Europe's largest economy has passed legislation introducing a minimum quota for women on the boards of large listed companies, in a move widely praised by business diversity advocates as an important step toward gender equality.

The German Federal Cabinet on Jan. 6 backed a bill which will mandate that large businesses, usually with more than 2,000 employees and at least three board positions, appoint at least one woman board member, as well as at least one man.

Companies under the scope of the law include listed entities trading on the DAX index of Germany's largest companies, as well as those listed on other indices in Germany. The Ministry of Justice and Consumer Protection said 70 listed companies are affected, 31 of which have no women on their boards.

The bill, which still needs final legislative sign-off, also includes provisions for a further 90 companies in which the government has a substantial shareholding. These, such as state-owned railway operator Deutsche Bahn AG, will have to have at least 30% female representation in the boardroom.

READ MORE: Sign up for our weekly ESG newsletter here, read our latest coverage of environmental, social and governance issues here and listen to our ESG podcast on SoundCloud, Spotify and Apple podcasts.

Public service companies such as health insurance, pensions and accident insurers, and the Federal Agency for Employment will also need to have at least one woman on their boards. This will affect 155 entities.

The underrepresentation of women and the best way to address it have been subject to fierce debate in politics and business in Germany for years.

BDI, the umbrella trade organization for German industry, said in a Jan. 6 email that it backs the political aim of supporting the appointment of women to leadership posts, but calls for a balanced sharing of responsibilities and a flexible transition for companies.

"The introduction of a fixed board quota remains a special challenge for the economy. It is a significant intervention into business freedom. The tendency to always try to solve societal inequalities through the economy and businesses cannot become the rule," said Iris Plöger, a member of the BDI executive board.

The decision, when transposed into law, will make Germany one of the few countries in Europe with mandates on gender for company boards. Neighboring France has already exceeded its 40% legislative target of women on boards, set in 2011, for its largest businesses.

The U.K. has a voluntary initiative for raising the representation of women in boardrooms, with the independent Hampton-Alexander Review saying in February 2020 that the FTSE 100 index had reached its targeted 33% of female board representation — at 349 out of 1046 directorships — a year ahead of its deadline.

In the U.S., Californian companies are also mandated to ensure female board representation.

At an EU-level, a planned Women on Boards Directive was meant to put legislative meat on the bone of the European Commission's general support for boosting female board membership. The initiative has not progressed through parliament.

Diversity 'milestone' reached, but heavy lifts still ahead

Back in Germany, there is hope that the quota delivers what guidance has so far failed to achieve. Monika Schulz-Strelow, president of think-tank FidAR, which tracks the share of women in Germany's boardrooms, described the legislation as "another milestone on the way to equal participation." However, she noted that its scope is limited, and will only apply from 2022 and to new board appointments.

"But the signaling effect is enormous: [it tells business] to stop favoring men. In the past few years the increase of female representation has stalled. Now I am anticipating a new dawn," she said.

FidAR has compiled a list of the companies affected by the new law, finding around 30 who do not yet have a woman on their board. Companies from a range of sectors fall short of the new requirement, but many businesses without female board members are in heavy industry.

Chemicals giant Bayer AG and energy company Uniper SE currently do not have women on their boards; nor do insurer Talanx AG and finance group Wüstenrot & Württembergische AG. "Look at the DAX-30 company HeidelbergCement AG. No woman on the seven-person board, a target of zero," Schulz-Strelow said.

In anticipation of the law's approval, there has already been a shift in German boardrooms. Sportswear maker adidas AG and energy giant E.ON SE both appointed women to their boards in recent weeks, in the fields of human resources and digitalization, respectively.

Under the new law, companies who do not appoint female board members will need to justify and report on why that is, and those who do not set a target for boardroom diversity can be sanctioned more effectively in the future.

"Without an explanation, this can get very expensive for companies. Companies will now think twice," Schulz-Strelow said.