Codetermination (also "copartnership" or "worker participation") is the practice of workers of an enterprise having the right to vote for representatives on the board of directors in a company. It also refers to staff have binding rights in work councils on issues in their workplace. The practice of board level representation is widespread in developed democracies. The first laws requiring worker voting rights include the Oxford University Act 1854 and the Port of London Act 1908 in the United Kingdom, a voluntary Act on Manufacturing Companies of 1919 in Massachusetts in the United States, and the Supervisory Board Act 1922 (Aufsichtsratgesetz 1922) in Germany, which codified collective agreement from 1918. Most countries with codetermination laws have single-tier board of directors in their corporate law (such as Sweden, France or the Netherlands), while a number in central Europe (particularly Germany and Austria) have two-tier boards. Most laws apply to companies over a certain size, from Denmark at 20 employees, to Germany over 500 (for one-third representation) and 2000 (for just under one half), to France over 5000 employees.
In economies with codetermination, workers in large companies may form special bodies known as works councils. In smaller companies they may elect worker representatives who act as intermediaries in exercising the workers rights of being informed or consulted on decisions concerning employee status and rights. They also elect or select worker representatives in managerial and supervisory organs of companies.
In codetermination systems the employees are given seats on 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 to 3 members. In some systems the employees can select 1 or 2 members of the supervisory boards, but a representative of shareholders is always the president and has the deciding vote. An employee representatives on management boards are not present in all economies. They are always limited to a Worker-Director, who votes only on matters concerning employees.
In one-tier systems with codetermination the employees usually have only one or two representatives on 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 codetermination is the German system. The typical one-tier system with codetermination is the Swedish system.
There are three main views as to why codetermination 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 codetermination having either no effect or a positive but generally small effect on enterprise performance.
The German model of codetermination 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. Codetermination in Germany is regulated by the Codetermination Act 1976 (Mitbestimmungsgesetz 1976), and the Work Constitution Act 1972 (Betriebsverfassungsgesetz 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 Codetermination Act 1976 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. Work councils: 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.
In the UK, the earliest examples of codetermination in management were codified into the Oxford University Act 1854 and the Cambridge University Act 1856. In private enterprise, the Port of London Act 1908 was introduced under Winston Churchill's Board of Trade.
Proposals for codetermination were drawn up, and a command paper produced named the Bullock Report. This was done in 1977 by Harold Wilson's Labour 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. That tied into the European Commission's proposals for worker participation in the Fifth Company Law Directive, which was never implemented.
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.
- Labour law
- Labor union
- Works council
- Workers' council
- Codetermination in Germany
- Paritarian Institutions
- Social Partnership
- Workplace democracy
- See worker-participation.eu
- E McGaughey, 'The Codetermination Bargains: The History of German Corporate and Labour Law' (2015) LSE Legal Studies Working Paper No. 10/2015
- Prominent views of codetermination 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 codetermination 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 codetermination in effect corrects several market failures so lack of voluntary adoption cannot be viewed as evidence that codetermination is inefficient: see Stephen C. Smith, "On the economic rationale for codetermination 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.
- E Batstone, A Ferner and M Terry, Unions on the board: an experiment in industrial democracy (1983)
- P Brannen, ‘Worker directors: an approach to analysis. The case of the British Steel Corporation’ in C Crouch and FA Heller, Organizational Democracy and Political Processes (Wiley 1983)
- E Chell, ‘Worker Directors on the Board: Four Case Studies’ (1980) 2(6) Employee Relations 1
- PL Davies and KW Wedderburn, ‘The Land of Industrial Democracy’ (1977) 6(1) ILJ 197
- E McGaughey, 'The Codetermination Bargains: The History of German Corporate and Labour Law' (2016) 23(1) Columbia Journal of European Law 135
- E McGaughey, 'Votes at Work in Britain: Shareholder Monopolisation and the ‘Single Channel’' (2017) Industrial Law Journal
- HJ Teuteberg, ‘Zur Entstehungsgeschichte der ersten betrieblichen Arbeitervertretungen in Deutschland’ (1960) 11 Soziale Welt 69
- Lord Wedderburn, ‘Companies and employees: common law or social dimension’ (1993) 109 Law Quarterly Review 261
- HJ Teuteberg, Geschichte der Industriellen Mitbestimmung in Deutschland (1961)
- S Webb and B Webb, The History of Trade Unionism (1920) Appendix VIII
- Lord Donovan, Royal Commission on Trade Unions and Employers’ Associations (1968) Cmnd 3623
- Liberal Party, The Report of the Industrial Partnership Committee: Partners at Work (1968)
- Emire: Germany - Co-Determination
- Emire: Austria - Co-Determination
- German Law in English - 40. Works council. Co-determination
- Co-Determination and Cooperative Culture in Israel
- EU Draft Fifth Company Law Directive