Co-Determination

From Max-EuP 2012

by Markus Roth

1. Employee participation at the board level

Co-determination is an important form of non-financial employee participation, especially in Germany. Employee participation at the board level and participation via works councils are to be distinguished. The former occurs in the supervisory board or in the board of directors of the firm while the latter takes place mainly at the operational level through special institutions. Other forms of employee involvement are financial participation both in the company itself and through occupational pensions. Occupational pensions in particular may serve to overcome the traditional separation of labour and capital. This device is widely used internationally. Due to the large amount of assets needed for capital-funded forms of retirement planning, the possibility of diversified investments and the international practice to invest extensively in equities, financial participation via occupational pensions is, alongside co-determination, a major factor for national corporate governance regimes.

Co-determination provides for the participation of employees in the decision-making of the supervisory board (Aufsichtsrat) in two-tier board systems or in the board of directors (Verwaltungsrat) in one-tier board systems. Participation of employees varies across Europe. Differences occur not only with respect to the form of employee participation generally (ie co-determination, works councils, financial participation in the company and occupational pensions) but also with respect to the specific form of co-determination. Systems of worker representation in decision-making that are largely independent from trade unions exist in Germany, Austria, the Netherlands and Luxembourg. France, Greece, Portugal and Spain have not established mandatory co-determination for private companies with a certain number of employees. The Scandinavian countries rely heavily on a representation of workers’ interests through trade unions. In England and Ireland, almost no employee involvement in corporate decisions exists beyond the EU requirements for works councils and the European Company (Societas Europaea).

The European directives dealing with co-determination issues do little to change this heterogeneous situation among Member States. Contrary to initial regulatory approaches, the directive on employee participation in the European Company does not focus on a mandatory unification of participation standards. Rather, the rules of procedure are emphasized. Regarding co-determination at the board level, the directive aims to fix employee participation at the highest level prescribed by national law, unless the employees agree otherwise. However, this requires certain quotas of affected workers to be met.

2. European rules on co-determination

In Europe, co-determination at the board level is regulated primarily by the directive supplementing the Statute for a European company with regard to the involvement of employees (Dir 2001/86; SE Co-Determination Directive) and the directive on mergers of limited liability companies in different Member States (Dir 2005/56; Cross-Border Merger Directive). Even where the applicable European rules make provision for a relevant situation, the form and level of employee participation is nevertheless determined largely by national law. The two applicable directives provide no autonomous legal framework for co-determination as such or the level of employee participation in company boards. Both directives provide for the establishment of a special negotiating body and, most notably, rules on procedure. Furthermore, with various criteria for inclusion, the relevant directives contain a fallback provision for the preservation of the status quo on co-determination in each Member State. The number of employee representatives is based on the most significant share of employees that were present on the boards of the participating companies before registration of the European Company (Societas Europaea) and the internationally merged company, respectively. The required co-determination regime to be included in the proposed regulation for a European Private Company (Societas Privata Europaea) is still being hotly debated.

3. The switch between the monistic and the dualistic system

Particular problems occur regarding co-determination in the monistic (one-tier) Societas Europaea (SE) with a board of directors. While half of the operating German SEs have chosen the one-tier system, all formerly co-determined German stock corporations now incorporated as SEs still have supervisory boards. This raises the question of how the European rules provide for employee participation in the dualistic supervisory board and in the monistic board of directors. The SE Co-determination Directive allows for a choice between one-tier and two-tier board systems, but it does not deal explicitly with the form that co-determination should take where a company switches from the two-tier supervisory board to the one-tier board of directors (or vice versa). One interpretation strongly supported by German trade unions is that the European law intends to transfer employee participation from supervisory boards to the board of directors. A fundamental principle and stated aim of the directive is to secure previously held employee participation rights regarding involvement in corporate decision-making. Thus, participation rights which existed before the establishment of the SE are the starting point for the form their involvement must take in the SE (before and after principle). However, placing the supervisory board and the board of directors on equal footing is questionable, especially from a German perspective where employee participation in supervisory boards constitutes such a deeply entrenched practice. Moreover, at the time of the adoption of the directive, of the seven Member States providing for compulsory representation of employees at board level, six restricted participation to either the supervisory board or to the board of directors, with only Finland allowing for co-determination in both boards. Finally, even the Council Regulation on the Statute for a European Company (SE) (Reg 2157/2001) distinguishes between co-determination in the supervisory board and in the board of directors.

