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May be, maybe not

11 July 2016 By Olaf Storbeck

Theresa May is a somewhat unlikely champion of workers’ rights. The favourite to become Britain’s next Conservative prime minister proposed in a speech on Monday that employees should join the ranks of company directors. Germany’s 40-year-old “Mitbestimmung”, or co-determination model, offers a mixed verdict.

May’s goal seems to be to strike a blow against inequality by ensuring that providers of labour, not just capital, have a voice in corporate boardrooms. In Germany, half of the seats on the supervisory boards of large companies are reserved for workers’ representatives. The chairman – usually a shareholder confidant – can call the shots in a stalemate. The double-layered board structure and union-heavy model goes far further than the UK would, but it’s still instructive.

For one thing, even a step in that direction will provoke opposition. The introduction of the German system in 1976 was preceded by an acrimonious debate that dragged on for 14 years. Companies and economists predicted the demise of the country’s corporate sector, warning of red tape and conflicts of interests between shareholders and workers.

Those concerns have proved to be misplaced. Arguably, compromises made between management and workers have contributed to more harmonious industrial relations. In an empirical study, economists Felix FitzRoy and Kornelius Kraft concluded that co-determination had a small, positive effect on productivity. It’s also easy to imagine a bit of front-line common sense helping to rein in an imperious chief executive’s overly grand acquisition ideas.

Yet there are downsides. German supervisory boards, which usually have 20 members, tend to be unwieldy. Divisions among investor representatives, which give union representatives the swing vote, can hamper needed change, too. Think Volkswagen, where powerful unions have been able to slow down necessary cost cutting.

Such a system may also mean employees in a global company’s home country have a voice whereas workers elsewhere don’t. At Siemens, for instance, two-thirds of the 348,000 staff are employed outside Germany. That could mean decisions are made favouring the domestic workforce.

May’s proposal makes policy sense, given the “us-and them” sentiment underlying the recent Brexit vote and the widespread concern, including among investors, that public companies are managed with too much focus on the short term. One challenge, however, would be making it happen without a new tangle of just the kind of EU-style red tape the Brexiteers hope to escape.

 

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