By Werner Altmeyer
Dr Altmeyer is an adviser and trainer for European works councils and transnational industrial relations in the organisation FREE e.V. in Hamburg
If after October 2004 a company opts to take the new legal form of a European Company, national structures for corporate governance will be replaced by European structures negotiated with employee representatives. What will these negotiations produce? This is a question of great importance, particularly for Germany.
At European level attempts to harmonise the rules of how companies are controlled or at least to bring them closer together have been going on since 1970. But it was only in October 2001 that the European Union directive on employee involvement in a European Company (Societas Europea, shortened to SE) was finally adopted, to be implemented in national law by October 2004. At present it is unclear how many companies will make use of this directive, which is entirely voluntary.
The advantage for a business which operates across national boundaries of being a European Company rather than a simple German, French or British company are, it is argued, in the lower costs of company organisation. But if a company decides to make this legal change, it could have a very substantial impact on its system of corporate governance. The existing structure, covering only one country will be dissolved in favour of a European body or will not be set up in the first place.
The extent to which employee representatives will be present in the new body will depend to a large extent on the negotiating skills of works council members and unions. A "Special Negotiating Body" has to be set up to agree the details of the arrangements with the employer. In contrast to the situation with European works councils it is the company which initiates the process. However, it needs an effective agreement with the employees' side before the new European Company can be legally registered.
Supervisory boards in Germany
Employee involvement in the supervisory board is an important element of the German industrial relations system. In all companies with more than 2,000 employees the supervisory board is made up of equal numbers of voting representatives of the employees and the owners (the shareholders) - parity composition as it is known in Germany. It is true that in contested votes, which are very rare, the chair, who is chosen by the owners, has the last word. However, even in these cases the fact that employee representatives are on the supervisory board means that they can get hold of strategic information about company policies. It is an addition to the system of works councils which cannot be underestimated.
At present there are some 750 companies which are covered by the 1976 Co-determination Act, which provides for equal numbers of representatives of employees and owners. There are also smaller companies with 500 to 2,000 companies where employee representatives make up one-third of the supervisory board and the coal and steel sector, where there is an even more extensive system of employee involvement. In total there are some 6,000 seats on supervisory boards held by employee representatives. Of these around 1,500 are held by full-time union officials, while the rest are held by works council members.
It is already clear that the creation of a European Company will lead to the loss of German seats on supervisory boards. Even when a high level of employee representation can be pushed through, the employees' seats will have to be divided among delegates from other countries. This helps to explain the degree of concern felt in Germany by the prospect of European Companies, as nowhere else, apart from Austria, has such a large number of employee representatives at the highest level of corporate governance.
In addition the negotiations may also lead to a clash between the systems of supervisory board and the differing national standards of employee involvement. The Anglo-Saxon model in Britain and the model of Rhineland capitalism in Germany, can classically be seen as the two extremes of the spectrum with systems in the other EU states somewhere between them. Unlike in Germany, in many countries the creation of European Companies will produce an improvement in the current situation of employee involvement.
Single and two-tier boards
Within the EU there are two models of corporate governance for public limited companies. The two-tier or dual board system has two separate bodies, a body exercising management functions (the management board) and a body whose duty is to oversee the business (the supervisory board). Traditionally this system is found in Germany and Austria, although in 1971 it was also introduced in the Netherlands. In Germany, Austria and some EU accession countries a set number of seats in the supervisory board can only be filled by the employee side either directly or indirectly. However, the employee side has no right to veto appointments to the management board. (The one exception to this is the particular situation of the labour director in the iron and steel industry.)
All other EU countries and Switzerland primarily have the single-tier or monistic board system, where the management and oversight functions are combined in a single body, the single-tier board - known as the board of directors in the UK and the conseil d'administration in France. In many countries there is no employee involvement in the single-tier system. However, the Scandinavian countries and Luxembourg are an exception with up to one third of the seats in the single-tier board reserved for employee representatives. In France between two and four representatives of the workforce can take part in board meetings, although only in a consultative capacity. In some countries there is a significantly stronger involvement of the workforce at board level in companies where majority ownership is in the public rather than in the private sector. However, following the wave of privatisation in recent years this is hardly relevant today.
There are also mixed systems in some countries. For example legislation passed in France in 1996 opened up the possibility of choosing the two-tier system, although in practice this has hardly been taken up. The "supervisory boards" which exist alongside management boards in Italy and Portugal are in fact not comparable to German supervisory boards as they have no influence on appointments to the management board. In many countries during the 1990s there was a growing debate about the legitimacy and decision-making structure of large companies, which revealed a greater interest in the two-tier model. As a result many EU accession countries in Central and Eastern Europe have chosen the two-tier supervisory/management board system, although in Western Europe it is still the exception.
The role of the board
Differences between the single-tier and two-tier systems are also found in the role of the leading figure in the company. While the chair of a German company is seen as first among equals among a group of colleagues, the British CEO (Chief Executive Officer) or French P-DG (président-directeur général) carries sole responsibility. In practice, however, there is also a division of tasks in a single-tier board. The executive board members take on the management of the company, while the role of the non-executive members is that of oversight.
There has been a tendency in the two-tier system for the management board to exercise a strong influence over the supervisory board and in effect to choose the people who oversee its work. This has been particular the case in companies where shares are widely distributed and where there is no dominant owner. In these circumstances the supervisory board becomes a strategic instrument for the policies of the management board, in which the employee representatives are the only group exercising a structurally guaranteed external control. The choice of the employee representatives is not in the hands of the management board. In addition they have grass-roots information and particular knowledge about the internal structures of the company and so can build up a "social oversight" of the company's policies.
Practical experiments
With the legal form of the European Company only being available from 2004 other forms had to be chosen for previous transnational mergers. In 1991 the steel tubes maker Europipe was the first company to set up a transnational supervisory board with employee involvement. It was a German-French joint venture including the then Mannesmann Group, covered by the special rules on employee involvement that govern the coal and steel industry. The IG Metall was able to ensure that the supervisory board of Europipe was made up of equal numbers of representatives of the employees and the owners, as in a German supervisory board.
A transnational solution was also sought when the supervisory board of the German pharmaceutical company Hoechst was dissolved following its merger with the French company Rhône-Poulenc to create the new company Aventis. It was found in March 2001 and is based on the French system of employee representation in a single-tier board. The position is similar in the steel company Arcelor, established through a merger in February 2002. Its single-tier board includes a number of employee representatives, including a full-time official from the European Trade Union Confederation. When EADS, the Netherlands based parent company of Airbus, was founded the unions were unable to achieve employee involvement at the level of the holding company. However, EADS did make concessions to the employees' side in the establishment of a wide-ranging European works council, which has separate committees for the different parts of the business.
Other examples are limited to the inclusion of employee representatives from abroad in existing German supervisory boards. At Daimler Chrysler a seat was given to a representative of the US autoworkers' union UAW and a seat on the supervisory board at ThyssenKrupp Nirosta belongs to an Italian employee representative. However, these examples are exceptions among the supervisory boards where, at least on the employees' side, almost all the seats are held by domestic representatives. As with European works councils in the past, an intercultural learning process is still to come.
