Germany has UK to thank for its divided boardrooms

The Business Online ^ | 24 September 2006 | Eric Culp

[lowbuck]

THOSE who have a problem with workers’ representatives occupying half of German companies’ supervisory boards can blame the British. The British instituted the current scheme after World War Two.

The requirements providing trade union bosses with boardroom seats were first enacted in Berlin’s British Zone in the late 1940s. The German law which underpins its current system of Mitbestimmung, or “co-determination”, turned 30 last month.

Chancellor Angela Merkel was on hand to help celebrate the edict, which gives workers’ representatives half the seats on supervisory boards at some 750 German corporations, including almost all the companies listed on the main stock market.

The law is unique. No other country in the world provides so much power to employees.Last week, we saw another example of this creaking policy when a leading member of British trade union, Amicus, was appointed to the supervisory board of Allianz, the German insurance and financial services group.

The supervisory board is responsible for selecting executives, and it has a major say in restructuring talks. The influence of labour at the top level of German business is one reason the country’s corporations have so much difficulty adapting to changes in the global economy.

Speaking to a crowd of mainly union officials to mark the anniversary, Merkel lauded the country’s system of co-determination. “The German model has a position of solidarity,” she said, using the Continental codeword for organised labour.

Such a statement from the country’s leading Christian Democratic Union (CDU) politician runs counter to her party’s dogma, but Merkel has proven that her strength as leader of Berlin’s shaky Grand Coalition is appeasing the junior partner Social Democrats.

Georg Schreyögg, professor for business administration at Berlin’s Free University, says Merkel’s support for co-determination was surprising since the CDU has long bemoaned the system. Even though the German chancellor said it needed to be “adjusted”, she refused to denounce it outright, which is significant, says Schreyögg. “She didn’t want to take a position that was completely against that of her coalition partner,” the SPD, who strongly support co-determination and are heavily reliant on Germany’s unions.

Workers sitting on boards leave most foreign managers shaking their heads. Part of the problem with Germany’s unique system of co-determination is that “Anglo-Saxons see it as a curiosity,” Schreyögg says. They shouldn’t.

After World War Two, officials in charge of the British Zone and the German industrial heartland in the Rhine-Ruhr valley agreed to the system of co-determination for the region’s steel and iron industries in 1947. The decision, eventually codified by a series of laws, gave management and employers an equal number of seats on the supervisory board (the head of a company’s vote counts twice, so the capital side has control).

Such a composition was seen as a method to halt the increasing socialisation of industry. The idea of co-determination, which first emerged in Germany in the 19th Century, was reborn with vigour thanks to the help of the British occupying army.

Nearly 60 years later, British thought is still impacting on corporate Germany, at least in the eyes of the chancellor. Merkel said: “In 2005, every seventh newly-founded corporation with limited liability was registered in the form of a British “limited” company.

Many executives choose the British structure because it is much cheaper than its German counterpart, the GmbH, which costs E20,000 ($24,600, £13,800) in cash and collateral to register compared to around £50 for the Ltd. However, the chancellor mistakenly cited this development as an example of how other European corporate models were being set up in Germany as a way to bypass co-determination.

Schreyögg notes that once the employee level at an Ltd reaches 2,000, the company has to follow German labour law and create a supervisory board in which half the members come from the workers’ side. European courts may eventually be forced to decide the law’s legality in the euro zone, an area with widely disparate corporate law. And there are ways around co-determination; some corporations subdivide into units with fewer than 2,000 employees to avoid the supervisory board requirement.

German insurance giant Allianz is in the process of completing its transformation into a European company, known as the Societas Europaea, or SE, but will retain the German supervisory board model. Under SE regulations, the insurer could reduce or eliminate employee representation, but since it will be based in Munich, Allianz and other SEs set up in Germany generally have to adhere to the country’s labour laws.

The company is believed to trust co-determination, at least for the moment. It could be saying that simply to avoid a fight with unions. Also, Allianz may have decided that pushing for fewer employee surrogates could result in an unwanted, highly politicised legal battle at European level.

Allianz, though, is paring down the board from 20 to 12, and the six labour seats will include a Frenchman and a Brit, a rarity in a country where boardrooms are predominately German. Ethnocentrism in top boardrooms has long been a sticking point with foreign investors, and Merkel has also expressed concern about the situation.

Foreign stockholders should also take note: More than half of the country’s share capital is in foreign hands, but those who hold it are underrepresented on the capital side of supervisory boards.

One reason is co-determination, says Wolfgang Gerke, a business professor and expert on German management. He suggests many foreign executives see workers in the boardroom as a socialist relic, one they would rather avoid confronting.

Gerke, who himself sits on a number of supervisory boards, supports the current system since it keeps the number of strike days down. He points out that many new companies throughout the world are attempting create team environments instead of relying on a management dictatorship, which he calls an outdated style of administration.

That is fine for small companies. However, in some cases when staff size reaches the tipping point, keeping everyone happy can prove difficult and lead to disarray, an eventuality that even Gerke admits can be counterproductive.

“Chaos is not the best principle of management,” he says. In the fast moving global economy, the consensus mentality can prove a major stumbling block to quick decision-making. “It is a problem when radical changes are linked to major job cuts,” Gerke says.

Sometimes decisions have to be made, and quickly, or events often end up making decisions for companies. Handcuffing management in Europe’s largest economy has kept Europe’s largest economy Germany from evolving and growing.

It is time to get rid of the British system.

[lowbuck]

An interesting article noting the origin of the workers councils having board representation. I did not know that the British introduced this.

Anyway, this might explain to fellow FReepers why German companies are not quite as nimble as say the average US or UK company.

[untenured]

Gerke, who himself sits on a number of supervisory boards, supports the current system since it keeps the number of strike days down.

It keeps the number of jobs created down, too.

I was vaguely familiar with co-determination, but I had no idea that workers got half the seats, nor did I know about the British origins. As socialist as Britain was in the late 1940s, this is not surprising in hindsight.