Co-determination

In corporate governance, codetermination (also "copartnership" or "worker participation") is a practice where workers of an enterprise having the right to vote for representatives on the board of directors in a company. It also refers to staff having binding rights in work councils on issues in their workplace. The practice of board level representation is widespread in developed democracies.[1] The first laws requiring worker voting rights include the Oxford University Act 1854 and the Port of London Act 1908 in the United Kingdom, a voluntary Act on Manufacturing Companies of 1919 in Massachusetts in the United States, and the Supervisory Board Act 1922 (Aufsichtsratgesetz 1922) in Germany, which codified collective agreement from 1918.[2]

Most countries with codetermination laws have single-tier board of directors in their corporate law (such as Sweden, France or the Netherlands), while a number in central Europe (particularly Germany and Austria) have two-tier boards.

The threshold of a company's size where co-determination must apply varies between countries: in Denmark it is set at 20 employees, in Germany over 500 (for 1/3 representation) and 2000 (for just under a half), and in France for over 5000 employees. Sweden has had a law of codetermination since 1980.

Overview

In economies with codetermination, workers in large companies may form special bodies known as works councils. In smaller companies they may elect worker representatives who act as intermediaries in exercising the workers' rights of being informed or consulted on decisions concerning employee status and rights. They also elect or select worker representatives in managerial and supervisory organs of companies.

In codetermination systems the employees are given seats on a board of directors in one-tier management systems, or seats in a supervisory board and sometimes management board in two-tier management systems.

In two-tier systems the seats in supervisory boards are usually limited to one to three members. In some systems the employees can select one or two members of the supervisory boards, but a representative of shareholders is always the president and has the deciding vote. Employee representatives on management boards are not present in all economies. They are always limited to a Worker-Director, who votes only on matters concerning employees.

In one-tier systems with codetermination the employees usually have only one or two representatives on a board of directors. Sometimes they are also given seats in certain committees (e.g. the audit committee). They never have representatives among the executive directors.

The typical two-tier system with codetermination is the German system. The typical one-tier system with codetermination is the Swedish system.

There are three main views as to why codetermination primarily exists: to reduce management-labour conflict by improving and systematizing communication channels;[3] to increase bargaining power of workers at the expense of owners by means of legislation;[4] and to correct market failures by means of public policy.[5] The evidence on "efficiency" is mixed, with codetermination having either no effect or a positive but generally small effect on enterprise performance.[6]

Impact

A 2020 study in the Quarterly Journal of Economics found that co-determination in Germany had no impact on wages, the wage structure, the labor share, revenue, employment or profitability of the firm, but it increased capital investment.[7]

European Union
See also: European labour law and Draft Fifth Company Law Directive

In the 1970s, the European Community (now the European Union) drafted the 5th Directive on company law, proposing a two-tier board and worker representation on supervisory boards. The law would’ve been similar to Germany's, but the proposal was not passed. The directive has not yet won widespread support to be brought into force.

Germany
See also: German labour law, Codetermination in Germany, and Mitbestimmungsgesetz

The first codetermination plans began at companies and through collective agreements.[8] At the end of World War I, the Stinnes-Legien Agreement between unions and business agreed that economic power would be shared throughout the economy. In 1920 a work council law was passed, and in 1922 a law to enable representation on company boards was passed. Hitler abolished codetermination, along with free trade unions, from 1933. After the military defeat of the fascist dictatorship in World War II, codetermination was again restored from 1946 through collective agreements.[9] In 1951, and 1952, the collective agreements were codified into new laws.[10] This first affected the coal and steel industries of West Germany, with an equal number of worker and shareholder (or bank) representatives, and one-third representation on other large company boards.

The Codetermination Act 1976 (Mitbestimmungsgesetz 1976), and the Work Constitution Act 1972 (Betriebsverfassungsgesetz 1972) are the basis for the current law. The 1976 Act requires companies with over 2,000 workers to have just under one-half representation on the supervisory board, which in turn elects the management board. Shareholders (mostly banks) and workers (who can delegate their votes to trade unions) elect members of a supervisory board (Aufsichtsrat). The chairman of the supervisory board, with a casting vote, is always a shareholder representative under German law. The supervisory board is meant to set the company's general agenda. The supervisory board then elects a management board (Vorstand), which is actually charged with the day-to-day running of the company. The management board is required to have one worker representative (Arbeitsdirektor). In effect, shareholder voices still govern the company for a number of reasons, but not least because the supervisory board's vote for the management will always be a majority of shareholders.