Stronger arguments favour the interpretation that the standard rules appearing in the annex of the directive, which regulate all components of co-determination as well as the share of employee participation at board level, apply only where the relevant company remains in the one-tier board system or in the two-tier board system. The purpose of the directive is to maintain previous employee participation rights when an SE is formed. The directive seeks to avoid the decline of the standard of employee participation when choosing a supranational legal form rather than preventing the change to a different form of employee participation according to national law. This may make no difference if national law provides for both forms of participation (ie one-tier or two-tier boards). However, where this is not the case, the directive implicitly calls on national law to codify the other form of employee participation. Implementing alternative corporate governance forms and establishing a choice between the one-tier and the two-tier system in national stock corporation law is a recent European trend, which is especially relevant to Germany.

4. National co-determination regimes

National co-determination regimes depend heavily on the organizational structure of stock corporations and limited liability companies as prescribed by respective national company laws. Internationally, the one-tier system with a sole board of directors is the dominant form for company organization. Most countries with a one-tier system, ie a board of directors which may give orders to management, do not provide for mandatory co-determination at board level. The one-tier system is especially widespread in large industrialized countries. No G8 country besides Germany provides for mandatory co-determination at the board level. On the other hand, co-determination is particularly widespread in smaller countries. Due to their regional roots, companies in these countries depend on good relations with their employees, who, in turn, have fewer opportunities to change jobs. Sweden is the most important of these countries, economically speaking. It provides for two or three employee representatives on the board of directors. In Finland, up to one fourth, in Norway, not more than one third, and in Luxembourg, one third of the members of the board are elected by the employees. In Denmark, with its two-tier board structure, more than one third of the directors may in individual cases be elected by the employees. Hungary allows companies to determine the level of participation of employees in the articles of association. Germany has maintained its quasi-parity co-determination in the supervisory board, yet a board of directors has ceased to be an option for German stock corporations today. Before German stock corporation law was moved from the Commercial Code and codified in the Stock Corporation Act 1937, which excluded the supervisory board from business decisions due to the so-called ‘leadership principle’, German supervisory boards were de facto boards of directors with a subordinated management board. In the 1920s and early 1930s, works councils could post one or two employee representatives to this de facto board of directors. Savings banks still form a board of directors, yet the law governing the savings banks is state law and therefore differs from state to state. Some state laws provide for one-third employee participation in savings banks, while other states allow no co-determination at all or only allow two employee representatives on the board of directors. In Europe, Hungary and Slovenia firmly distinguish between employee participation in one-tier and two-tier boards. Hungary delegates co-determination issues in the one-tier board to the articles of incorporation, while the law prescribes one-third employee participation in supervisory boards.

Besides Hungary, Austria and the Netherlands provide for one-third employee participation in supervisory boards. Since 2004, the supervisory board members in the Netherlands are no longer co-opted but instead elected by the general meeting. Dutch international holding companies are not subject to co-determination while the national companies are subject to one-third employee co-determination. In Germany, after World War I and the Russian Revolution, the Works Councils Act of 1920 and its implementing legislation provided for employee participation via one or two members of the works council being nominated to the supervisory board. After the abolition of employee participation during the Third Reich, employee participation was re-introduced in Germany shortly after the end of World War II, initially through autonomous private agreements on joint participation in the steel and mining industry. These were followed by the Montan Co-determination Act, the Works Councils Act 1952 (now: One-Third Participation Act), the Supplementary Montan-Co-Determination Act and the Co-Determination Act 1976. These four legal regimes differ, particularly with regard to the number of workers required for the specific employee participation and the level of participation. For companies with between 500 and 2,000 employees, one-third employee participation is required (One Third Participation Act), whereas for companies with more than 2,000 workers, quasi-parity co-determination applies with a tie-breaking vote going to the (effectively shareholder-nominated) chairman of the supervisory board (Co-Determination Act 1976). Special rules for the steel and mining industry without the tie-breaking vote are provided in the Montan Co-Determination Act. Participation agreements in the steel and mining industry in 1946 were meant to protect the industrial basis from disassembly in post-war Germany.

