Co-determination is a practice whereby the employees have a role in management of a company. The word is a literal translation from the German word Mitbestimmung. Co-determination rights are different in different legal environments. In some countries, like the USA, the workers have virtually no role in management of companies, and in some, like Germany, their role is more important. The first serious co-determination laws began in West Germany. At first there was only worker participation in management in the coal and steel industries. But in 1976, a general law was passed mandating that worker representatives hold seats on the boards of all companies employing over 500 people.
In systems with co-determination workers in large companies usually form special bodies - works councils and in smaller companies elect worker representatives. These act as intermediaries in exercising the workers rights of being informed or consulted with on decisions concerning employee status and rights. They also elect or select worker representatives in managerial and supervisory organs of companies.
In systems with co-determination the employees are given seats in a board of directors in one-tier management systems or seats in a supervisory board and sometimes management board in two-tier management systems.
In two-tier systems the seats in supervisory boards are usually limited to 1/3 of all members. In some systems the employees can select 1/2 of all members of supervisory boards, but a representative of shareholders is always the president and has the deciding vote. The employee representatives in management boards are not present in all systems. They are always limited to a workers director, who votes only on matters concerning employees.
In one-tier systems with co-determination the employees usually have only one or two representatives in a board of directors. Sometimes they are also given seats in certain committees (e.g. the audit committee). They never have representatives among the executive directors.
The typical two-tier system with co-determination is the German system. The typical one-tier system with co-determination is the Swedish system.
There are three main views as to why co-determination primarily exists: to reduce management-labour conflict by means of improving and systematizing communication channels; to increase bargaining power of workers at the expense of owners by means of legislation; and to correct market failures by means of public policy. The evidence on "efficiency" is mixed, with co-determination having either no effect or a positive but generally small effect on enterprise performance.
The German model of co-determination is unique. Formulated at the end of World War II, it was applied first in the coal and steel industries of West Germany following the war and gradually expanded to other sectors. Co-determination in Germany is regulated by the Co-operative Management Law (1951), amended in 1976, and the Workers Committee Law (1952), amended in 1972. Within the framework of the 1976 reform, the government broadened the laws' applicability to all firms throughout the German economy employing more than 2,000 workers. The German co-determination law (Mitbestimmungsgesetz) forms part of the bedrock of German industrial and company policy. It requires that just under half of companies' supervisory boards' members be representatives of workers. German company law is curious to an English speaker's eye, because it has not one but two boards of directors. Shareholders and trade unions elect members of a supervisory board (Aufsichtsrat). The chairman of the supervisory board, with a casting vote, is always a shareholder representative under German law. The supervisory board is meant to set the company's general agenda. The supervisory board then elects a management board (Vorstand), which is actually charged with the day to day running of the company. The management board is required to have one worker representative (Arbeitsdirektor). In effect, shareholder voices still govern the company for a number of reasons, but not least because the supervisory board's vote for the management will always be a majority of shareholders. Co-determination in Germany operates on three organisational levels:
1. Board of directors: Prior to 1976, German coal and steel producers employing more than 1,000 workers commonly maintained a board of directors composed of 11 members: five directors came from management, five were workers' representatives, with the eleventh member being neutral. (Note: Boards could be larger as long as the proportion of representation was maintained.) In 1976, the law's scope was expanded to cover firms employing more than 2,000 workers; there were also revisions to the board structure, which now had an equal number of management and worker representatives, with no neutral members. The new board's head would represent the firm's owners and had the right to cast the deciding vote in instances of stalemate.
2. Management: A worker representative sits with management in the capacity of Director for Human Resources. Elected by a majority of the Board of Directors, the workers' representative sits on the Board and enjoys the full rights accorded to that position.
3. Workers committees: The workers committee has two main functions: it elects representatives to the Board of Directors and serves as an advisory body to the trade union regarding plant-level working conditions, insurance, economic assistance and related issues. The committee is elected by all the workers employed in a plant.
Thanks to the years during which a co-operative culture has been in place, management requests from workers for proposals to improve operations or increase productivity, for example, are no longer considered mere legal formalities; they represent recognition of the fact that workers play an important part in plant success. In tandem, a practical approach has evolved among both parties, with each aiming to reach decisions based on consensus. In addition, worker representatives no longer automatically reject every proposal for structural reform, increased efficiency of even layoffs; instead, they examine each suggestion from an inclusive, long-term perspective. At the core of this approach is transparency of information, such as economic data. Co-determination is thus practised at every level, from the local plant to firm headquarters.
Co-determination enjoys intractable support among Germans in principle. In practice, there are many calls for amendments to the laws in various ways. One of the main achievements seems to be that workers are more involved and have more of a voice in their workplaces, which sees a return in high productivity. Furthermore, industrial relations are more harmonious with low levels of strike actions, while better pay and conditions are secured for employees.
The UK Bullock Report
In Britain, the proposals for co-determination were drawn up, and a command paper produced named the Bullock Report. This was done in 1977 by the Harold Wilson Labour Party (UK) government. It involved a similar split on the board, but its effect would have been even more radical. Because UK company law requires no split in the boards of directors, unions would have directly elected the management of the company. Furthermore, rather than giving shareholders the slight upper hand as happened in Germany, a debated 'independent' element would be added to the board, reaching the formula 2x + y. However no action was ever taken as the UK slid into the winter of discontent and, as Labour lost the next election, two decades of Thatcherism. This tied into the European Commission's proposals for worker participation in the 'fifth company law directive', which was never implemented.
EU Fifth Directive
Also in the 1970s, the European Community (now the European Union) drafted the 5th Directive on company law, proposing a two-tier board and worker representation on supervisory boards. This was similar to the German model. The directive has not yet won widespread support to be brought into force.
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- Labour law
- Labor union
- Works council
- Workers' council
- Codetermination in Germany
- Social Partnership
- Prominent views of co-determination have thus been “social” in nature, concerned with expanding democratic participation in new spheres as a good in itself, reducing “alienation,” and smoothing management-labour relations to prevent strong conflicts. A collection of views of this nature are found in Magazin Mitbestimmung: http://www.boeckler.de/92462_16613.html
- A conservative economic approach views co-determination as not benign: a political means for transfer of wealth from shareholders to employees and to increase power of political and perhaps union actors; as evidence it is noted firms rarely adopt codetermination voluntarily: see Svetozar Pejovich, "The economics of property rights: towards a theory of comparative systems," Chapter 8, Dordrecht, NL: Kluwer Academic, 1990.
- Another economist argues that co-determination in effect corrects several market failures so lack of voluntary adoption cannot be viewed as evidence that co-determination is inefficient: see Stephen C. Smith, "On the economic rationale for co-determination law," Journal of Economic Behavior and Organisation, Vol. 16, pp. 261-281, December 1991.
- For example see Felix R. Fitzroy and Kornelius Kraft, "Co-determination, efficiency and productivity," British Journal of Industrial Relations, Vol. 43, No. 2, pp. 233-247, June 2005.
- Lord Wedderburn, ‘Companies and employees: common law or social dimension’ (1993) 109 Law Quarterly Review 261
- Emire: Germany - Co-Determination
- Emire: Austria - Co-Determination
- German Law in English - 40. Works council. Co-determination
- Co-Detemination and Cooperative Culture in Israel
- EU Draft Fifth Company Law Directive