German Law Journal
[Vol. 11 No. 02
To be clear, it is not the role of codetermination to enhance share value. The major benefit is to provide the board level with first‐hand knowledge of employees. Although this may have a positive effect on share value, however, empirical evidence on the economic effects of codetermination is ambiguous. With regard to the theoretical background of empirical research on codetermination, the participation theory is not convincing, because the arguable benefits of codetermination are outweighed by some major weaknesses of the current codetermination regime, as I will show in the following sections by providing anecdotal evidence.148 Furthermore, if the idea of codetermination was convincing, firms would adopt employee representation at the board level voluntarily. As Michael Jensen and William Meckling put it: “The fact that stockholders must be forced by law to accept codetermination is the best evidence we have that they are adversely affected by it”. Data from 1993 shows that only one firm out of Germany’s 250 largest publicly held companies had established a codetermination regime that was not required by law. In addition, the majority shareholder of that firm was the state, so it is most likely that political forces rather than economical goals have been the reason for implementing this optional regime of employee representation in the said company.150 149
Disadvantages of German Codetermination
Weak Factual Position of the Supervisory Board
The most important downside of German codetermination is its detrimental effect on the monitoring ability of the supervisory board. As a result of codetermination, the management board and the shareholder representatives often join forces against the employee representatives in order to limit their influence on the decision‐making process of the company. Overall, this development on the one hand weakens the factual position of the supervisory board, and on the other hand, it leads to a much stronger position of the management board.151 This may explain why executives in Germany still cheer the active participation of employees in the decision‐making process152. In the end, the supervisory
148 For an early discussion of the impact of codetermination on German corporate management, see, Vagts (note 1), 67‐75.
149 Michael Jensen & William Meckling, Rights and Production Functions: An Application to Labor‐Managed Firms and Codetermination, 52 JOURNAL OF BUSINESS (J. BUS.) 469, 474 (1979).
See, v. Rosen (note 144), 796.
151 See, ELMAR GERUM, MITBESTIMMUNG UND CORPORATE GOVERNANCE 43 (1998); Raiser (note 140), 488; Joachim Jahn, Nach dem Mannesmann‐Urteil des BGH, 27 ZIP 738, 745 (2006); Martin Peltzer, Unternehmerische Mitbestimmung und gute Corporate Governance: Führt die Unvereinbarkeit zur Nachbesserungspflicht des Gesetzgebers?, in FESTSCHRIFT FÜR KARSTEN SCHMIDT, 1243, 1253‐1254 (Georg Bitter et al. eds., 2009).
152 See, Wolfgang Bernhardt, Deutsche (Unternehmens‐)Mitbestimmung zwischen Wünschen und Wirklichkeit, 59 BB 2480 (2004); see also, Vagts (note 1), 68.