovative steps to promote diversity in society and the Boardroom. These may not be immediately transferable but the process of benchmarking and understanding what works is incumbent on both governments and companies that are committed to greater diversity.
  • ▪  Objectivity in Selection and Appraisal – There is an increasing recognition that bias creeps into even the most well-intentioned appointment or appraisal. To counter this subjectivity, a robust process is the most effective antidote. If the process is trusted, better candidates will apply and there will be greater confidence in those that succeed to senior executive and Board roles. This methodology underpins Fidelio’s approach to Search and clearly leads to results in terms of diverse outcomes, as well as success in role.
  • ▪  Institutional Investors – Investors have a major role to play in promoting diversity and insisting on appropriate data disclosure from companies. In the UK we have already seen major houses such as Legal & General Investment Management engage on diversity and importantly vote against Chairs and companies with a poor track record. At last year’s ‘Die Frauenquote’ seminar, Hans-Christoph Hirt, Executive Director, Hermes Investment Management committed to do the same in Germany and called upon institutional investors to also be prepared to take a stand against German Supervisory Board Chairs who were making inadequate progress on diversity.
  • ▪  The Power of Networks – It is clear that networks play an important role in underpinning Boardroom success. Fidelio has conducted primary research into what it takes to succeed at the Board room table and networks of support and reciprocity were identified as one of the 5 key attributes of highly effective Board Directors.
    We build upon this in Fidelio’s ’A Seat at the Table’ programme. The panellists in Stuttgart were equally clear that network matters but were also aware that Germany provides more of a challenge with business spread across different cities and regions.

SO, WHAT’S NEXT?

Both Germany and the UK recognise the benefits of greater Board diversity. Both countries have made progress, but it is arguable whether the most influential roles at the top of leading quoted companies have fully opened up to female talent. The dearth of female Chairs in Germany and the UK speaks for itself.

So, what comes next and what can Boards do to keep moving the dial?
Based on our research and assignments, Fidelio sees the next steps as critical:

  • ▪  Clear focus on the pipeline. There is a strong bench of women ready and available for Board roles. But many organisations have been hollowed out at a more junior level. This needs to be remedied. Companies that have rewarded progress towards diversity through remuneration and advancement have made greatest headway.
  • ▪  Board composition, Search and succession planning need to earn respect and trust. Confidence in the robustness and fairness of appointments will attract a wider and more diverse pool and enable the successful candidates to flourish.
  • ▪  Finally, through Evaluation and Board learning, Chairs will ensure that the Board becomes increasingly proficient at embracing diversity which in turn underpins effectiveness.

Fidelio will continue to support our clients in the UK, Germany and internationally in increasing and embedding Board and leadership diversity. We shall do this through Search, Evaluation and Development.

We also recognise the benefits of establishing an international network of senior executives and directors who are committed to diversity and to learning from best practice across different countries, sectors and organisations. Fidelio therefore looks forward to collaborating again with CMS in 2020 to increase the momentum towards gender balance in UK and German Boardrooms.

ABOUT FIDELIO AND CMS

FIDELIO

Fidelio Partners is a Board Development and Executive Search consultancy. Our focus is Board effectiveness and Board composition, as we build Boards and leadership teams fit for the future. We do this through Board Evaluation, Development, and Search.

We have a track record in supporting Chairs cross-border, cross-sector, cross-function. Fidelio has strong public company experience and also supports private and non-profit organisations. 50% of our Search, Development and Evaluation is outside the UK.

In 2018, Fidelio was accredited for the second consecutive year by the UK Government’s Hampton-Alexander Review for our contribution to increasing Board gender-diversity beyond the FTSE 350. Fidelio’s flagship “A Seat at the Table” Board Learning Programme for Senior Executives and Directors is also core to our contribution to diversity and reflected in our accreditation. We will host the eighth iteration of the programme in March 2020.

Fidelio’s advocacy of the governance of Search is reflected in our strong Search process and outcomes. Our approach to Search is distinctive and forward-looking and predicated upon an exceptional international network. Diversity is hardwired into every aspect of our Search process and 50% of our appointments are female and our track record on mandated Search is well above industry benchmarks.

Fidelio is recognised for thought leadership, advocacy, and primary research on topics including Board composition, diversity, how leading Chairs prepare their Boards for disruption, and stakeholder and shareholder engagement.

CMS

CMS is one of the leading commercial law firms in Germany.

More than 600 lawyers, tax advisers and notaries public operate out of eight major German business locations and five international locations. Most recently, CMS opened an office in Hong Kong in 2016. At all our locations, we advise German and international companies and institutions from many different sectors on all aspects of national and international commercial law.

We have long experience of working with corporate legal departments and in-house lawyers. In addition to the required specialist legal knowledge in all areas of commercial law, our lawyers understand the business needs and market-specific requirements of every industry and sector.

CMS advises SMEs and major corporations on all aspects of national and international commercial law. Our strong teams comprise experienced specialists across a wide range of legal areas, making us a partner you can rely on. We are one of the few commercial law firms to possess expertise in all fields relevant to business enterprises, the public sector, high net worth individuals and entrepreneurs.

Digital transformation has profound consequences for the global economy, with the impact already being felt in everyday corporate life and across almost every industry. As an innovative partner with strong digital expertise, CMS can assist you with key issues around the digital economy and its legal implications.

Our success is underpinned by the knowledge and experience of our more than 4,800 lawyers and tax advisers in over 70 offices worldwide.

CONTACT DETAILS

CMS

Dr Martina Schmid
Partner
+49 711 9764 670 martina.schmid@cms-hs.com

Dr Alexandra Schluck-Amend
Partner
+49 711 9764 278 alexandra.schluck-amend@cms-hs.com

John Hammond
Partner
+49 711 9764 788 john.hammond@cms-hs.com

Fidelio

Gillian Karran-Cumberlege
Head of Chair Advisory
+44 (0)207 759 2200 gkarrancumberlege@fideliopartners.com