Codetermination Law Research Articles

What Does Codetermination Do?

The authors provide a comprehensive overview of codetermination, that is, worker representation in firms’ governance and management. The available micro evidence points to zero or small positive effects of codetermination on worker and firm outcomes and leaves room for moderate positive effects on productivity, wages, and job stability. The authors also present new country-level, general-equilibrium event studies of codetermination reforms between the 1960s and 2010s, finding no effects on aggregate economic outcomes or the quality of industrial relations. They offer three explanations for the institution’s limited impact. First, existing codetermination laws convey little authority to workers. Second, countries with codetermination laws have high baseline levels of informal worker voice. Third, codetermination laws may interact with other labor market institutions, such as union representation and collective bargaining. The article closes with a discussion of the implications for recent codetermination proposals in the United States.

What Does Codetermination Do?

We provide a comprehensive overview of codetermination, i.e., worker representation in firms’ governance and management. We cover the institution’s history, implementation, and the best available evidence on its economic impacts. We argue that existing quasi-experimental estimates suggest that codetermination has zero or very small positive effects on worker and firm outcomes at the partial-equilibrium firm level. In addition, we test for general-equilibrium effects of codetermination laws using novel cross-country event studies exploiting a series of codetermination reforms between the 1960s and 2010s, and find no evidence that codetermination laws shift aggregate economic outcomes or the quality of industrial relations. We offer three potential explanations of the institution’s limited impact. First, existing codetermination laws convey relatively little authority to workers. Second, countries with codetermination laws have high baseline levels of informal worker involvement in decision-making, independently of formal codetermination. Third, codetermination laws may interact with other labor market institutions, such as union representation and collective bargaining. We close by discussing implications of these facts for recent codetermination proposals in the United States.

Works councils and performance appraisals

PurposeWe analyze the role of works councils for the use of performance appraisals (PA). We distinguish between the incidence of PA systems as intended by the firm and their actual implementation on the level of the individual employee.Design/methodology/approachWe draw on two complementary data sets. These are the German Linked Personnel Panel (LPP), which combines firm-based information with information provided by several of those employees, and the German Socio-Economic Panel (SOEP), which is a representative longitudinal study of persons living in Germany.FindingsWe find that works councils tend to promote rather than restrict PA. Employees working in establishments with a works council are more likely to face a formal PA procedure. Works councils also act as a transmission institution for the actual use of an existing PA system – i.e. among the firms that claim to implement PA for all their employees, the likelihood of their employees actually having regular appraisals is substantially larger when works councils are in place. Moreover, the existence of works councils is positively related particularly to PA systems, which affects bonus payments.Research limitations/implicationsWe contribute to the understanding of the work of works councils in firms. In more general, we shed light to the relation of industrial relations and human resource management in firms.Practical implicationsThis result hints at a higher acceptance of PA systems in firms with works councils. It seems likely that the stronger formalization of such systems necessitated by codetermination laws increases the likelihood of supervisors consistently carrying out such appraisals.Originality/valueWe are the first who complement the analysis of the existence of HR practices (PA system) with its actual use for employees.

Employee Orientation and Financial Performance of Foundation Owned Firms

Shleifer and Vishny (1997) argue that corporate governance should be weak in the absence of powerful residual claimants. We compare foundation owned firms (FoFs) and family firms, with and without codetermination. As foundations have no owners, residual claimants of FoFs are weak. This might strengthen FoF-managers and employees. Codetermination law also strengthens employees. We derive hypotheses about business policy of FoFs and test them. Our findings show that German FoFs are more labor intensive relative to family firms. But their wages and their hiring and firing policy are about the same. Their financing policy is more conservative, their financial performance is slightly weaker. Apart from financing policy, codetermination has similar effects. These findings indicate a stronger impact on corporate governance of employees in firms with weak residual claimants and in codetermined firms, combined with long-term orientation. But, in contrast to Shleifer and Vishny (1997), we do not find evidence of weak corporate governance.

Productivity and distribution effects of codetermination in an efficient bargaining model

Codetermination can be regarded as an extreme regulatory intervention of the legislator in the labor market which might affect the efficiency of production and the bargaining power of labor. Based on a model that covers both efficient bargaining and employment bargaining a simple equation is derived that is suited to empirical testing. The empirical test is based on German data and includes years before and after the extension of German codetermination law in 1976. The estimates determine the productivity of labor and relative bargaining power of capital and labor. It turns out that codetermination does not affect productivity, but leads to a significant increase in workers’ bargaining power and the distribution of rents. Results based on a second data source with more recent information support the conclusions of the difference-in-differences estimations.

Productivity and Distribution Effects of Codetermination in an Efficient Bargaining

Codetermination can be regarded as an extreme regulatory intervention of the legislator in the labor market which might affect the efficiency of production and the bargaining power of labor. Based on a model that covers both efficient bargaining and employment bargaining a simple equation is derived that is suited to empirical testing. The empirical test is based on German data and includes years before and after the extension of German codetermination law in 1976. The estimates determine the productivity of labor and relative bargaining power of capital and labor. It turns out that codetermination does not affect productivity, but leads to a significant increase in workers’ bargaining power and the distribution of rents.

