Codetermination from an economic perspective

Today entire business models are under pressure and companies are testing new product portfolios in new technological directions. This analysis applies to the automotive and supplier industries in particular.

Dr. Daniel Hay is the Academic Director of the Institute for Codetermination and Corporate Governance at the Hans-Böckler-Stiftung. 

The transition to hydrogen-powered engines or electric cars is in motion. Also, the steel sector, which for many years has been under sustained competitive and price pressure, is massively affected. Especially in the quest for climate-neutral steel production, the European industry needs support from European policymakers, to create a hydrogen infrastructure to supply the steel companies.

Today we face many challenges: Digitization and automation, the socio-ecological transformation, the aftermath of the Covid pandemic. All these developments can be a danger to social cohesion, financial stability, and our ecological future. We are experiencing a war in Europe that does not only make us reflect our political position and strong beliefs, but also pose enormous economic pressure on markets.

Solving multiple crises poses enormous challenges not only on politics, but also on companies and, along with them, their employees. We want to reach climate neutrality until 2045, which makes radical structural changes to climate-friendly business models necessary. There is a lot at stake for employees, especially for workers in the industrial sector.

In recent years, the EU proposed progressive legislation, be it the new draft on the Corporate Sustainability Due Diligence Directive (CSDDD), on working conditions in platform work or the Sustainable Finance Taxonomy and ESG. In order to actually achieve the goal of carbon neutrality by 2045, the EU’s legislation has been setting clear requirements for companies. It is now time for the EU to step up when it comes to social and governance matters. Sustainability is not only a question of ecology but does also involve workers’ participation. We therefore need to talk about decision-making processes in companies affecting their employees and society as a whole.

In many sectors of the European industry, old business models need to adapt. Our goal must be to keep key industries with well-paid and future-safe jobs in Europe. Additionally, we still experience difficulties in many supply chains. Despite well-filled order books, production has slowed down – with negative consequences for workers and companies. This is why companies need to steady and diversify their supply chains while the EU needs to consider incentives relocating production back to Europe.

Strengthening production and therefore industry in the EU is an essential part of focusing on medium- and long-term perspectives for the company instead of only taking into account short term success like managers and investors often do. Employee representatives’ unique knowledge of the company and its processes is urgently needed when it comes to transforming business models. They strengthen the sustainability perspective of the supervisory board and focus on the long-term success of the company and its jobs. Codetermination counterbalances short-term investor interests and is needed for sustainable corporate governance. Good corporate governance therefore needs workers’ participation and codetermination. The transition for new and sustainable concepts for the company needs to begin before new legislation, or new environmental or societal circumstances hinder the company from proceeding the way they used to.

The Institute for Codetermination and Corporate Governance has been able to prove scientifically that companies with codetermination perform better during and recover fast after crisis. Codetermination is economically valuable in times of crisis and can also help to accompany transformation processes. It can cushion the negative consequences of a crisis for employees, and it is also advantageous for companies in purely economic terms. Companies with workers’ participation in supervisory boards invest more in research and development and use the limits of “window dressing” for their accounts less frequently.

Therefore, it must be very clear: Codetermination needs to be strengthened both on national and European level as it is an effective measure of crisis management and an important asset of good corporate governance.

Unfortunately, what we are experiencing right now is rather an erosion of codetermination. Companies circumvent or simply ignore applicable legislation to withhold codetermination from their employees. If there were no loopholes in European and German legislation on codetermination, a total of 1000 instead of 656 German companies would have employee representatives in the board. However currently, more than 2.1 million employees in Germany are deprived of their democratic rights to vote employee representatives onto the supervisory board.

These are of course solely German figures, but the current threat for codetermination must be a concern for all of Europe. 17 out of 27 EU states have some kind of employee representation on the supervisory board and therefore also have democracy at work.

What is more, it must become an essential task of the European Union to strengthen the democracy perceivably for each and every citizen. We see that democratic values are under pressure more than ever outside but also inside the EU. Starting at the direct workplace, the necessity for closing the legal loopholes must be reiterated. Employees must be able to vote their representatives at company level. Those representatives must be equipped with the necessary rights to drive and accompany transformation processes from an early stage to minimize and mitigate effects on the employees’ workplaces. Employee representatives can substantially contribute to strengthening democracy from within companies.

So why don’t we introduce something as “Democracy mainstreaming”, making sure that the consequences on societal democracy and democracy at work will always be considered in new legislation?

Experiencing democratic principles in the workplace makes democracy itself more vivid and resilient. Saving and strengthening workers’ participation must therefore not only be the goal of strong labor unions and employee representatives, but also an essential task of national and European politicians – for the sake of our democracy. In times of rising populist movements democratic values need to be put first. Insecurities regarding the changing way we work and live can only be encountered by strengthening participation and ownership of the process itself.