Co-determination in Germany operates on three organisational levels:

  • 1. Board of directors: Prior to 1976, German coal and steel producers employing more than 1,000 workers already commonly maintained a board of directors composed of 11 members: five directors came from management, five were workers' representatives, with the eleventh member being neutral. (Note: Boards could be larger as long as the proportion of representation was maintained.) In 1976, the law's scope was expanded to cover all firms employing more than 2,000 workers; with some changes concerning to the board structure, which has an equal number of management and worker representatives, with no neutral members (except in the Mining-and-steel industries where the old law remained in force). The new board's head would represent the firm's owners and had the right to cast the deciding vote in instances of stalemate. (The original law comprising coal-and-steel industries thus remained unchanged in force)[11]
  • 2. Management: A worker representative sits with management in the capacity of Director for Human Resources. Elected by a majority of the Board of Directors, the workers' representative sits on the Board and enjoys the full rights accorded to that position.
  • 3. Work councils: The workers committee has two main functions: it elects representatives to the Board of Directors and serves as an advisory body to the trade union regarding plant-level working conditions, insurance, economic assistance and related issues. The committee is elected by all the workers employed in a plant.

Thanks to the years during which a co-operative culture has been in place, management requests from workers for proposals to improve operations or increase productivity, for example, are no longer considered mere legal formalities; they represent recognition of the fact that workers play an important part in plant success. In tandem, a practical approach has evolved among both parties, with each aiming to reach decisions based on consensus. In addition, worker representatives no longer automatically reject every proposal for structural reform, increased efficiency or, even, layoffs; instead, they examine each suggestion from an inclusive, long-term perspective. At the core of this approach is transparency of information, such as economic data. Co-determination is thus practised at every level, from the local plant to firm headquarters.

Co-determination enjoys strong support among Germans in principle. In practice, there are many calls for amendments to the laws in various ways. One of the main achievements seems to be that workers are more involved and have more of a voice in their workplaces, which sees a return in high productivity. Furthermore, industrial relations are more harmonious with low levels of strike actions, while better pay and conditions are secured for employees.

New Zealand

The Companies Empowering Act 1924[12] allowed companies to issue shares for labour and have them represented by directors, but it was little used,[13] even its chief promoter, Henry Valder, being unable to get his company board to agree to it.[14] It was consolidated into the Companies Act in 1933.[15] The Law Commission recommended its abolition in 1988 for lack of use.[16] The Companies Act 1993 did not allow for labour shares.[17]

United Kingdom
See also: UK labour law

In the UK, the earliest examples of codetermination in management were codified into the Oxford University Act 1854 and the Cambridge University Act 1856. In private enterprise, the Port of London Act 1908 was introduced under Winston Churchill's Board of Trade.[18]

Proposals for codetermination were drawn up, and a command paper produced named the Bullock Report. This was done in 1977 by Harold Wilson's Labour government. It involved a similar split on the board, but its effect would have been even more radical. Because UK company law requires no split in the boards of directors, unions would have directly elected the management of the company. Furthermore, rather than giving shareholders the slight upper hand as happened in Germany, a debated 'independent' element would be added to the board, reaching the formula 2x + y. However no action was ever taken as the UK slid into the winter of discontent and, as Labour lost the next election, two decades of Thatcherism. That tied into the European Commission's proposals for worker participation in the Fifth Company Law Directive, which was never implemented.

While most enterprises do not have worker representation, UK universities have done so since the 19th century. Generally the more successful the university, the more staff representation on governing bodies: Cambridge,[19] Oxford,[20] Edinburgh, Glasgow and other Scottish Universities,[21] have rights for staff election of councils in statute, while other universities have a wide variety of different practices. Under the UK Corporate Governance Code 2020, listed companies must comply or explain with one of three worker involvement options including having a worker director on board. However, companies have not yet ensured workers have the right to vote for representatives on the board.

United States

The United States has, in Massachusetts, the world's oldest codetermination law that has been continually in force since 1919, although it is only voluntary and only for manufacturing companies.[22] A large number of universities also enable staff to vote in the governance structure. In the 1970s, a number of large corporations including Chrysler appointed workers to their board of directors pursuant to collective agreement with the labor union.

In 2018, five Senators (Tammy Baldwin, Elizabeth Warren and Brian Schatz in March 2018, joined in April 2018 by Kirsten Gillibrand, and in November 2018 by Bernie Sanders) sponsored the Reward Work Act (S.2605) which would amend federal legislation to require all listed companies to have one-third board representation for workers. Polls showed majority support among Americans for the measure. In August 2018, Elizabeth Warren sponsored a new Accountable Capitalism Act (S. 3348) that would require 40% of the board of directors be elected by employees in federal corporations with incomes over $1 billion.

In his 2020 run for President, Bernie Sanders proposed a version of co-determination where 45% of the board of directors of corporations with over $100 million in annual revenue would be elected by the workers of that corporation.

