Court sets stricter limits on coal, iron and steel co-determination

On 2 March 1999, the Federal Constitutional Court decided that parts of the special regulations on co-determination in Germany's coal, iron and steel industries are unconstitutional. This feature explains the legal background, highlights the Mannesmann case which prompted the ruling, and comments on the significance of the decision.

Co-determination in Germany

In Germany, the concept of co-determination refers to two distinct levels and forms of employee participation: co-determination at establishment level by the works council; and co-determination above establishment level, on the supervisory board of companies (DE9806267F). Three different statutes, applying to different sectors of the economy and sizes of company, regulate the latter form of co-determination, as follows:

  • The 1951 Coal, Iron and Steel Industry Co-determination Act (Montanmitbestimmungsgesetz) provides for parity co-determination in this sector - ie the supervisory board consists of an equal number of employee and shareholder representatives, plus one additional member who is elected by the shareholders' meeting on the proposal of the majority of both groups on the supervisory board.
  • The 1952 Works Constitution Act (Betriebsverfassungsgesetz) covers companies in other industries with between 501 and 1,999 employees. Under this law, employee representatives occupy one-third of seats on the supervisory board.
  • The 1976 Co-determination Act (Mitbestimmungsgesetz) covers all companies employing more than 2,000 employees (DE9812188F). It provides for equal numbers of representatives of employees and shareholders on the supervisory board. In the event of a tie, the chair - elected by the shareholders' representatives - has two votes in a second ballot and hence can cast the casting vote in favour of the shareholders.

Co-determination in the coal, iron and steel industry

The current system ...

Co-determination in the coal, iron and steel industry (Montanmitbestimmung) is the most extensive form of co-determination, confined to this sector. Its operation is also extended to group parent companies which are not active in this industry themselves, but whose subsidiary companies within the coal, iron and steel industry produce at least 20% of the group's net output or employ more than 2,000 employees. Its foundation in law derives from the Coal, Iron and Steel Industry Co-Determination Act of 1951 as amended in 1985 and the Co-Determination Amendment Act of 1956, as amended in 1988.

Under the Montanmitbestimmungsystem, the supervisory boards of the companies concerned normally consist of 11 members, and the number can be increased to 15 or 21 in companies where the nominal capital is correspondingly higher. Half of the members represent the employees and half represent the shareholders (hence the term "parity co-determination"). Each side chooses its own candidates. The trade unions and works councils propose their nominated candidates to the shareholders' meeting for election; this is purely a formality and the meeting must confirm their nominations. The additional member who is needed to wield the casting vote must be elected by the shareholders' meeting on the proposal of the majority of both factions on the supervisory board. Furthermore, the company's management board must include one member who is responsible for personnel matters, the so-called "labour director" (Arbeitsdirektor), who may not be elected against the majority vote of the employees' side on the supervisory board. In companies to which this system is extended under the Co-Determination Amendment Act, the supervisory board consists of 15 members - seven members each for the employees' and employer's sides, plus one additional member. Four of the employee representatives must be employed in establishments belonging to the group member companies, and must comprise three manual workers and one white-collar worker. The employee representatives are elected by a secondary election procedure, and a labour director must be appointed in this case also.

... and its historical development

Montanmitbestimmungin its present form originates from a 1947/8 agreement between the British Military Government and the trade unions in the British sector of post-war Germany. The agreement stipulated that the supervisory boards of companies in the coal, iron and steel industries which were to be demerged should consist of 50% employee representatives and 50% employer representatives. Furthermore, a labour director, who should enjoy the confidence of the trade unions, should be nominated to the board.

When in 1950, under Law No. 27 of the Allied High Commission, these demerged companies were to be transformed into companies under German law, which at the time did not include co-determination provisions, trade unions - with the threat of strikes - pressed the German government to pass a law on the co-determination of employees on the supervisory and management boards of coal, iron and steel companies, resulting in the 1951 Coal, Iron and Steel Industry Co-Determination Act. In 1951 the Act covered 105 companies - 34 iron and steel producers and 71 mining companies.

Since the 1951 Act did not include rules for co-determination in concerns (groups of companies), concentration, mergers and acquisitions threatened to undermine its effectiveness. Subsequently, the Co-Determination Amendment Act (Mitbestimmungsergänzungsgesetz) was passed in 1956. It stipulates two cases where concerns in the steel and coal industries with subsidiaries covered by the 1951 Act fall under coal, iron and steel co-determination:

  1. if the "dominant purpose of the concern" (überwiegende Betriebszweck) is either in the areas of hard-coal/iron-ore mining or in the production of iron and steel; or
  2. in other cases, the purpose of the concern is characterised by its subsidiary covered by the 1951 Act.