Particularly in England, Italy and Spain, employee participation in the form of co-determination in large companies does not exist. In France, there is a mandatory employee committee (comitée d’entreprise) and a special regime for cases where employees hold three per cent of the company’s shares. In Poland, employee participation in the supervisory board is required for former state enterprises which have subsequently been privatized.

5. Common rules and developments

Further developments of co-determination at the national level and its coordination with other forms of employee participation, such as occupational pensions, will be crucial. The establishment of the European Company Statute and the abolition of the ‘real seat theory’ by the European Court of Justice (ECJ) will test Germany’s quasi-parity co-determination as provided by the Co-Determination Act 1976. Many European companies are of German origin and foreign legal forms like the English limited company (ltd) are more widely accepted and used. A report for the German Jurists Forum has moved away from the current strict co-determination regime and proposed the introduction of a negotiated co-determination solution. Legal and economic scholars share this view but it has been heavily opposed by German unions and therefore not yet implemented. A driving factor for the modernization of co-determination regimes outside Germany was the choice between dualistic and monistic systems. The legal regimes in Hungary and Slovenia now provide different solutions for one-tier and two-tier systems. The Netherlands provide special rules for international holdings.

Literature

Klaus J Hopt, ‘New Ways in Corporate Governance: European Experiments with Labor Representation on Corporate Boards’ (1984) 82 Michigan Law Review 1338; Klaus J Hopt, ‘Labor Representation on Corporate Boards: Impacts and Problems for Corporate Governance and Economic Integration in Europe’ (1994) 14 International Review of Law and Economics 203; Gary Gorton and Frank A Schmid, ‘Capital, Labour and the Firm: A Study of German Codetermination’ (2004) 2 Journal of the European Economic Association 863; Christine Windbichler, ‘Cheers and Boos for Employee Involvement: Co-Determination As Corporate Governance Conundrum’ (2005) 6 EBOR 507; Catherine Barnard, EC Employment Law (3rd edn, 2006); Larry Fauver and Michael E Fuerst, ‘Does Good Corporate Governance Include Employee Representation? Evidence from German Corporate Boards’ (2006) 82 Journal of Financial Economics 673; Jan von Hein, ‘Between a Rock and a Hard Place: German Codetermination under Pressure’ (2007) 3 Kyoto Journal of Law and Politics 1; Claudia Schubert, ‘The National Implementation of Employee Participation in the Administrative Board of the SE in the One-tier Model—A Legal Comparison on the Basis of Germany, Austria, Sweden and France’ (2008) 4 European Company and Financial Law Review 422; Arbeitskreis ‘Unternehmerische Mitbestimmung’ (Gregor Bachmann, Theodor Baums, Mathias Habersack, Martin Henssler, Marcus Lutter, Hartmut Oetker and Peter Ulmer), ‘Entwurf einer Regelung zur Mitbestimmungsvereinbarung sowie zur Größe des mitbestimmten Aufsichtsrats’ (2009) ZIP 885; Horst Eidenmüller, Lars Hornuf and Andreas Engert, ‘Incorporating under European Law: The Societas Europaea As a Vehicle for Legal Arbitrage’ (2009) 10 EBOR 1; Markus Roth, ‘Employee Participation, Corporate Governance and the Firm, A Transatlantic View focused on Occupational Pensions and Co-Determination’ (2010) 11 EBOR 51.

Retrieved from Co-Determination – Max-EuP 2012 on 28 November 2022.

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