Business and employers' representatives propose changes to co-determination

In November 2004, a commission on co-determination convened by the BDA employers' association and the BDI industry federation issued a report that calls for fundamental changes to Germany's rules allowing workers a role in corporate decision-making. In particular, the commission suggests that companies and employees should be free to establish the co-determination system that best suits their corporate structure and specific needs. Trade unions have rejected the proposals. A new joint commission to discuss co-determination, which would also include trade unions, is currently under discussion.

In mid-November 2004, a report compiled by a special commission on Germany's system of co-determination, which had been trailed for several months (DE0408106F and DE0411204F), was finally published and presented formally at an annual employers' conference. Its contents had been reported in the press on 10 November.

The 'co-determination commission' (Kommission zur Mitbestimmung) consisted of 72 practitioners, including representatives of Deutsche Telekom, Siemens, DaimlerChrysler and academics, and was convened by the Confederation of German Employers’ Association (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and the Confederation of German Industry (Bundesvereinigung der Deutschen Industrie, BDI). Its report calls for rather wide-ranging changes to German co-determination legislation. These changes are necessary, the report contends, as a result of: first, increased competitive pressures on firms that stem from globalisation; and, second, the increased importance of EU legislation, which is likely to force company board requirements to be more flexible. 'Despite widespread international criticism of co-determination, a large majority of the members of the commission believe that the system should not be abolished,' the report says. Nonetheless, co-determination 'should be fundamentally changed'. According to the report, the German co-determination system represents a hindrance to foreign investment and a competitive disadvantage for Germany as a place in which to do business in the global economy, unless it is adapted to the changed legal framework conditions at the European level, in particular the European Company Statute (EU0206202F) and its accompanying employee involvement Directive (2001/86/EC), and draft Directives on cross-border mergers and relocation of company seats. It is argued by the co-determination commission, amongst other points, that the strong board-level co-determination rights in Germany may cause many companies seriously to consider moving their headquarters out of the country.

Currently, the co-determination system provides for companies with 501 to 2000 employees to dedicate a third of the seats on the supervisory board to employee representatives. In the roughly 770 companies in Germany with more than 2,000 workers, the law requires half of the board be composed of workers' representatives. However, in the case of a stalemate in board decision-making, the chair of the supervisory board, who is always a representative of the shareholders, has the casting vote. The latter does not apply, however, in the coal and steel industry where the so-called 'Montan' Co-determination Act applies (DE9903101F). In these industries, the additional member who is needed to hold a casting vote must be elected by the shareholders’ meeting on the proposal of the majority of both sides on the supervisory board. Supervisory boards have great authority in a company’s decision-making process in Gemany’s 'two-tier' system of company boards, as they oversee the management board, which is responsible for developing company policy and strategy.

Specific proposals

The commission suggests changes in the nature and scope of co-determination rights at both company level and workplace level (ie through works councils- DE0309201T).

With regard to board-level representation, the report proposes that, in future, management and employees should jointly decide on the number of workers' representatives on the supervisory board. This number should be agreed in negotiations between central management and a negotiating body that represents employees and whose members should be selected by a ballot of the whole workforce. Depending on company size, companies and their staff would be free to choose a system of board-level employee representation from three options. These options should range from half of the board being composed of staff representatives with the chair of the supervisory board (always a representative of the shareholders) having a casting vote, to a looser consultation system that comprises a body, which would be separate from the supervisory board, representing employees only and whose functions would be limited to an advisory role. The 'middle ground' option would be a limitation of employee representation to one-third of the seats on the supervisory board. If an agreement cannot be reached between the employers and employee representatives, then companies with a two-tier board system will be required to dedicate only a third of the seats on the supervisory board to employee representatives. Moreover, in the case of a corporate-governance structure that has only a single board (as in most UK and US firms), a 'consultation council' would have to be established if an agreement cannot be reached between the two parties. Amongst other points, the co-determination commission also suggests abolishing the trade unions’ legal right to board representation in larger companies. Instead, all members of the supervisory board who represent employees should be elected by all employees of the company in a secret ballot. In other words, full-time trade union officials would no longer have guaranteed posts, but would have to be elected in secret ballots.

