Thirtieth anniversary of Codetermination Act celebrated

At the end of August 2006, the thirtieth anniversary of the Codetermination Act was celebrated in Berlin. At the event, the German Chancellor and trade union representatives recognised the significance of board-level codetermination within companies. The celebrations were accompanied by an intense debate on the need for the act to be updated.

On 30 August 2006, the Hans Böckler Foundation (Hans-Böckler-Stiftung, HBS) and the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB) organised an event in Berlin to celebrate the thirtieth anniversary of the Codetermination Act (Mitbestimmungsgesetz) coming into effect.

At the event, the German Chancellor, Angela Merkel, gave a presentation (in German) to around 800 participants, most of whom were trade union officials. Ms Merkel emphasised that codetermination (Mitbestimmung) and workers’ participation in decision-making processes were characteristic features of the social market economy (Soziale Marktwirtschaft) and pointed out that the equal representation of employees and shareholders on the supervisory board of German companies was unique across Europe. She also referred to the coalition agreement from the autumn of 2005 in which the preservation and shaping of workers’ participation rights at European level had been set as a political target. Although Ms Merkel did not propose any specific reforms of the Codetermination Act, she reminded her audience that ‘the system of codetermination should be made more flexible’.

Background

The Codetermination Act came into effect in 1976 and stipulates that employees and shareholders should be equally represented on the supervisory board in certain companies. The act applies to private limited and public limited companies (Gesellschaften mit beschränkter Haftung and Aktiengesellschaften, respectively) with more than 2,000 employees. Before the act came into effect in 1976, codetermination in these enterprises had been less extensive. According to the former Works Constitution Act of 1952 (the current Drittelbeteiligungsgesetz), employees only had the right to one third of the seats on the supervisory board (DE9809172S, 43Kb Word doc).

In addition, the Codetermination Act stipulates that a certain proportion of the seats allocated to employee representatives are filled by trade union representatives. All employee representatives are elected by the staff in the company’s sites in Germany. Initially, employer organisations not only strongly criticised the act but, in 1977, also lodged an appeal against the act to the Federal Constitutional Court (Bundesverfassungsgericht). The employer organisations claimed that the act was unconstitutional; however, their appeal was eventually rejected in 1979.

Challenges of representation

Equal representation at company board level is now well established. The number of companies with such representation has increased significantly since German reunification in 1990. In 2004, about 750 companies were covered by the Codetermination Act, according to HBS. Nonetheless, globalisation and the growing international integration of companies have put pressure on the system of equal representation in the following ways.

• First, only employees at German sites are eligible to vote for candidates on the supervisory board. In this respect, its legitimacy has been called into question, as the interests of employees at sites in other countries are not represented on the supervisory board.

• Secondly, competition has arisen among the various European codetermination systems because of the possibility to run businesses in Germany under foreign corporate forms. For example, in 2005, every seventh newly established private limited company in Germany was registered according to the legal form of the United Kingdom. Therefore, such companies do not have to adhere to German codetermination laws.

• Finally, it is feared that the ‘fall-back solution’ in cases of cross-border mergers and acquisitions could encourage companies to locate their headquarters outside Germany. The fall-back solution stipulates that the most extensive form of codetermination should apply to the merged company. Furthermore, German companies with equal representation on the supervisory board might become unattractive for foreign companies that are searching for business partners.

Possibility for reform

A consensus exists that board-level codetermination needs to be reassessed in light of these challenges. Since 2005, a codetermination commission has been working on reform proposals and the results of its deliberations are expected to be published in December 2006. In the meantime, trade unions and employer organisations have put forward their various proposals for the modernisation of the Codetermination Act.

Views of social partners

At the ceremony in Berlin, the Chair of the German Metalworkers’ Union (Industriegewerkschaft Metall, IG Metall), Jürgen Peters, referred in his speech (in German, 123Kb PDF) to codetermination as a pillar of both the German economy and society. He claimed that a minimum catalogue of business transactions should be drawn up which would require the approval of the supervisory board. Such a catalogue would, he argued, improve the transparency of, for example, investment decisions. In addition, the election procedure should be made less complicated and thus less expensive. Furthermore, Mr Peters called for the internationalisation of board-level employee representation in multinational corporations.

In a press release on 30 August 2006 (in German), the Chair of DGB, Michael Sommer, emphasised that the act’s threshold of 2,000 employees should be reduced considerably as the size of companies had generally decreased over the last number of years.

In an article in the Frankfurter Allgemeine Zeitung on 30 August 2006, a member of the executive board of the Federation of German Industries (Bundesverband der Deutschen Industrie, BDI), Klaus Bräunig, stated that the scope of board-level codetermination should be fixed by agreements between shareholders and employers. Such agreements could allow for the alignment of codetermination with the requirements of companies arising from their international development.

According to Mr Bräunig, a mandatory fall-back solution could prevent board-level codetermination from being phased out. In November 2004, BDI along with the Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) had proposed in a resolution document (142Kb PDF) that this fall-back solution should be based on a proportion of one third worker participation (Drittelbeteiligung) rather than the current equal representation (DE0408106F).

In the Handelsblatt on 31 August 2006, the Director General of BDA, Reinhard Göhner, highlighted that the involvement of foreign employees in board-level codetermination should also be based on negotiations.

Oliver Stettes, Cologne Institute for Economic Research (IW Köln)