Report assesses co-determination and recommends modernisation

In May 1998 the "Commission on co-determination" published its final report, which gives a broad evaluation of existing co-determination practices in Germany. Co-determination is seen as a major pillar of German industrial relations, which supports the development of a cooperative and employee-oriented company culture and thereby creates an important factor in the high level of competitiveness of German companies. In recent years, however, the number of employees in companies with co-determination structures has been declining. Therefore, the Commission sees a need for a continuous improvement of co-determination practices and elaborates various recommendations for modernisation.

On 19 May 1998, the so-called "Commission on co-determination" (Kommission Mitbestimmung) presented its final report, entitled Co-determination and new company cultures - balance and perspectives ("Mitbestimmung und neue Unternehmenskulturen - Bilanz und Perspektiven", Bericht der Kommission Mitbestimmung, Bertelsmann Stiftung und Hans-Böckler-Stiftung (eds), Verlag Bertelsmann Stiftung, Gütersloh (1998)). The Commission - composed of 35 high-level experts, including representatives from trade unions and employers' associations, managers and works councillors, state representatives, labour lawyers and industrial relations experts - was set up in June 1996 on behalf of a joint project by the Hans Böckler Foundation of the German Trade Union Federation (Deutscher Gewerkschaftsbund, DGB) and theBertelsmann Foundation (the foundation attached to one of Germany's biggest media corporations, Bertelsmann).

The central aim of the project was to evaluate the recent practice of co-determination in Germany and to elaborate recommendations for its further development. Over a two-year period, the Commission held various hearings with co-determination experts from different companies and commissioned several expert reports on co-determination and its impact on various social and economic areas, such as employment, innovation, human resource management, collective bargaining, profits and investments. In its final report, the Commission tried to establish as far as possible a common viewpoint on the assessment of existing co-determination practices and, based on a broad consensus of the Commission's members, offered 26 recommendations for the future development of the German co-determination system.

Co-determination in Germany: legal framework and empirical evidence

The German system of co-determination includes two distinct levels and forms of employee participation:

• co-determination at establishment level. Based on the 1952 Works Constitution Act (Betriebsverfassungsgesetz), the works council is provided with far-reaching participation rights in fields such as works rules, working time (including overtime), health and safety, recruitment, transfer and dismissal of individual employees;
• co-determination on the supervisory board s of companies through elected employee representatives (usually including works council members as well as trade union officials). There are three forms of board-level co-determination;
  • the most extensive form of co-determination, that in the coal, iron and steel industry, is based on the 1951 Coal, Iron and Steel Industry Co-determination Act (Montan-Mitbestimmungsgesetz) and provides "parity co-determination" (paritätische Mitbestimmung) for employee and shareholder representatives on supervisory boards,
  • the 1976 Co-Determination Act (Mitbestimmungsgesetz) provides that all standard forms of companies normally employing more than 2,000 employees should have equal numbers of representatives from the employee and the shareholders' side on the supervisory board. However, in the event of a tie, the chair, who is always elected by the shareholders' representatives, has two votes, which means that for all practical purposes the shareholders' side is always over-represented by one vote, and;
  • the 1952 Works Constitution Act provides the employee representatives in companies employing between 500 and 1,999 employees with one-third of the seats on the supervisory board.

According to the empirical analysis conducted by the Commission on co-determination, there has been a significant decline in the number of employees who work in companies with co-determination on supervisory boards. In the mid-1990s, about 24.5% of all employees in the private sector were affected by supervisory board co-determination, compared with 30.5% in the mid-1980s (see the table below). In 1996, approximately 5.2 million employees fell under the 1976 Co-determination Act and about 400,000 employees fell under the 1951 Coal, Iron and Steel Industry Co-determination Act.

* Table does not take into consideration the supervisory board co-determination based on the 1952 Works Constitution Act.

Source: Report of the Commission on co-determination 1998.

The number of employees who were represented only through works council co-determination saw a significant decline, from 19% to 15%, in the private sector during the past decade. As a result there has been a sharp increase - to more than 60% - in the proportion of all employees in the private sector who work in a "non co-determination area" (mitbestimmungsfreie Zone). The latter is particularly the case in small-sized companies. For example, less than 10% of all companies with fewer than 20 employees have established a works council (DE9702101F). According to DGB figures, a total of more than 40,000 works councils with about 220,000 members were elected in 1994. The proportion of employees affected by co-determination is higher if the well-organised public sector is taken into consideration. For the whole economy, the share of employees with no co-determination still lies at about 45%, though the tendency is clearly increasing.

The Commission's evaluation of co-determination

German co-determination is widely seen as a major institutional pillar of the particular economic and institutional framework of German capitalism, which follows the concept of a "social market economy" (Soziale Marktwirtschaft). The concrete historical forms taken by co-determination have thus always been the result of certain compromises between different political motivations and social interests among employers, trade unions and other political forces. This is particularly true for the post-war period in Germany, when the trade unions claimed far-reaching co-determination rights as an expression of economic democracy, while the employers strongly opposed co-determination as an unacceptable interference in the freedom of ownership.

According to the report of the Commission on co-determination, however, at the end of the 1990s co-determination has lost its "ideological bias" and is widely accepted, even within the employers' camp, as "one element of corporate governance". In the Commission's view, the concept of co-determination has been proved an efficient institution to regulate labour relations at company level, to safeguard the social integration of the workforce and to create a particular company culture of mutual trust and cooperation.