In the 1960s, problems again arose, when restructuring and the decline of the coal, iron and steel industry threatened Montanmitbestimung, because the proportion of coal, iron and steel activities within many concerns fell below 50%. Until 1967, such companies became subject to the 1952 Works Constitution Act when their coal, iron and steel activities were below 50% for more than two years. In 1967, this period was extended to five years by law.

In 1971, the "Act on the limited continuation of co-determination in previously co-determined companies" (""Gesetz über die befristete Fortgeltung der Mitbestimmung in bisher den Mitbestimmungsgesetzen unterliegenden Unternehmen) stipulated that: (1) companies become no longer subject to parity co-determination only if they cease coal, iron and steel production completely; and (2) concerns drop out of Montanmitbestimmungonly if the proportion of total turnover made up by iron, steel and coal production is lower than either 40% for at least five years, or 25% for at least two years. The 1971 Act was limited in duration until 1975.

At the beginning of the 1980s, there were already signs that restructuring activities would lead to a situation where concerns would soon no longer meet the conditions of Montanmitbestimmung. So in 1981, an amendment to the 1951 and 1956 Acts was made, stipulating that companies covered by parity co-determination would drop out only if the legal qualifications were not met during the following six years. This secured Montanmitbestimmunguntil 1987, when only five concerns were still covered: Mannesmann AG, Thyssen AG, Klöckner-Werke AG and Hoesch AG were covered by the 1951 law, and Salzgitter AG by the 1956 law. At the end of 1987, two of the five companies threatened to drop out and thus the 1981 amendment was extended until the end of 1988.

Against the certain knowledge that sooner or later all concerns would grow out of Montanmitbestimmung, and the fear that this would also have serious implications for steel and coal co-determination at lower levels, the 1988 "Act on securing parity co-determination "(""Montanmitbestimmungs-Sicherungsgesetz) amended the 1951 Act, intending to secure parity co-determination permanently. It extended the coverage to group parent companies which are not active in this industry themselves but whose subsidiary companies within the coal, iron and steel industry produce at least 20% of the group's net output or employ more than 2,000 employees. Furthermore, the transition period was extended to six years.

Parity co-determination in the 1990s

After the 1992 merger of Hoesch AG with Krupp AG, the co-determination required by the 1976 law was supplemented with additional agreements. Thus the new concern has since no longer fallen under the provisions of parity co-determination.

When in 1998, Krupp-Hoesch AG and Thyssen AG decided to merge, a March 1998 co-determination agreement (Mitbestimmungsvereinbarung) between the metalworkers' trade union, IG Metall, the works councils and the two companies confirmed that Thyssen Krupp will be subject to the 1976 co-determination law. In addition, a "supervisory board presidency" consisting of the chair of the supervisory board and one representative each of shareholders and of employees was established. In the event of disagreement between the representatives of the shareholders and the majority of employees' representatives (or vice versa), this presidency has the task of finding a consensual solution. Furthermore, it prepares a consensual proposal for the nomination of the labour director. There are employee directors at the level of the whole concern and of the five divisions. The spirit of the agreement is to force the supervisory board to stick to consensual decision making. (DE9804159F). With this agreement, the new concern thus dropped out of Montanmitbestimmung.

As regards parity co-determination at Klöckner-Werke AG and Mannesmann AG, there are cases pending at the Higher Regional Court in Düsseldorf (see below). In 1994, Klöckner-Werke AG stopped its steel activities and will fall under Montanmitbestimmungonly until 30 September 2001.

The last concern left under parity co-determination is Salzgitter AG. In 1989, Salzgitter AG, previously owned by the Federal Republic of Germany, was bought by Preussag AG and renamed as Preussag Stahl AG. In 1998, Preussag Stahl AG was bought by the Federal State of Lower-Saxony, and subsequently named Salzgitter AG again.

According to information provided by the newspaper Börsen-Zeitung on 3 March 1999, the 1951 Act currently covers only 32 companies. Most companies which were formerly steel and iron giants now operate in mechanical engineering and telecommunications. In the final report of the "Commission on co-determination" in 1998, 400,000 employees were estimated to fall under coal, iron and steel Industry co-determination (DE9806267F).

The Mannesmann case

The former steel producer Mannesmann AG is today an industrial and telecommunications concern which: builds plants and machinery; makes systems and components for the automotive industry; manufactures hydraulic, pneumatic and electrical drives and controls; offers telecom services; produces steel tube and pipe; and trades on a worldwide scale. On 30 September 1998, Mannesmann AG had around 131,000 employees.

In 1981, Mannesmann AG transferred all steel and iron production to its subsidiary Mannesmannröhren-Werke AG, which under the category tubes trading remained one of the four core business activities until 1997. The proportion of total value-added accounted for by this activity stood at 20% in 1991, and fell below that threshold thereafter. In 1997, Mannesmannröhren-Werke AG ceased production. The remaining tubes production was transferred into a joint venture with the French company Vallourec. Thus, since then, Mannesmann AG has been no longer active in the coal, iron and steel sector.

