ZEW President Franz on Worker Participation

In the latest edition of the ZEWNews, ZEW President Professor Wolfgang Franz gives his thoughts on worker participation in company decisions.

Worker Participation

The recent scandal surrounding the rather expensive special “support” offered to Volkswagen works council members which have only partially come to light (there are even rumblings of corruption in the press) are not the first instance where this type of operational co-determination has come under the microscope. The same applies to managerial co-determination, whereby employees are represented on a company’s supervisory board, with one particularly notable case of misconduct involving a deputy chairman of the board of a large company in his capacity as union leader indirectly calling for a warning strike against his own company. There are countless other examples: reports abound of conflicts of interest, extraneous quid-pro-quo deals and “cooperative agreements” between members of the supervisory board, executive board and works council within the same company. For example there are accounts of company CEOs “buying” an early extension of their contract, which requires the approval of the employee representatives on the supervisory board, by supporting generous employee wage increases in ongoing wage negotiations.

This and other gross abuses of power could still be seen as a bug in the system, but the latest ruling from the European Court of Justice seems to suggest that the system itself may be developing into the problem. According to the ruling, companies that have been officially founded in an EU Member State are allowed to relocate their head office to another EU country while keeping their legal form. In simple terms, a company founded in one EU Member State (with limited or non-existent regulations regarding worker participation) can move its headquarters to Germany, for instance, but does not have to comply with the country’s laws regarding corporate co-determination.

This does little to preclude competition between various legal institutions governing corporate co-determination, a development many economists would like to see. However, we should also be scrutinising operational co-determination that is not affected by the above ruling. This type of worker participation incurs considerable costs, with the running of a works council alone costing around €338 a year per employee in 2004, according to recent calculations by the Cologne Institute for Economic Research.

Possible reforms should go beyond simply abolishing worker participation but should aim to create greater contractual freedom and lower costs. In the face of widely acknowledged failings and considerable costs on the one hand and uncertain returns on the other, the extent to which managerial or operational co-determination should be drawn upon should be left up to personal contractual freedom. In the case of managerial co-determination, whether and in what form the supervisory board should involve worker participation should be decided by shareholders. The extent to which the board then appoints union officials is its own business. In the case of operational co-determination, there should in principle be an enforceable works council if at least one third, or better one half, of employees vote for it. The rights of this council must be agreed upon by the contractual parties at the company level, otherwise a statutory fall-back solution in the form of a significantly streamlined version of the Works Constitution Act is also an option.

Here the focus should be on using the council’s co-determination rights to concentrate on social matters, making the system considerably less bureaucratic and lowering costs. Cost-saving measures would include, firstly, significantly raising threshold levels and, if these are exceeded, relieving works council members of their position. Secondly, workers would bear the entire cost, as in Austria, or at least half the costs of running the works council and have the money deducted from their wages.