Co-determination: Stronger Together

In many countries, key company decisions can be quickly made by the CEO and executive board without consultation. Not so in Germany, where the co-determination rule ensures employees have their say, thereby promoting sustainable business.

September, 2017

At face value, the hierarchy within any company is clear: directors make the decisions and their employees have to implement them. In Germany, however, it is not so straightforward. In many companies, employees have a right in law to decide on important topics. From the perspective of a foreign investor, this system, known as “co-determination,” may seem a little strange, but it has been working well for decades, to the extent that even employers praise it.

“Employee participation has proved successful in difficult situations,” says Ingo Kramer, president of the employers’ association BDA, adding, “sometimes it also acts as a brake pad.” From checking the excesses of big business when decisions are made purely in the interests of shareholders and directors, to steering the company in the right direction from an employee perspective, co-determination promotes sustainable business.

Staff meeting at the Volkswagen factory in the German city of Wolfsburg: Anyone who is thinking about investing in Germany should be familiar with the rules of employee participation, which also apply to German subsidiaries of foreign companies.

© Kristoffer Finn/laif

Works councils: The voice of the worker

In all German companies with at least five employees, the workers are entitled to elect a “works council.” The employer must not hinder these elections and management must involve the employee representatives in important decisions. For example, if there’s a round of new recruitment, if redundancies are pending or if the organization of the company is to be changed, the employees must have their say. The powers of the works council vary from case to case, ranging from the right to information to the right of veto.

For example, works councils in companies with more than 20 employees can prevent a new employee from being hired without the management first posting the vacancy internally. Members of the works council must be allowed to devote time to their duties as the employees’ representative during working hours, be it hours or days, depending on the size of the company.

Employee participation has proved successful in difficult situations.

The supervisory board: Monitoring the managers

In large corporations co-determination is taken a step further. If a company has between 500 and 2,000 employees, the workforce should appoint a third of the members of the supervisory board. Within this supreme control body, the workers’ representatives sit together with the representatives of the shareholders and are involved in all decisions.

In corporations with more than 2,000 ­employees, employees can even appoint 50 per cent of the supervisory board. However, in a stalemate situation, where there is no clear majority vote, the vote of the chairman of the supervisory board (the shareholders’ representative) will swing the motion. More than 600 companies in Germany are large enough that employees occupy half of the supervisory board.

Facts & Figures

180,000

Number of works council members in Germany

7,500

Number of employee representatives in supervisory boards in Germany

Source: PwC

Co-determination: Promoting company success

Unsurprisingly, the unions are the first to praise the positive consequences of ­employee participation. Reiner Hoffmann, chairman of the trade union umbrella DGB, describes co-determination as “a living democracy in the company,” although it is not always convenient for employers. It also has a positive effect on the company’s success and longevity because it makes for sustainable policymaking and reduces the impact of short-term return targets for shareholders.

Many economists have come to the same conclusion. Researchers at the think tank Wissenschaftszentrum Berlin have proven that in co-determined companies more money is invested back into the business than would have been if the shareholder representatives were free to decide for themselves. Sustainability issues from directors’ bonuses to waste reduction are also particularly high on the agenda in these companies.

The German system of co-determination may even provide a model for other countries. Last July, British Prime Minister Theresa May proposed introducing co-workers to the controlling bodies of the largest companies in Great Britain, in a bid to curb the excesses of company executives.