Board-level employee representation under debate

Germany's system of employee representation on company supervisory boards is under debate during 2004. In April, the BDA employers' confederation set up a 'commission on co-determination' with a remit to come up with proposals for change. Part of the context is the implementation of the EU Directive on employee involvement accompanying the European Company Statute, and in June the cabinet approved a bill on German transposition of the Directive. Also in June, BDA organised a conference at which experts discussed the question of whether or not the German system of board-level employee representation is a disadvantage for firms operating there, given current debates on corporate governance and the continuing development of EU-wide company law.

German co-determination law stipulates that the supervisory boards (bodies that oversee a separate management board, which runs the day-to-day business) of public limited companies with more than 2,000 employees must include 50% shareholder representatives and 50% employee representatives (TN9809201S). A certain proportion of the seats for employee representatives are filled by trade union representatives. The chair (usually a representative of the shareholders) has the deciding vote in the event of a tie. There is an even more extensive system of board-level co-determination in the coal, iron and steel industry (DE9903101F). Furthermore, in smaller public limited companies with a workforce of between 500 and 2,000, employees have a right to one third of the supervisory board seats.

EU Council Regulation (EC) No. 2157/2001 on the Statute for a European Company (or Societas Europaea, SE) gives companies the option of forming a European Company (SE) which can operate on a Europe-wide basis and be governed by Community law directly applicable in all Member States (rather than national law). It comes directly into force across the EU on 8 October 2004. By the same date, Member States must transpose into national law Council Directive 2001/86/EC supplementing the Statute for a European Company with regard to the involvement of employees (EU0206202F). The Directive lays down the employee involvement provisions to apply to SEs - providing for negotiations between management and employee representatives in each SE on the arrangements to apply, with a set of back-up statutory 'standard rules' where no agreement is reached. Involvement constitutes the information and consultation of employees and, in some cases, board-level participation.

A bill on SEs was passed by the German cabinet at the end of June 2004. It provides that German firms that establish an SE can choose freely between: on the one hand, the two-tier system of corporate governance that currently prevails in Germany, with its separation of powers between a management board and a supervisory board; or, on the other, the system - which is common in countries such as the UK and France - whereby there is a single board of directors. If a German public limited company (Aktiengesellschaft, AG) were to convert itself into an SE registered in Germany, its current form of co-determination would be unaffected by the change. The extent of employee involvement, including board-level participation, in SEs formed by cross-border mergers will have to be established in negotiations between a special negotiating body, representing the workers in all the companies directly affected by the merger, and management. If no consensus can be reached in the negotiations, under the 'standard rules' the extent of employee representation on the supervisory board or administrative board will be based on the highest existing level of such representation in the companies that are merging. The employee representatives on the SE's supervisory or administrative board would be drawn on a pro rata basis from the countries in which the workforce of the SE is employed. However, during negotiations in SEs, the employee representatives can decide, in principle, that they do not wish to have board-level participation.

Debate

On 19 April 2004, the presidential board of the Confederation of German Employers' Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) set up a 'commission on co-determination'. The Confederation of Germany Industries (Bundesvereinigung der Deutschen Industrie, BDI) accepted BDA’s invitation to join this commission, whose remit is to produce a report on how German co-determination can be made 'fit for the future' by the end of the year. The commission's report will take into consideration the development of EU company law, but also current international discussions on corporate governance. In these discussions, new issues, such as the independence of members of supervisory bodies as well as the efficiency of different forms of corporate control, are being raised. Possible German reform alternatives are, according to BDA’s biannual report, 'the general introduction of bargained settlements [resulting from free negotiations between senior managers and a committee of employee representatives] in place of co-determination, the transformation of board-level co-determination into a separate consultative body, and open competition between different forms of corporate governance'.

However, in a publication issued in February 2004, the Hans Böckler Foundation (Hans Böckler Stiftung) comes to the conclusion that a reduction in board-level employee representation rights would not contribute to an improvement in the quality of the work performed by supervisory boards. Along with other parties, though, the Foundation does see a need for a modernisation of board-level co-determination in view of changed social and economic conditions. For instance, it proposes that employees in other countries should be represented on company supervisory boards, election procedures should be simplified, and the number of meetings that supervisory boards hold should be increased.

