Empirical Research on Co-determination - Corporate Governance and Business Ethics

Economic consequences of labors law are a well-established topic of economic research in Germany (e.g., Albach et al. 1985; Weiber and Stocker 1987). Likewise, the consequences of the 1976 Co-determination Act, which gives employees of larger corporations a quasi-parity in supervisory boards, have been closely investigated from the very beginning (Küpper 1992). While some empirical studies examining the impact of co-determination on the profitability and productivity of companies show ambiguous results, the vast majority cannot detect any negative effects (Renaud 2007). This finding is a particular feature of studies that apply advanced econometric methods.

Kraft and Ugarkovic (2006), for instance, analyses the impact of increased employee representation in supervisory boards on return on equity by comparing co determined and non co-determined companies before and after the introduction of the Co-determination Act. They find no empirical support for the hypothesis that the extension of co-determination has decreased return on equity. Using similar research methods, Renaud (2007) even concludes that the enforced quasi-parity in German supervisory boards has increased corporate returns in the long run. Fauver and Fuerst (2006) study to what extent the degree of employee representation in supervisory boards affects the stock market performance of German firms. They find that the degree of co-determination has a positive effect on both the firm value and the size of dividends: particularly in sectors with complex products, the firm value can be increased by quasi-parity.

From the perspective of empirical economic research, co-determination can thus be seen as a specific, but economically “innocent” element of corporate governance. Until recently, even leading employer representatives subscribed to that view (Bertelsmann Sifting and Hans-Böckler-Stiftung 1998). Today, however, this has changed dramatically. In 2004, the main employer associations advocated a restriction of co-determination rights (BDA and BDI 2004), and, in 2006, the Biedenkopf Commission found that the different positions of employee and employer representatives were irreconcilable. Members of parliament also raised their voices: deputies of the FDP (a German party which aimed for the abolishment of quasi-parity co-determination already in its manifesto for the federal elections in 2005; Freie Demokratische Partei 2005) clearly supported the employers’ position (FAZ, 21 December 2006).

Irrespective of empirical evidence, co-determination is thus perceived as a problem by several actors. This ultimately raises the following question: which views make it into public opinion, which into politics and how?

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