The ECJ Erzberger Case: An Analysis of German Co-Determination and EU Law

German co-determination law regarding large companies mandates that employees elect half of the members of the Supervisory Board. However, only employees working in Germany are involved in this process, whilst those outside Germany are not. On November 3, 2015, the European Court of Justice received a request from the Appeals Court Berlin for a preliminary ruling in the Erzberger-case, whether this system complies with EU law, specifically the provisions prohibiting discrimination on grounds of nationality (Art. 18 TFEU) and/or restrictions concerning the free movement of employees (Art. 45 TFEU). On July 18, 2017, the European Court of Justice ruled that the current German co-determination system does not violate EU law. In this article, we critically analyse this decision. Furthermore, we explore what the consequences and the options for the German legislator would have been if the ECJ had found that the German system does violate EU law.

The effectiveness of codetermination laws in cooperative and adversarial employment relations: When does regulation have bite?

The German Codetermination Law grants workers of establishments with 200 or more employees the right to have a works councillor who is fully exempted from his or her regular job duties while still paid a regular salary. This article analyses theoretically and empirically how this de jure right to exemption translates into de facto practice, and explicitly takes into account the nature of the employment relations participation regime. It is found that the right of exemption has no effect in cooperative employment relations because exemptions are granted even in the absence of legal rights, but does make a difference in adversarial relations when exemptions are only granted above the threshold where legal rights force employers to do so, i.e. legal rights do make a decisive difference in exactly those situations where the legislators’ intent would not be realized without the right to legal enforcement.

The Macro-Economic Effect of Codetermination on Income Equality

Many studies on the effect of codetermination at company-level reveal its significant influence on wage levels within companies. However, does this effect at the micro-level result in higher income equality at the macro-level as well? A cross-sectional regression analysis of data on EU and OECD countries will be used to test for the codetermination’s effect on income distribution. Assessing the impact of codetermination, a new index on codetermination strength will be introduced, combining the scope of codetermination rights with the threshold of codetermination laws. The results suggest a significant negative impact on the Gini index which indicates that codetermination rights lead to higher income equality.

The Economic Consequences of One-third Co-determination in German Supervisory Boards

Summary In Germany, the establishment of supervisory boards and, therefore, the board-level employee representation are mandatory, depending on the legal form and size of a company. However, the empirical analysis reveals that the bigger part of the companies observed (Limited liability companies with 500 to 2000 employees active in the West-German service sector) does not satisfy the law. This fact has strong impact on research questions in the co-determination field: Many studies have tried to analyze the economic consequences of the German co-determination laws (all examining the 1976 Co-determination Act). However, as the regulations are compulsory, compelling results are difficult to obtain. The bigger part of the studies compares companies that fall into the scope of different co-determination laws. This implies that mainly big companies are contrasted to smaller ones. It is not difficult to see that a comparison of such kind entails further irregularities. The study presented allows better analysis. The data is taken from two sources: the commercial Hoppenstedt Database and official German statistics. Due to the special kind of data it is possible to compare companies of same size, same legal form, active in the same sector that only differ in the existence or non-existence of a supervisory board. Therefore, the study at hand provides more accurate evidence of the economic consequences of the German 2004 Co-determination Act.

Machtindex und Drittelmitbestimmung. Differenzierter Arbeitnehmereinfluss und dessen Konsequenzen

Abstract We are using a panel data set of companies listed in one of the three largest German stock indices between 1998 and 2007 with a third of the directors on the supervisory board representing employees. We measure the influence of these employee representatives by established power indices. Although all analysed companies fulfil the co-determination law and give a third of the directorships to employee representatives, in only about a third of these companies the employees have a corresponding power. In nearly half of the analysed companies the employees merely have information rights. Regression analyses indicate an inversely U-shaped relationship between employee power in the supervisory board and company performance. Zusammenfassung Anhand eines Paneldatensatzes der drittelmitbestimmten Unternehmen im DAX, MDAX und SDAX zwischen 1998 und 2007 wird der tatsachliche Einfluss der Arbeitnehmervertreter im Aufsichtsrat uber in der Spieltheorie etablierte Machtindizes gemessen. Dabei zeigt sich, dass f...

Co-determination and innovation

This paper examines the effect of the German co-determination law of 1976 (MitbestG) on the innovative activity of German firms. Co-determination applies to firms with 2,000 employees or more. Data from 1971–1976 and 1981–1990 on 148 firms are used to compare the number of patents granted to co-determined firms before and after the introduction of the law. Several control variables are applied and in particular, in order to avoid a possible bias from specific effects of firm size, we compare the co-determined firms with others before and after 1976. The results do not support the view that co-determination slows down technological progress and reduces innovativity.