See also

Notes
  1. See worker-participation.eu
  2. E McGaughey, 'The Codetermination Bargains: The History of German Corporate and Labour Law' (2016) 23(1) Columbia Journal of European Law 135
  3. Prominent views of codetermination have thus been "social" in nature, concerned with expanding democratic participation in new spheres as a good in itself, reducing "alienation", and smoothing management-labour relations to prevent strong conflicts. A collection of views of this nature are found in Magazin Mitbestimmun Archived 2009-08-03 at the Wayback Machine
  4. A conservative economic approach views codetermination as not benign: a political means for transfer of wealth from shareholders to employees and to increase power of political and perhaps union actors; as evidence it is noted firms rarely adopt codetermination voluntarily: see Pejovich, Svetozar. The economics of property rights: towards a theory of comparative systems. Chapter 8. Dordrecht, NL: Kluwer Academic, 1990.
  5. Another economist argues that codetermination in effect corrects several market failures so lack of voluntary adoption cannot be viewed as evidence that codetermination is inefficient: see Stephen C. Smith, "On the economic rationale for codetermination law", Journal of Economic Behavior and Organisation, Vol. 16 (December 1991), pp. 261-281.
  6. For example see Felix R. Fitzroy and Kornelius Kraft, "Co-determination, efficiency and productivity", British Journal of Industrial Relations, Vol. 43, No. 2 (June 2005), pp. 233-247.
  7. Jäger, Simon; Schoefer, Benjamin; Heining, Jörg (2020). "Labor in the Boardroom". The Quarterly Journal of Economics. doi:10.1093/qje/qjaa038.
  8. E McGaughey, 'The Codetermination Bargains: The History of German Corporate and Labour Law' (2016) 23(1) Columbia Journal of European Law 135, page 22
  9. E McGaughey, 'The Codetermination Bargains: The History of German Corporate and Labour Law' (2016) 23(1) Columbia Journal of European Law 135, page 33
  10. This was the Mining Codetermination Act 1951 (Montanmitbestimmungsgesetz 1951) and the Work Council Act 1952 (Betriebsrätegesetz 1952).
  11. https://www.gesetze-im-internet.de/montanmitbestg/BJNR003470951.html. Retrieved 3 December 2018. Missing or empty |title= (help)
  12. "Companies Empowering Act 1924 (15 GEO V 1924 No 52)". www.nzlii.org. Retrieved 2018-03-22.
  13. Parliament, New Zealand (1986). Parliamentary Debates. House of Representatives.
  14. Taonga, New Zealand Ministry for Culture and Heritage Te Manatu. "Valder, Henry". teara.govt.nz. Retrieved 2018-03-22.
  15. "Companies Act 1933" (PDF).
  16. "Preliminary Paper No. 5 COMPANY LAW A discussion paper" (PDF). 1988.
  17. "Companies Act 1993 (1993 No 105)". www.nzlii.org. Retrieved 2018-03-22.
  18. E McGaughey, 'Votes at work in Britain: shareholder monopolisation and the ‘single channel’ (2018) 47(1) Industrial Law Journal 76, page 9.
  19. Cambridge University Act 1856
  20. Oxford University Act 1854
  21. Higher Education Governance (Scotland) Act 2016 ss 10-11
  22. E McGaughey, 'Democracy in America at Work: The History of Labor's Vote in Corporate Governance' (2019) 42 Seattle University Law Review 697

References
Articles
  • E Batstone, A Ferner and M Terry, Unions on the board: an experiment in industrial democracy (1983)
  • P Brannen, ‘Worker directors: an approach to analysis. The case of the British Steel Corporation’ in C Crouch and FA Heller, Organizational Democracy and Political Processes (Wiley 1983)
  • E Chell, ‘Worker Directors on the Board: Four Case Studies’ (1980) 2(6) Employee Relations 1
  • PL Davies and KW Wedderburn, ‘The Land of Industrial Democracy’ (1977) 6(1) ILJ 197
  • E McGaughey, 'The Codetermination Bargains: The History of German Corporate and Labour Law' (2016) 23(1) Columbia Journal of European Law 135
  • E McGaughey, 'Votes at Work in Britain: Shareholder Monopolisation and the ‘Single Channel’' (2018) 47(1) Industrial Law Journal 76
  • E McGaughey, 'Democracy in America at Work: The History of Labor's Vote in Corporate Governance' (2019) 42 Seattle University Law Review 697
  • HJ Teuteberg, ‘Zur Entstehungsgeschichte der ersten betrieblichen Arbeitervertretungen in Deutschland’ (1960) 11 Soziale Welt 69
  • S Vitols, 'Prospects for trade unions in the evolving European system of corporate governance' (2005) ETUI, summarising different economic results of codetermination
  • Lord Wedderburn, ‘Companies and employees: common law or social dimension’ (1993) 109 Law Quarterly Review 261
Books
  • HJ Teuteberg, Geschichte der Industriellen Mitbestimmung in Deutschland (1961)
  • S Webb and B Webb, The History of Trade Unionism (1920) Appendix VIII
Reports
  • Lord Donovan, Royal Commission on Trade Unions and Employers’ Associations (1968) Cmnd 3623
  • Liberal Party, The Report of the Industrial Partnership Committee: Partners at Work (1968)
  • Uday Dokras, doctoral thesis, published as a book, The Act on Codetermination at Work- An Efficacy Study, Almqvist & Wiksell International, Stockholm Sweden, 1990
EU Draft Fifth Company Law Directive
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