In 18 of the 28 countries that make up the European Union, employees of a company are legally granted the right to be represented on the corporate board. Usually it is Germany that is presented as the main defender of this system, which is called “co-determination.’’
Germany was the first country in Europe to broadly mandate employee representatives on the supervisory boards that hire CEOs and set company policy in 1976.
To this day, Germany grants its employees more far-reaching, board-level representation than do other European countries. In companies with more than 2,000 employees, half of the seats on a German supervisory board are occupied by employee representatives.
Deadlocked votes are sometimes decided by the chairperson of the supervisory board, whose vote is counted twice. But most German boards strive for consensual decisions and this remedy is only used as a last resort. In fact, it is very rare that decisions are taken against the unanimous wishes of employees.
It took a while to find a modus vivendi between employers and employees as well as between trade unions and workers councils.
The use of co-determination in Germany, along with the country’s use of dual boards – the non-executive supervisory board and the executive level management board, chaired by the CEO – are two unique features of German corporate governance.
While some in Europe now question the wisdom and efficacy of employee representation – especially in France – it would be useful to acknowledge that this system has consistently proven its value in Germany, helping establish the country as the motor of the European economy.
When it was set up in post-war Germany, the system of co-determination was also met with strong opposition from employers’ associations as well as workers’ councils and especially from trade unions, which feared that employee representation would create a competing force, undermining the power of corporate managers.
It took a while to find a modus vivendi between employers and employees as well as between trade unions and workers councils, which are the official, non-union organs within companies that represent workers. Today, however, this system has been established for so long that theoretical debates about other forms of integrating employee perspectives into corporate decisionmaking are largely moot.
Half a century later, co-determination is a simple fact of life.
The economic and social challenges of the last few years have been better weathered by German companies taking a longer-term view.
From an international perspective, Germany’s system of mandatory employee representation has long been seen as an obstacle to investment. In the case of cross-border mergers, for example, it was regularly demanded that the new entity not be headquartered in Germany to avoid putting employees on the supervisory board. There has, however, been no evidence that co-determination has in fact hindered the growth of the German economy.
On the contrary, the country has mastered the challenges presented by recent economic crises rather well. Foreign investors active in Germany for some time have come to acknowledge the fact that the German model can, despite the conventional wisdom, actually be a strength.
I would argue that the system brings not only social, but economic benefits, as well.
First, both employer and employee representatives in Germany have over the years developed a considerable professionalism in navigating this system. This can be attributed to clear, transparent procedures and good preparatory work by employees. Employee representatives have the same rights but also the same board duties as shareholder representatives, and thus have the same need for training and education.
When co-determination was mandated in Germany, lawmakers limited the size of supervisory boards at large companies to 20 members
Secondly, the economic and social challenges of the last few years have been better weathered by German companies taking a longer-term view. The fact that board members have the overarching mandate to steer a company in the best interests of the company — and not only to maximize short-term shareholder value – has proven to be wise and beneficial.
The mandate to taking the longer view, and not opting for short-term profit, has been enshrined in German corporate law and in the German Corporate Governance Code, a voluntary set of behavioral guidelines, at its creation more than a decade ago.
Since then, this guiding principle has consistently proven its value, through thick and thin.
Co-determination is not only shared decision-making but shared responsibility. This makes it an important factor for the success of the transformative efforts of German companies.
But one shouldn’t view contemporary German board conflicts exclusively through a management-labor prism.
One can justifiably say that the modern conflict lines in corporate board discussions in Germany nowadays run less and less along the old lines of capital versus labor and more and more along the differing time-horizons taken by the various stakeholder groups.
While there is room for improvement, manager-employee co-determination as a guiding principle of German corporate governance remains undisputed.
More and more debate within supervisory boards is taking place among members with a longer-term and those with a shorter-term perspective. These debates are independent of whether they originate with corporate managers or employees. Sometimes these debates are aligned, sometimes not. The old cultural fronts are often relics of the past.
Obviously, no system is perfect and challenges remain.
The most common concern is that co-determination leads to larger, unwieldy boards and weakens the effectiveness of corporate governance. I would disagree.
When co-determination was mandated in Germany, lawmakers limited the size of supervisory boards at large companies to 20 members. This limit, still in effect, has helped keep corporate decision making on track.
Several big German companies, such as MAN, have decided to swap the typical German legal form of incorporation, called an “aktiengesellschaft,’’ or AG, for a model called a Societas Europea, or SE, which enables companies to reduce the number of supervisory board members in most cases to 12 from 20. At the same time, companies choosing this route have still maintained the system of co-determination in smaller and more effective boards.
Another challenge increasingly being discussed in companies is the representation of foreign employees within this system. In German boards, only German nationals can be represented due to the regulations excluding the already huge and still growing number of international employees who are abroad or are living and working in Germany.
With the challenges of globalization and corporate restructuring, it is obvious that this might influence a board as it decides how and where to invest and restructure a global company.
So while there is room for improvement, manager-employee co-determination as a guiding principle of German corporate governance in a modern, global world, remains undisputed.