Co-Determination and Innovation

This paper examines the effect of the German co-determination law of 1976 (MitbestG) on the innovative activity of German firms. Co-determination applies to firms with 2000 employees or more. Data from 1971-1976 and 1981-1990 on 148 firms are used to compare the number of patents granted to co-determined firms before and after the introduction of the law. Several control variables are applied and in particular, in order to avoid a possible bias from specific effects of firm size, we compare the co-determined firms with others before and after 1976. The results do not support the view that co-determination slows down technological progress and reduces innovativeness.

Gesetzliche Mitbestimmung und Kapitalrendite Co-Determination and Return on Equity / Co-Determination and Return on Equity

Summary Many observers regard the German system of codetermination as a very strong intervention into the working of the capital market. With the introduction of the codetermination law in 1976, employee representatives in limited liability companies with more than 2000 employees are entitled to occupy half of the number of seats and are granted nearly 50% of the voting rights on the supervisory board. We investigate the impact of the introduction of the German codetermination law in 1976 which implied an extension of co-determination from third parity to almost parity on return on equity. Our estimations are based on panel data for 179 companies from 1971 to 1976 and from 1981 to 1986, thus allowing for adjustment to the 1976 law. In contrast to frequently raised fears, no negative impact is found. Our empirical results suggest a positive influence from the 1976 strengthening of co-determination law on return on equity.

EC Freedom of Establishment, Employee Participation in Corporate Governance and the Limits of Regulatory Competition

This article examines the extent to which the corporate governance systems of the Member States of the EC are exposed to regulatory competition, paying particular attention to the potential threat to the sustainability of mandatory employee participation rules. The introduction sets out essential context, and looks at the reasons for which a number of supranational harmonisation initiatives failed. Part B sets out the theory of regulatory competition. Part C looks at the necessary conditions for regulatory competition to operate in the EC, in respect of both incorporations and reincorporations. Part D looks at the German system of co-determination and Part E examines the position of German co-determination law in the face of the developing system of regulatory competition at European level. The article concludes with some thoughts about the limits of regulatory competition in the EC.

Die Auswirkungen der gesetzlichen Mitbestimmung auf die Innovationsaktivität deutscher Unternehmen

We investigate the effects of the German codetermination law of 1976 on the innova-tiveness of a sample of German stock companies from the manufacturing industry. Information from 155 companies on the number of patents granted in the time period 1971-1990 is combined with other firm and industry data. The sample, totalling 1,961 observations, is used for a difference-in-differences estimator on the question of a possible change after the introduction of the codetermination law. We find no evi-dence in favour of the popular hypothesis that codetermination reduces innovative activity. If anything, it increases it.

Mergers and Acquisitions in Germany - Social Setting and Regulatory Framework

The paper describes the legal and economic environment of mergers and acquisitions in Ger- many and explores barriers to obtaining and executing corporate control. Various cases are used to demonstrate that resistance by different stakeholders including minority shareholders, organized labour and the government may present powerful obstacles to takeovers in Ger- many. In spite of the overall convergence of European takeover and securities trading laws, Germany still shows many peculiarities that make its market for corporate control distinct from other countries. Concentrated share ownership, cross shareholdings and pyramidal ownership structures are frequent barriers to acquiring majority stakes. Codetermination laws, the supervisory board structure and supermajority requirements for important corporate deci- sions limit the execution of control by majority shareholders. Bidders that disregard the Ger- man preference for consensual solutions and the specific balance of powers will risk their takeover attempt be frustrated by opposing influence groups.

Worker Participation and Productivity in Labor-Managed and Participatory Capitalist Firms: A Meta-Analysis

Using meta-analytic techniques, the author synthesizes the results of 43 published studies to investigate the effects on productivity of various forms of worker participation: worker participation in decision making; mandated codetermination; profit sharing; worker ownership (employee stock ownership or individual worker ownership of the firm's assets); and collective ownership of assets (workers' collective ownership of reserves over which they have no individual claim). He finds that codetermination laws are negatively associated with productivity, but profit sharing, worker ownership, and worker participation in decision making are all positively associated with productivity. All the observed correlations are stronger among labor-managed firms (firms owned and controlled by workers) than among participatory capitalist firms (firms adopting one or more participation schemes involving employees, such as ESOPs or quality circles).

The Transformation of Industrial Relations in Eastern Germany

Citing case studies based on interviews they conducted in 1991 and 1992 with labor representatives and managers at six eastern German manufacturing firms, the authors argue that the future could hold either vigor and growth or stagnation and permanent second-class status for the economy and labor movement in eastern Germany, depending largely on actor strategy and choice. The rapid spread of privatization and open markets is tending to undermine unions' influence, on the one hand; but on the other hand, institutional transfer from former West Germany (especially of codetermination law and centralized, regional-level collective bargaining) is giving unions and works councils increased possibilities for leverage.

On the economic rationale for codetermination law

This paper develops a positive (efficiency) economic case for codetermination law resting on the correction of labor and capital market and organizational failures. A legally mandated codetermination structure is shown to provide employee ‘checks’ on several structural incentives for management opportunism. Codetermination is shown to offer advantages for technical efficiency, skill development and knowledge generation through its protection of specific human capital investments. Financial markets cannot enforce codetermination due to a set of free rider problems.