BDA organises conference

On 9 June 2004, BDA organised in Berlin a symposium entitled 'European and international challenges for co-determination in Germany'. Speakers included: Professor Abbo Junker, chair of the Institute for Labour Law at the University of Göttingen; André Leysen, honorary chair of the board of Agfa Gevaert, a Belgian-based photographic, medical imaging and graphics arts company; Professor Volker Rieble, director of the Centre for Labour Law at Munich University; and Dietmar Hexel, an executive member of the federal board of the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB). The meeting served, among other aims, as a preliminary exchange of opinions over the BDA-BDI commission on co-determination

The meeting was opened by Reinhard Göhner, the director general of BDA and a member of its presidential board. He stated: 'The fact that German wage and tax laws are not a locational advantage is well known. We are now becoming increasingly aware that labour laws and laws on co-determination in Germany are not exactly a locational advantage either.' BDA had already made its position on this matter clear in its invitation to the symposium: 'The regulations regarding corporate governance in the USA and the Directives from Brussels, first on public limited companies and second on cross-border mergers, have made the lack of conformity of the German system with other systems in Europe and the USA clear. In Germany, two systems of employee representation - firm-level co-determination and board-level co-determination - are combined in a way that is unique in the world. It is precisely this interplay between the two levels that often has negative consequences.'

Mr Göhner concluded from this that 'the German model of co-determination is, for this reason, not a product that can be exported.' He added that 'ways will have to found to make German co-determination fit for the future.' The invited speakers then addressed how this might be achieved.

Some pros and cons

For the labour lawyer Professor Junker, the German model of co-determination has come under pressure for three main reasons:

• as a result of the creation of the SE. Those starting a firm in the future can choose this form of legal entity, for which the co-determination requirements are lower than for those of a German public limited company;

• subsidiaries now have freedom to choose their legal form. Accordingly, foreign companies that set up subsidiaries in Germany will not have to adhere to the current German company law in the future; and

• if in cases of cross-border mergers and acquisitions the most extensive form of co-determination should apply to the merged company (as proposed by the European Commission), a problem for Germany would arise if it was often decided to locate the headquarters of such newly merged companies outside Germany.

Mr Leysen of Agfa Gevaert was certain that 'the more efficient Anglo-Saxon model, and not the unique German system of co-determination, would win through'. He stated that the special form of co-determination in Germany would lead 'in its current form, without any doubts, to isolation. It is not possible to go against 99% of the world’s population.'

Professor Rieble, a law expert, [set out](http://www.zaar.uni-muenchen.de/fileadmin/ZAAR-Dateien/kongressbericht/Vortrag Mitbestimmung.pdf) ways in which co-determination could, in his opinion, be changed to meet the demands of the future. He suggested, amongst other reforms, transferring the rights associated with board-level co-determination to firm-level co-determination bodies. The rights of 'co-counselling' on economic matters that strongly affect the rights of workers would then be exercised either by the firm’s overall works council (as opposed to the works councils at individual establishments) or by the economic committee (a specialised employee representative body). In addition, he rejected the current restrictions of co-determination to private-sector companies with a particular legal form and to employees in the home nation of a company, who often make up only a part of the workforce. It is currently the case that only employees in Germany are represented at board level in multinational companies based in Germany.

Mr Hexel of DGB saw things differently. He stressed the advantages of the current form of co-determination both for companies and for Germany as a place to do business: 'Despite the bitter social and political quarrels, co-determination in Germany has proved itself to be a success story. Without co-determination, it would not have been possible to bring the democratising process of the whole of society so far forward.' He also claimed that investments in Germany by US-based companies such as General Electric, General Food and Ford showed that German co-determination was not a locational disadvantage: 'Co-determination does not scare foreign investors off if they believe that being present in Germany is a sensible thing to do.' In the name of DGB, Mr Hexel proposed measures such as limiting the number of supervisory board mandates and prohibiting former chairs of the board from moving to the supervisory board. He also called for all committees that carried out preparatory work for the supervisory board to be made up equally of employer and employee representatives.

Commentary

There is a consensus that board-level co-determination needs to be reassessed as a result of new challenges - even if important adjustments have already been made with the introduction of the SE. However, whilst one side has called for a more evolutionary development of board-level co-determination with proposed amendments to individual aspects of co-determination, the other has proposed comprehensive structural reforms. To the extent that board-level co-determination is a locational disadvantage for Germany in an era of increasing Europeanisation and globalisation - and the BDA commission finds this in its report - it should be changed accordingly to make it promote both economic growth and employment. (Lothar Funk, Cologne Institute for Business Research, IW)