Co-determination
In corporate governance, codetermination 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 having 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 in Germany, which codified collective agreement from 1918. Most countries with codetermination laws have single-tier board of directors in their corporate law, while a number in central Europe have two-tier boards. Most laws apply to companies over a certain size, from Denmark at 20 employees, to Germany over 500 and 2000, to France over 5000 employees. Sweden has had a law of codetermination since 1980.
Overview
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 one to three members. In some systems the employees can select one or two members of the supervisory boards, but a representative of shareholders is always the president and has the deciding vote. 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. 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 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.
Germany
The first codetermination plans began at companies and through collective agreements. At the end of World War I, the Stinnes-Legien Agreement between unions and business agreed that economic power would be shared throughout the economy. In 1920 a work council law was passed, and in 1922 a law to enable representation on company boards was passed. Hitler abolished codetermination, along with free trade unions, from 1933. After the military defeat of the fascist dictatorship in World War II, codetermination was again restored from 1946 through collective agreements. In 1951, and 1952, the collective agreements were codified into new laws. This first affected the coal and steel industries of West Germany, with an equal number of worker and shareholder representatives, and one-third representation on other large company boards.The Codetermination Act 1976, and the Work Constitution Act 1972 are the basis for the current law. The 1976 Act requires companies with over 2,000 workers to have just under one-half representation on the supervisory board, which in turn elects the management board. Shareholders and workers elect members of a supervisory board. 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, which is actually charged with the day-to-day running of the company. The management board is required to have one worker representative. 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 already 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. In 1976, the law's scope was expanded to cover all firms employing more than 2,000 workers; with some changes concerning to the board structure, which has 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.
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.
United Kingdom
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.
While most enterprises do not have worker representation, UK universities have done so since the 19th century. Generally the more successful the university, the more staff representation on governing bodies: Cambridge, Oxford, Edinburgh, Glasgow and other Scottish Universities, have rights for staff election of councils in statute, while other universities have a wide variety of different practices. Under the UK Corporate Governance Code 2020, listed companies must comply or explain with one of three worker involvement options including having a worker director on board. However, companies have not yet ensured workers have the right to vote for representatives on the board.
European Union
In the 1970s, the European Community drafted the 5th Directive on company law, proposing a two-tier board and worker representation on supervisory boards. The law would’ve been similar to Germany’s, but the proposal was not passed. The directive has not yet won widespread support to be brought into force.United States
The United States has, in Massachusetts, the world's oldest codetermination law that has been continually in force since 1919, although it is only voluntary and only for manufacturing companies. A large number of universities also enable staff to vote in the governance structure. In the 1970s, a number of large corporations including Chrysler appointed workers to their board of directors pursuant to collective agreement with the labor union.In April 2018, four Senators sponsored the Reward Work Act which would amend federal legislation to require all listed companies to have one-third board representation for workers. Polls showed majority support among Americans for the measure. In August 2018, Elizabeth Warren sponsored a new Accountable Capitalism Act that would require 40% of the board of directors be elected by employees in federal corporations with incomes over $1 billion.