A Look at 'Codetermination' from Attorney Blake D. Lewis

By Blake D. Lewis
Published by Arkansas Business

Last week, U.S. Sen. Bernie Sanders, I-Vermont, attended Walmart Inc.'s annual meeting to introduce a shareholder proposal that would give hourly employees a seat on the corporation's board of directors.

While uncommon in the U.S., this concept commonly referred to as "codetermination" is mandated in several European countries — Germany, France, Sweden and Norway — and gained national attention last year when U.S. Sen. Elizabeth Warren, D-Massachusetts, proposed legislation that would have required large American corporations to give employees the right to elect 40 percent of their board of directors.

Models of codetermination vary from country to county. But the goal seems to be to align the objectives of corporations with those of its workers by allowing workers to participate in corporate decision-making.

In the U.S., major business decisions and corporate policies are decided by the corporation's board of directors, which is composed of members appointed by the corporation's shareholders. The board of directors also elects corporate executives to carry out the corporation's policies.

Over the last several decades, these policies have centered on the idea that the sole purpose of every corporation is to maximize shareholder value. While no shortage of ink has been spilled arguing over the merits of this maxim, proponents of codetermination, particularly in the U.S., contend that focusing solely on shareholder value forces corporate executives to engage in practices, such as paying dividends to shareholders and share buybacks, that increase quarterly earnings but deprive corporations of the capital necessary to increase compensation to workers and invest in long-term research and development projects.

Although there has been a recent resurgence in discussions on codetermination, the concept is not new. In fact, in the early parts of the 20th century there was a trend among many U.S. corporations to implement some form of governance that allowed the involvement of workers, the latest example being Chrysler, which gave the United Automobile Workers president a seat on its board from 1980 to 1991. But to my knowledge, since 1991, there has not been a publicly traded U.S. corporation that has given workers, who were not also shareholders in some capacity (e.g. through employee pension funds), the right to appoint a corporate board member.

The German Way

In Germany — the most widely cited example by proponents of codetermination — corporations meeting certain criteria are required to give employees the right to participate in corporate decision making at two different levels, the work council and supervisory board.

The work council negotiates with corporations on changes affecting the workforce, such as compensation and working conditions. Supervisory councils are responsible for setting corporate policies, making major decisions on behalf of the corporation and electing an executive board to implement those decisions.

Under the German Co-Determination Law of 1976, qualifying corporations are required to give workers the right to elect as many as half of the members of the supervisory board, thus giving worker's the right to set corporate policy. The shareholders elect the remaining members of the supervisory board.

Which Is Better?

Whether codetermination is better for the economy is not an easy question to answer. Like any other economic policy, asking a group of economist their opinion on the matter will yield any number of mixed answers.

On the one hand, codetermination could result in better compensation and job stability, at least in the short run, as worker representatives would be incentivized to allocate more of the corporation's profits to the workers it represents and to make it harder to dismiss workers.

But worker representatives would seem just as likely, if not more likely, to forego investing corporate profits in research and development given its long-term, uncertain payout and potential to reduce demand for labor by producing labor-saving technologies and instead shifting those profits to increase worker pay.

The Profit Motive

It would seem that workers and shareholders would share the same goals of ensuring long-term growth, stability and prosperity of their corporations. Where the two groups appear to diverge is on how to divide the profits: to the investors who provided the capital or to the workers who provided the labor.

So the question of codetermination ultimately seems to be whether corporations should give workers the right to participate in deciding on how to divide the pie they helped create and presumably already compensated for creating.

In the end, Sanders's proposal failed, receiving less than 1.01 percent of the vote of the shares represented at the meeting and entitled to vote. Although the political climate seems to suggest that we will see more discussions in the U.S. regarding codetermination, it's unlikely that U.S corporations will voluntarily implement any form of codetermination in the near future — unless of course codetermination would maximize shareholder profitability.

This information is written by Attorney Blake D. Lewis who is an associate in the firm’s Mergers and Acquisitions Practice Group at Friday, Eldredge & Clark, LLP. Blake's practice focuses on taxation, mergers and acquisitions, real estate transactions, tax controversies, entity formation and governance, and franchising.

This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Mergers and Acquisitions Attorneys.