In January 1989, Mannesmann AG announced that the composition of its supervisory board would in future follow the rules of the 1988 amendment of the legislation, the Act on securing parity co-determination (see above). In 1989, the German Association for Protecting the Interests of Holding Securities (Deutsche Schutzvereinigung für Wertpapierbesitz, DSW) brought the case to the courts, asking which of the co-determination models would apply at Mannesmann AG and stating that it considered the 1988 amendment unconstitutional. Instead, the concern's supervisory board should be subject to the 1976 Co-determination Act. In 1991, the Düsseldorf Higher Regional Court passed the case to the Federal Constitutional Court (Bundesverfassungsgericht).

During the court proceedings, the German Federal Government, the federal states of Northrhine-Westphalia, Saarland, Hessia and Lower-Saxony, and the trade unions defended the 1988 amendment. Walter Riester, the Federal Minister of Labour and Social Order, stated that the inclusion of employees in essential decision-making procedures within companies had had a positive impact on social peace in the steel and iron industry. Necessary structural adjustment in the industry could be achieved only in cooperation between employees and employers. Ursula Engelen-Kefer, vice-chair of the German Federation of Trade Unions (Deutsche Gewerkschaftsbund, DGB), said that parity co-determination had helped avoid redundancies in restructuring procedures.

In contrast, Mannesmann AG and the employers' associations demanded the abolition of the 1988 amendment. Only 120 of Mannesmann's 131,000 employees would be employed in iron and steel activities and Klaus Esser, a Mannesmann board member, argued that the proportion of the iron and steel in the group's total value-added was less than 1%.

The decision of the Federal Constitutional Court

In a ruling issued on 2 March 1999, the first senate of the Federal Constitutional Court decided that parts of the regulations on Montanmitbestimmungas amended by the 1988 Act are unconstitutional. According to the highest German court, the regulation that, in determining coverage by the Montanmitbestimmungrules, reference to the number of employees (more than 2,000) is sufficient if the value-added quota (more than 20%) is not met in companies under the 1951 co-determination legislation, is not compatible with the e"quality principle" included in Article No. 3 of the German Basic Law (Grundgesetz). The indicator based on the number of employees chosen by the legislation would not be suitable for drawing conclusions regarding the importance of coal, iron and steel activities within the concern. Mannesmann AG is thus now subject to the 1976 Co-determination Act.

The Court's decision also confirmed that:

  • both the 20% quota and the six-year transition period are constitutional; and
  • concerns drop out of Montanmitbestimmungonly when their subsidiary companies within the coal, iron and steel industry produce less than 20% of the group's net output, whereas companies which previously were not subject to parity co-determination are included only if more than 50% of their total value-added is in coal, steel and iron production.

Reactions to the Court decision

Mannesmann AG welcomed the decision. However, since the court ruling has to be implemented by the Düsseldorf Higher Regional Court, the group's next supervisory board elections in May 1999 would take place according to the old rules.

The Confederation of German Employers Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA) also welcomed the decision as setting limits to the "myth" of parity co-determination in iron and steel. In practise, the impact of the decision would be rather limited and affect only two companies.

DGB and IG Metall demanded legislation which would secure the co-determination rights of the employees. The Federal Ministry of Labour and Social Order announced that it would examine ways to secure parity co-determination.

Commentary

Montanmitbestimmungis a relic of a 1947/8 deal between the British Military Government and the German trade unions in the British sector. Since then, numerous attempts have been made to keep alive parity co-determination, which represents both an important pillar of trade union policy and an element of the "German model" of industrial relations. Frequently and repeatedly, the trade unions have demanded the extension this model to the whole economy. Since the actual impact of the Federal Constitutional Court decision is rather limited in its extent (affecting Mannesmann AG and possibly also Klöckner-Werke AG), its significance is more symbolic, in the sense that it sets limits to the attempts of the German government, very much steered by trade union lobbying, to keep parity co-determination at concern level alive.

A closer look reveals that, at least as regards the concern level, parity co-determination is already very much a thing of the past. The main reason for this is first and foremost a reorientation of concerns away from steel and iron into diversified industrial conglomerates. As of 1 October 2001 at the latest, the state-owned Salzgitter AG will be the only concern left under Montanmitbestimmungfor industrial relations researchers to visit. For the other companies formerly covered by the coal, iron and steel co-determination rules, different rules will then apply, such as the 1976 Codetermination Act, or collectively agreed supplementary co-determination rules in the case of Thyssen Krupp.

One does not need to be a prophet to foresee that Montanmitbestimmungat concern level will sooner or later share the same destiny as the dinosaurs ... (Stefan Zagelmeyer, IW Köln)

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