Economic Democracy and Codetermination: Harnessing the Capitalist Engine

In the terrible aftermath of World War II, a group of prominent German economists proposed what they called the “social market economy.” They believed that a free market should also serve broader social goals.

Interestingly, the victorious Allied powers were encouraging of this line of thinking, since it manifested in economic structures that decentralized economic power, shifting it away from the German industrialists who had supported the Nazis.

As a matter of fact, American planners in postwar Germany believed that they were “punishing” the Germans with economic democracy as a way of handicapping concentrations of German wealth and power.

One of the key structures that evolved out of this thinking was known as codetermination (Mitbestimmung). It included a framework of supervisory boards (Aufsichtsrat) where elected worker representatives sat side-by-side with stockholder representatives on corporate boards of directors, and works councils (Betriebsrat) in every workplace.

Works councils gave workers a great deal of input at the shop floor level.

For added surprise, it was Germany’s conservative Christian Democratic government that introduced codetermination in the early 1950s, launching the most democratic corporate governance structure the world has ever seen.

The magic of what is known as “codetermination,” “supervisory boards” and “works councils” provides Europe’s economy with a distinct advantage over that of the United States. This will become increasingly apparent as the impact of truly global capitalism deepens.

These distinctly European advances are perhaps the most important innovations in the world economy since the invention of the modern corporation itself.

One just has to wonder how long it will be before these “goodies” — in part an American-made concept — will be applied in the United States as well. As things stand, the longer we Americans wait, the more of a disadvantage to our economy.

Unquestionably, capitalism has proven itself to be the greatest wealth generator ever, raising the living standards for hundreds of millions of people. What is at issue is our ability to harness that wealth-generating capacity for the good of the many — instead of the enrichment of the few.

That harnessing requires a balancing act, an optimal mix of free enterprise combined with the right amount of government regulation that does not unduly burden entrepreneurship and commerce.

Codetermination — specifically supervisory boards and works councils — is one of the keys to that harnessing, and to Europe’s distinct brand of “social capitalism.”

Klas Levinson, a researcher for the former National Institute for Working Life in Sweden, is one of the world’s top experts on codetermination. “Codetermination,” he told me, “is Europe’s little secret advantage.”

He emphasized in particular the crucial role of supervisory boards with employee representatives, broadly overseeing company managers who are handling the day-to-day operations.

“The idea that elected worker directors should sit side-by-side as equal decision makers with stockholder representatives, supervising management, is a little-known yet unprecedented extension of democratic principle into the corporate sphere.”

Half of the supervisory board members for the largest corporations in Germany — Siemens, Bertelsmann, BMW, Daimler and many more — are elected by workers. In Sweden, one-third of the directors of their corporations are worker elected.

Imagine Wal-Mart’s board of directors having anywhere from a third to half of its directors elected directly by its workers. It’s hard to even conceive of such a notion from the American standpoint. Yet, most European nations employ some version of this as standard operating procedure. The impact has been immensely significant.

Professor Levinson’s research shows that, contrary to fears that employee representation on corporate supervisory boards would create difficult tensions or render decision-making too cumbersome and time consuming, it actually has fostered a healthy degree of communication and cooperation between management and workers.

This, in turn, has benefited the businesses as well as the workers. Workers have input, even into important decisions, so the companies are less plagued by labor strife and internal schisms, which can easily paralyze a company.

According to Levinson, one of his studies of Swedish businesses found that two-thirds of company executives viewed codetermination as “very or rather positive” for their company, because it contributed to a “positive climate,” “made board decisions more deeply rooted among employees” and “facilitated implementation of tough decisions.”

Eight of ten chairmen were satisfied with the arrangement and felt it was not important to reduce worker representation on their supervisory boards.

The other twin pillar of codetermination, works councils, are just what their name implies — elected councils at individual companies through which workers gain significant input into their working conditions at the shop-floor level. Works councils are not the same as labor unions or some feel-good or symbolic exercise.

Works councils have real clout. They enjoy veto power over certain management decisions pertaining to the company’s treatment of individual employees, such as redeployment and dismissal.

They also have “co-decision rights” to meet with management to discuss the firm’s finances, daily work schedules, scheduling of holidays, work organization and other operating procedures.

In addition, they benefit from “information and consultation rights” in regard to planning for the introduction of new technologies, mergers and layoffs.

Finally, they can also obtain information that is useful in contract negotiations, such as profit and wage data. In some individual nations — Germany, Sweden and France, among others — works councils have acquired even more rights and greater influence.

To get a sense of the corporate benefits of this system, ask none other than Ed Whitacer, GM’s new no-nonsense chairman. A tough businessman through and through, this former telecom executive has come to see the benefits of this cooperation with the company’s workers firsthand in his dealings with the top labor representatives in GM’s German subsidiary, Opel.

Since 1994, when the European Union issued a pioneering directive on works councils, every multinational company with at least 1,000 workers within the EU or with at least 150 workers in two or more EU nations must negotiate agreements with works councils.

Various academic studies have concluded that works councils contribute to efficiency by improving the flow of communication within companies, which in turn improves the quality and legitimacy of decisions. These studies also found that works councils are associated with lower rates of absenteeism, more worker training, better handling of worker grievances and smoother implementation of health and safety standards.

Codetermination in European companies generally gives workers a say in their workplace and work conditions far beyond what any workers in the United States can even imagine. It also reflects European community-oriented values and long-term strategic vision.

In an uncertain age dominated by global capitalism, when flows of capital and investment are international in scope but the movement of workers mostly is not, the interests of businesses and their employees often seem to collide.

But codetermination facilitates a more harmonious route and gives Europe a distinct advantage over its competitors. In fact, Professor Levinson believes that eventually codetermination will be used throughout the world, since it’s a better system in an age of globalized capitalism.

“It’s better for long-term planning, and it’s better for making everyone feel like they have input into their economic destiny,” he says.

Critics allege that codetermination hurts the competitiveness of businesses and the overall economy. But the success of the European economy and of its many global businesses, including having a higher per capita growth rate from 1998-2008 and more Fortune 500 companies than the United States (179 to 140), belies this criticism.

Indeed, the World Economic Forum in 2008–09 ranked Denmark, Sweden, Finland, Germany and the Netherlands in the top ten for having the most competitive economies in the world. All these countries also employ some degree of codetermination.

They also have the highest quality of life, proof that you can have it all — but only if you have the right institutions to facilitate both a powerful economic engine and the supportive institutions and benefits to harness that engine and keep employees and families healthy and productive.

In the decades following Germany’s launch of social capitalism, some degree of codetermination spread throughout most of Europe, and it also is used to some degree in most of the new EU member states.

Sixty years after its Deutschland genesis, codetermination is now a core feature of the European economy and integral part of the European consensus — and it forms one of the main economic pillars that distinguish the European Way from the American Way.

Editor’s note: This feature is adapted from “Europe’s Promise” by Steven Hill, published by University of California Press. Copyright 2010 Steven Hill. Reprinted with permission of the author.