German workers’ representation. Goodbye consensus

An overdue debate about reforming German co-determination

IMAGINE your company has a governance structure that works, but is a hard sell to investors. Should you change it, even if that causes trouble, and there are more pressing problems? Germany is pondering whether to weaken its Mitbestimmung (co-determination), which gives its workers' representatives more votes on boards than those anywhere else in the rich world. This week the Confederation of German Employers' Associations demanded change. And the government must decide if co-determination should apply to German firms that opt for the Societas Europea, the EU's new form of company.

Workers' representatives make up as much as half of a German supervisory board, depending on company size. This is largely thanks to the British, who, as post-war occupiers, allowed industry and unions in the Ruhr to adopt “equal representation”, partly in the hope of putting Germany's military-industrial complex in a straitjacket. Co-determination was then extended and, in 1976, became compulsory for all big companies.

No other country has gone as far as Germany, although most big EU members have some sort of co-determination. Employers usually dislike power-sharing, though it can bring some advantages. It is one reason why strikes cost Germany five working days per 1,000 workers a year in 1993-2002, against 25 days in Britain and 45 in America. Polls suggest that a majority of Germany's executives like it, and are not afraid to say so - as Jurgen Schrempp, boss of DaimlerChrysler, did recently.

Yet critics say this support is part of the problem. Bosses play nice because they need the votes of workers' representatives; without them, Mr Schrempp would long since have been fired. This, it is argued, aggravates Germany's corporate-governance ills, notably slow decision-taking. And some say that German co-determination is dying anyway. Foreign investors increasingly avoid it; German firms flee it by moving to other countries. Freed of co-determination, they may even sneak back as a French SA or British plc, now legal after recent European court decisions.

Regulatory arbitrage may thus force Germany to make adjustments. This week's reform proposals would be a starting-point. They respond to the main weaknesses of co-determination: supervisory boards are too large, foreign employees are not represented and equal representation may not be the optimal model. The employers want managers and unions to negotiate over which model they want, including one in which workers' representatives make up only one-third of the supervisory board, the standard set-up elsewhere in the EU.

Yet going for changes now may be a mistake, which is why Chancellor Gerhard Schroder has said no to them. Unions have been quite flexible recently, as cost-cutting deals at Siemens and Volkswagen show. And it is precisely in times of economic pain that co-determination may be most helpful: workers who have a say may accept change more readily.

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