Chill Enters Cosy German Boardrooms

About 50 leading German business executives will this week draw up plans for radical changes to the system of co-determination which gives workers and unions seats in boardrooms. For decades the system has been seen as a boon for Europe's biggest economy but is now derided by Michael Rogowski, president of the Confederation of German Industry, as "an error of history". Mitbestimmung is increasingly seen as a baneful influence, preventing the modernisation of a floundering economy, discouraging foreign investors, cementing a rigid labour market and forcing a flight of capital.

But the system, introduced in the British zone of occupation after the war before going nationwide in 1976, has found staunch defenders in Chancellor Gerhard Schröder and Jürgen Schrempp, DaimlerChrysler chief executive, as well as the unions.

Mr Schröder said last week he had always supported co-determination and that would remain the case. "It has strengthened, not weakened, Germany," he said, echoing the words of his economics minister, Wolfgang Clement.

Mr Schrempp told Stern magazine he had "very good experiences, all things considered" with the system, dealing over the past 20 years with very "competent" labour representatives who were closely bound up with the firm and its success. "In our case it works extraordinarily well." Privately, British executives serving on German boards disagree.

The British originally imposed co-determination in the coal and steel industries, the industrial muscle behind Hitler's military power, in an effort to prevent the rebirth of Nazi-style aggression. Giving workers equal places in the board room with capital would act as a brake on over-ambitious expansion.

The nationwide system imposed by Willy Brandt's Social Democrat government gave workers and union representatives up to 10 seats on 20-strong supervisory boards which are designed to oversee the executive board in the development of company policy and strategy - including investment, rationalisation and closures. The chairman, normally representing investors, has the casting vote in the event of a deadlock.

Co-determination, its proponents say, has enabled German companies to manage change in an exemplary fashion through consensus. But critics argue that companies such as Opel, the carmaker shedding 10,000 jobs, and Karstadt, the retailer axing 5,500 posts, have been plunged into financial crisis because the supervisory board postponed radical surgery or enjoyed so cosy a relationship with the executive board that nothing ever happened.

Now Mr Rogowski and officials in the German Federation of Employers in effect want to hand all decision-making powers to the executive board. Under the revised system being drawn up by their joint working group, all companies would be empowered to renegotiate co-determination arrangements.

If the "social partners" fail to agree, a draft paper leaked to Der Spiegel last week says that only a third, rather than a half, of all supervisory board seats would be reserved for worker representatives. In Anglo-Saxon-style firms with a single board, the worker representatives would be confined to a watered-down consultative council. In the coal and steel industries, co-determination would cease altogether.

Worker representatives, often including union leaders active in a particular sector such as transport or chemicals, are delegated but Mr Rogowski's plans would force a ballot of the entire workforce.

Dennis Snower, head of Kiel's Institute for the World Economy, told a reporter from the Süddeutsche Zeitung last week that the system must be adapted to meet modern demands for entrepreneurial flexibility, especially among foreign investors.

The most telling business argument for change is that co-determination is an obstacle to cross-border mergers or, as in the case of Hoechst and Rhône-Poulenc (now Aventis), forces the transfer of the company headquarters outside Germany.

But EU company law reforms, in the making for 30 years, will enable transnational firms to become European plcs (or AGs in Germany), with little or no co-determination. So far, few British companies seem attracted by the idea, let alone by Mitbestimmung; their German rivals are much more interested.