According to the Commission, a major precondition for the relatively smooth functioning of co-determination is the fact that it is embedded in the German "dual system" of company co-determination and branch-level collective bargaining. Since bargaining on "distribution" issues, such as wages or length of working time, is usually externalised from the company to branch-level trade unions and employers' associations, co-determination can operate in a relatively cooperative atmosphere, freed from the more conflictual issues.

Although the issue of the effects of co-determination on economic performance has always led to rather controversial discussions among social and economic scientists, the Commission sees co-determination as a major supporting factor for the specific German economic model, which is traditionally based on export-led, high-quality and high-productivity production. In contrast to a widespread viewpoint (particularly outside of Germany), co-determination has not prevented German companies from carrying out successful globalisation strategies. On the contrary, co-determination might help German companies successfully to organise recent structural economic changes by following a "cooperative modernisation strategy". To sum up, the Commission sees co-determination as a factor which mainly strengthens rather than weakens German competitiveness.

Recommendations for the future development of co-determination

Although the Commission draws a rather positive picture of German co-determination, it also points out that during the second half of the 1990s increased international competition and rapid technological, economic and organisational changes have created new challenges which must lead to a flexible adaptation and modernisation of existing co-determination structures. The Commission has agreed that a necessary renewal of co-determination practices could take place, without changes to the existing legal framework of co-determination, through joint initiatives and activities by the social partners. All in all, the Commission has elaborated 26 recommendations for the future design of German co-determination, which can be summarised as follows.

• The Commission calls for a "new social contract at company level", which should identify the advantages of co-determination and the necessary modernisation. The social partners at company level should follow the pattern of a "cooperative, decentralised, participation-oriented and information-intensive company culture", which might include a differentiated and flexible adaptation of co-determination practices in line with the particular company needs. By using the "productivity of cooperation", co-determination might continue to be a major advantage for German competitiveness.
• Co-determination will persist as a particular element of German industrial relations, even within a changing European environment. The possible introduction of the European Company Statute (DE9806268F) should not lead to a diminution in co-determination rights. On the contrary, the Commission asks the social partners to use the opportunity of a growing Europeanisation of companies to present a better image of German co-determination in foreign countries.
• German co-determination has been proven as a flexible institution in adapting to new forms of work organisation (eg the delegation of works council's co-determination rights to working groups). However, further steps towards flexibilisation, decentralisation and a less bureaucratic co-determination are necessary.
• New methods and forms of co-determination should be provided by the social partners through collective agreements, which should include "opening clauses" allowing for flexible adaptation of the rules at company level and the conclusion of additional works agreements.
• Branch-level collective bargaining should become more flexible and should allow the conclusion of "site pacts" to safeguard employment at company level, even when these "site pacts" diverge in certain respects from collectively agreed standards. The social partners should define a framework for these company pacts through a "pact for jobs" at sectoral or national level.
• German industrial relations are based on a certain division of labour between co-determination and branch-level collective bargaining. While the Commission supports a "controlled decentralisation" of collective bargaining, it also makes clear that there should be no "overstretching" of co-determination with collective bargaining issues. Therefore, the most conflictual - that is, distribution-related - aspects of collective bargaining should remain at branch level.
• Since new forms of employment (eg "atypical" work or self-employment) and new forms of more decentralised company organisation run the risk of undermining existing co-determination structures, the social partners should develop more decentralised and process-oriented forms of co-determination.
• The growing number of small and medium-sized companies with no works council or other employee representation represents an important risk for the future of co-determination in Germany. Therefore, trade unions and employers' associations should search jointly for new ways to establish works councils and co-determination structures in smaller companies.
• The importance of supervisory board-level co-determination for a culture of trustful cooperation between employers and employees is underlined. Considering the growing internationalisation of German companies, the Commission proposes involving more employee representatives from foreign subsidiaries on supervisory boards (this will, for example, be the case in the newly merged Daimler-Chrysler- DE9805264N).
• Finally, to safeguard a continued improvement of existing co-determination practices, the Commission proposes establishing a permanent social dialogue between the social partners' organisations. The partners should observe and accompany recent developments of co-determination and should actively support companies in creating efficient co-determination structures.

Commentary

The report of the Commission on co-determination gives a comprehensive overview on co-determination practice in Germany and provides various proposals for its further development. In contrast to the international "mainstream" of neo-liberalism, for which co-determination is little more than a bureaucratic obstacle to efficient management, the Commission shows very clearly how co-determination supports the development of cooperative industrial relations which, at the same time, has been proven as an important factor in Germany's competitiveness.

However, the Commission also makes clear that the actual influence of co-determination in Germany has been declining for more than a decade. This is particularly true for small and medium-sized companies, only a minority of which are still practising co-determination. Although, the Commission sees co-determination as an efficient concept for the future, it underlines the necessity for permanent improvement of co-determination practices in order to adapt it to increasing international competition and rapid economic and organisational changes.

The fact that various social partners' representatives are involved as members within the Commission should demonstrate the broad consensus on co-determination in Germany. The reactions to the Commission's findings, however, were rather different. While the trade unions welcomed the report, employers' associations were rather reserved and issued no official statement.

Finally, what might be problematic, at least from a trade union point of view, is that the Commission, for the purpose of a broad consensus, reduces the concept of co-determination to an efficient instrument of corporate governance. The legitimacy of co-determination is thus primarily linked to positive economic performance, which is a rather different view than insisting on co-determination as a fundamental principle of democracy. (Thorsten Schulten, Institute for Economics and Social Science (WSI))