Justin Fox: Why German Corporate Boards Include Workers for Co-Determination: "One of the world’s most successful capitalist nations, Germany, currently requires 50 percent employee representation on the supervisory boards of large corporations, and that most countries in the European Union now also encourage or require some such form of employee 'co-determination'...

...Which got me wondering. How did German corporations end up giving all those board seats to employees?... The short answer is that in the aftermath of World War II the managers and owners of Germany’s large industrial concerns were discredited, with some headed for trial in Nuremberg as war criminals, while the country’s trade unions, which had been banned by Adolf Hitler in 1933, were considered by the Allied occupying forces to be free of Nazi taint. The most heavily industrialized part of the country was in the hands of the British, who were in the process of nationalizing several major industries back home and were inclined to do the same in Germany. Having experienced de-facto nationalization under the Nazis, though, the leader of the union movement in the British zone—seventysomething former metalworker and Social Democratic politician Hans Böckler—pushed instead for negotiated deals with company owners to give workers equal board representation. Greatly preferring this to nationalization, several big iron and steel concerns in the British zone assented....

In a 1979 paper that hasn’t aged well, American economists Michael Jensen and William Mecklin— the scholars probably most responsible for the widely held belief in the U.S. that the sole role of the corporation is to maximize shareholder returns—predicted that the new German law would turn out to be either irrelevant, as weak and divided worker representation allowed shareholders to continue to exercise “complete control over the affairs of the firm,” or transform the German economy into a “Yugoslav-type system” characterized by underinvestment, stalling growth and heavy government interference. Neither happened. German corporate governance is markedly different from the Anglo-American variety, with German companies seemingly placing more weight on worker concerns like job security and less on short-term shareholder value maximization. But the German economy hasn’t stalled; in fact, the country’s annualized growth in real per-capita gross domestic product since 1976 (1.8 percent) has been a smidge faster than that of the U.S. (1.7 percent)....

One interesting note in the 1979 Jensen-Meckling paper is that the authors portray the German system of corporate governance as artificial and the American one as natural... an inaccurate description of what transpired in Germany...


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