Workers on Boards – Research by the High Pay Centre

Posted on 07 Oct 2013 under Previous Publications, Working with Business

If the 2007/08 banking collapse represented a chastening for Britain, for Germany it has been something of a vindication.

Britain remains to this day below its economic peak of 2008. By contrast, the resilience of the German economy post-Lehman Brothers has been almost unmatched throughout the developed world. Germany came roaring out of recession with higher growth and lower levels of employment and youth employment than the UK. German industrial giants such as Volkswagen or BASF have maintained their position as global leaders in their industry, while British car-makers and chemical companies have collapsed.

Though inequality has increased in Germany over the past two decades (as it has in most developed economies) the increase has not been as pronounced as in the UK. While our politicians are beset by the cost of living and the challenge of delivering a recovery that is shared by all members of the population, wealth is already distributed far more evenly in Germany, with the consequence that poverty is not as widespread. The OECD estimates that the poorest 20% of German households have $12, 544 per year in disposable household income, compared to $9,927 in the UK. By contrast, the richest 20% have higher incomes in the UK than in Germany, even though disposable household income on average is higher than the UK for the German population as a whole!

The success of Germany has not gone unnoticed by commentators from across the political spectrum. Pamphlets published by Conservative MPs (Britannia Unchained) and the Trade Unions Congress (German Lessons) both praised aspects of the German economic model. The Kay Review into short-termism commissioned by Vince Cable compared the UK’s industrial culture unfavourably with Germany.

It would be simplistic to venerate every aspect of German economic policy, and doubly so to mis-identify a single German policy as the panacea for all the UK’s problems. Equally, however, it is clear that Germany is getting a lot right that we are currently getting wrong.  It seems intuitive that many virtues of the German system – a fairer distribution of wealth, a longer-term approach to business dedicated to protecting jobs –might be abetted by their system of ‘co-determination.’ German corporate governance mandates every company with over 2,000 employees to introduce a supervisory board of overseeing the executive team comprised of ten shareholder representatives and ten elected representatives of workers and their trade union.

As part of a recent research project on corporate democracy, the High Pay Centre interviewed a number of German board members – both employee directors and shareholder representatives – to understand the benefits and challenges of worker representation in more detail.

Unsurprisingly, the employee directors were enthusiastic about their input at the highest level of German companies. Worker and Trade Union representatives at Volkswagen felt that during the financial crisis, they had encouraged a long-term perspective, because their interests were most closely aligned with the company’s long-term success – they want to see good quality jobs maintained into the future. The supervisory board ensured that Volkswagen focused on protecting jobs, reaching an agreement with the workforce to reduce working hours, but avoiding layoffs. As the economy recovered, existing workers were able to increase their hours, saving the company money on training and recruitment costs.

At Deutsche Bank, not currently a heavily unionised organisation, Employee Director Martina Klee, a non-union member, said that she was still able to bring issues from lower down the business to the attention of the executives that might otherwise have gone unnoticed. As such, potential problems are spotted early and potentially averted. One can see how this might have benefitted recent scandal hit UK companies such as BP or Barclays. Klee was also quick to point out the understanding and ‘real world’ perspective that she could bring to reputational issues such as executive pay.  The supervisory board at Volkswagen also secured a significant reduction in CEO Martin Winterkorn’s pay package in 2013 after a public outcry in 2012.

It was interesting to note that interviewees from a management background were equally supportive of worker representation on boards. Christophe Danzer-Vanotti, non-executive director at Deutsche Bahn and former senior manager at E.On, claimed the system works as a communication channel both from workers to management and vice versa. Unions and workers representatives reach a consensus with management. They must then share responsibility for the decision and sell it to the workforce. This leads to a much less adversarial model of industrial relations than he had experienced while working in the UK for E.ON.

Such a cultural difference presents an obvious hazard in terms of implementing aspects of the German model in Britain. At the same time, co-determination was initially resisted vociferously by the business lobby in Germany following its introduction in the 1970s. Though Danzer Vanotti told us that he thought on balance the German system was better than its British and American counterparts, it is only recently that the business community has reached a consensus on this – so the question of whether a change in culture should lead or follow a change in policy is something of a ‘chicken or egg’ dilemma.

There are already successful examples from the UK of worker representation on boards where companies such as First Group and John Lewis have introduced the system voluntarily. John Lewis is frequently cited as one of the best-run companies in the country.

Sceptics should also acknowledge that, whatever their reservations about a revised model of corporate governance, the status quo is something of a car crash. Wages are stagnating with a debilitating effect on living standards. The European Trade Union Initiative ranks the UK 26th out of 27 EU countries in terms of worker involvement in corporate decision-making. The Kay Review concluded that the unchecked influence of short-termist shareholders has had a deleterious effect on our economy. The fact that German workers are guaranteed representation on company boards goes some way to explaining why their country is not afflicted by these same problems.

The full report by the High Pay Centre can be found here.