Additionally, the commission wants to repeal key elements of the 2001 reform ((DE0107234F) of the Works Constitution Act (Betriebsverfassungsgesetz), which governs works councils. This reform is regarded by the commission as making workplace co-determination (in the form of works councils’ rights) more bureaucratic, more complicated and more expensive for employers (DE0410103F). In this respect, the commission suggests several key reforms: a reduction in the range of issues on which works councils have co-determination rights; an increase in the legal workforce-size threshold above which a works council may be established; a lower number of works councillors who act as full-time employee representatives; a minimum participation in the vote of at least one-third of all employees entitled to vote in order to establish a works council; and a decentralisation of collective bargaining by granting a stronger negotiating role to works councils.

Trade union counter-arguments

The proposals drew strong criticism from proponents of Germany’s traditional consensus-based management system. According to the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB), the implementation of the proposals would roll back workers’ rights. Although acknowledging that the German system of co-determination needs adjustment in the current era of globalisation, DGB rejects most of the specific proposals made in the report. According to DGB, the proposals by the commission are not designed to prepare co-determination to meet future challenges but are 'seeking to dismantle plant-level co-determination, board-level representation and even collective bargaining autonomy'. In the view of DGB, the proposed negotiation-based solution amounts to nothing more than the abolition, 'through the backdoor', of co-determination at board level and the restoration of outdated power relations. According to DGB, 'the report is riddled with empirically unverifiable assertions concerning the economic effects of co-determination'. DGB warns that manifold social and economic benefits of co-determination at firm and board level, which it regards as a fundamental factor in the success of the German economic model, would be lost if the suggestions were implemented. Moreover, DGB points out that the trade unions had not ruled out participation in a debate on the issues with BDA/BDI before the publication of the report. Although DGB had offered to cooperate with the co-determination commission, this was rejected, DGB says.

Speaking at the November employers’ conference, Chancellor Gerhard Schröder also rejected proposals strongly to reduce co-determination rights. He said that employees should have a voice, particularly at a time when Europe’s largest economy is struggling with difficult economic reforms: 'We are experiencing trying times marked by demographic challenges and economic globalisation that is worrying people. My plea for co-determination rests upon that realisation.'

Joint commission proposed

As a result of the debate triggered by the co-determination commission report, trade union representatives suggested, on 14 December 2004, a joint commission on the future of co-determination that should include representatives from politics, academia, business and employers as well as trade unions. Hubertus Schmoldt, chair of the Mining, Chemicals and Energy Industrial Union (IG Bergbau, Chemie, Energie, IG BCE), said that he will propose such a commission to Chancellor Schröder in order to ensure that co-determination will be consistent with the demands of EU rules. Such a commission was also supported by Frank Bsirske, chair of the United Services Union (Vereinte Dienstleistungsgewerkschaft, ver.di). Finally, Dieter Hundt, president of BDA, also said that employers would be prepared to participate in a joint commission on co-determination, if Mr. Schmoldt suggests such a commission to Chancellor Schröder.

Commentary

If successful, the BDA and BDI’s joint initiative would clearly curb the role that workers currently play in corporate decision-making. However, if it is true that the current system of representation of workers contributes to hampering the competitiveness of German firms and postponing necessary cost-cutting measures until it is too late, as is argued by the proponents of sweeping reforms, the present system of co-determination needs to be re-designed in order to improve Germany’s situation as a business location and, in the final analysis, its growth and employment prospects. A further commission on the issue that would include representatives of politics, social partners and academia has a chance to build a new consensus on a potentially more employment- and growth-friendly system of co-determination. Such a new commission risks, however, making proposals that, in the end, might be insufficient to tackle the changes required by market forces and as a result of European Union Directives and judicial rulings, which aim to tear down barriers to EU-wide competition. Such proposals are possibly unlikely to solve, in a long-lasting way, the problems some associate with the current system of co-determination. (Lothar Funk, Cologne Institute for Business Research, IW, and University of Applied Sciences Duesseldorf)

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