Codetermination is an arrangement in which the management works together with the workers when making decisions relating to issues in their workplace and even voting for representatives. In developed democracies, there are laws that require workers to have a say in the voting of representatives.
Codetermination laws apply in countries which have one-tier or two-tier board of directors. Codetermination laws only apply when a company has a set number of employees as defined by local law.
A Little More on What is Codetermination
In large companies, ones with more than 100 employees, workers form small representative groups call workers council. In small companies, the workers vote one of theirs as a representative. Through the representative or the worker’s council, the employees will get informed or consulted on matters that need their input. Employees may also elect a representative in a managerial or supervisory position.
In single-tier systems, an employee is allowed a seat in the board of directors while in two-tier systems, an employee will work in a supervisory position. When electing into the board, an employee representative’s power is limited to issues relating to employee’s welfare. This is unlike the representative of shareholders who holds the deciding vote.
In 1-tier systems where codetermination applies, employees are allowed a representative or two in the company’s board of directors and sometimes in the other committees in the company.
Codetermination plays an important role in companies. First, it reduces conflicts between the management and the workers to enhance productivity. It also enhances the creation of legislation that favors workers and to correct failures in the market. However, codetermination has been shown to have minimal or no effect on how businesses perform.
References for Codetermination
Academic Research for Codetermination
- When Does Worker Ownership Work–ESOPs, Law Firms, Codetermination, and Economic Democracy, Hansmann, H. (1989). Yale LJ, 99, 1749. This paper examines how private and public companies are changing their policies to accommodate employee ownership. Employee/worker ownership has gained traction in the US where employees of a company should be allowed to own a part of the company in which they work. This paper observes that; most companies turn to employee ownership with the hope that it will enhance productivity.
- Capital, labor, and the firm: A study of German codetermination, Gorton, G., & Schmid, F. A. (2004). Journal of the European Economic Association, 2(5), 863-905. This paper is a study of the German codetermination system. It observes that, in German, employees are allowed control of the assets of the company through a seat on the supervisory board. In such a system, the supervisory board is the nonexecutive board and it oversees the activities of the management board. However, the executive board will have the final say, appoints board of supervisor’s members and determines salaries. The paper concludes that equal representation of employees and shareholders enhance the performance of a company.
- Co‐determination, efficiency and productivity, FitzRoy, F., & Kraft, K. (2005). British journal of industrial relations, 43(2), 233-247. This paper examines how codetermination affects efficiency and productivity of companies. It takes a closer look at the German system while examining codetermination at management level. It concludes that, codetermination in large firms show positive results.
- Economic effects of codetermination, FitzRoy, F. R., & Kraft, K. (1993). The Scandinavian Journal of Economics, 95(3), 365-375. This paper compares the success seen in West German, Japanese and Scandinavian economies with the lagging productivity witnessed in US and UK economies. It specifically looks at corporate controls and labor markets and codetermination laws in Germany. Though there was resistance from employees when creating these laws, studies show that there is a relation between the application of codetermination laws and the productivity of a company.
- On the economic rationale for codetermination law, Smith, S. C. (1991). Journal of Economic Behavior & Organization, 16(3), 261-281. This paper is an examination of codetermination laws and their relation to economics specifically the capital markets and the failures of companies’ management. Codetermination is shown to have an effect on the way a company’s management carries out its activities.
- Codetermination and the modern theory of the firm: a property-rights analysis, Furubotn, E. G. (1988). Journal of Business, 165-181. The author in this paper notes that in situations where workers finance investments in the firm they work, they should be treated as equity holders in that company as they offer the capital stock a company needs to enhance production. This paper aims at explaining the property rights structure that firms with such a condition must possess.
- Labor participation in corporate policy-making decisions: West Germany’s experience with codetermination, Benelli, G., Loderer, C., & Lys, T. (1987). Journal of Business, 553-575. This paper looks examines the effects of participation of workers in decisions making in companies. It observes that, if workers would work to maximize the profits of a firm, then shareholders would face less risk in their investments, there would be smaller dividends, firm leverage would go low and the workers would award themselves huge salaries. In such a case, unless codetermination has a direct positive impact on productivity, shareholder wealth would decline. However, a study on the effects of codetermination in West Germany shows that it has little to no effect on the performance of a firm.
- A general model of codetermination, Furubotn, E. G. (1989). In Codetermination (pp. 41-71). Springer, Berlin, Heidelberg. This paper compares codetermined firms with conventional firms where codetermination does not apply. It shows that there are no general agreements on how each of the respective firms are supposed to be structures and what characteristics they possess. The paper develops a model to show how studies on codetermination should be conducted and how codetermination should work in different companies.
- Codetermination: A sociopolitical model with governance externalities, Pistor, K. (1999). Employees and corporate governance, 163. This paper is an analysis of the socio-political influences of codetermination. It looks specifically at the events that led to the development of the 1976 Law and looks at how this law has impacted the performance of corporate. It notes that codetermination was meant to enhance the bridge between labor and capital. In codetermination, three parties are involved; the employees, the management and the shareholders. In this relationship, the management benefits the most.
- Co‐determination and Personnel Turnover: The German Experience, Frick, B. (1996). Labour, 10(2), 407-430. This paper examines the effects of codetermination law in Germany on the decisions of employees to quit and their dismissal. It shows that firms where codetermination is applied and those that have work councils, the quit and dismissal rates are lower than in those with no work councils. The paper concludes that, firms gain when a work council is present as the quit rates are low and therefore firms retain trained personnel.
- Codetermination and enterprise performance: empirical evidence from West Germany, Gurdon, M. A., & Rai, A. (1990). Journal of Economics and Business, 42(4), 289-302. The author in this paper investigates the effects of the 1976 Codetermination Law in West Germany on company performance. There are contrasting theories on the effects of codetermination with one school of thought affirming positive effects of codetermination and another saying the law has minimal results. This study samples 63 firms affected by the legislation and it shows that, productivity reduces with this law while profitability increased with the law.