Worker Participation: Employee Ownership and Representation

Irene Bucelli, Silvia Gatti, and Federica Soro are senior research analysts at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr., (discussed on the Forum here).

In the past thirty years, more and more attention has been paid to the effects of employee participation on company performance. What might be the effect of it on long-term company performance? How could increased employee influence affect corporate strategy and decision-making?

There are two main forms through which employees can participate directly to the life of a publicly traded company: through ownership of the company’s shares, and through representation on the board of directors.

Employee ownership usually results from “direct participation plans”, which provide a streamlined (and often discounted, tax-efficient) means for workers to invest in the company, with clearly established caps and conditions. Employee representation on the board of directors means that employees themselves, or a body representing employees, can appoint a representative to sit on the board of directors.

Glass Lewis’ new Worker Participation white paper provides a global overview of both ownership and representation. The paper outlines the level of participation around the world and dives deep into how employees are treated across Europe, including case studies on companies such as Rolls-Royce, Volkswagen and Vinci, and data on ownership and representation.

The following excerpt provides an overview of the German market; the full paper is available to Glass Lewis clients.

Germany

Germany has a relatively long history of promoting employee representation, reflecting the co-determination model. Researchers attribute the success of co-determination in Germany to different factors, including the peculiar legal structure of the supervisory board, which is clearly separated from the executive board and has a distinct oversight function, and the emphasis on ideological trade unionism against the American or British pragmatism, in connection with the high degree of organisation traditionally ascribed to Germany.

Employee Participation Laws

In Germany, publicly listed companies are governed by a two-tier system, comprising a supervisory board of non-executive members, overseeing a management board of executive members.

Companies with more than 500 employees are required to include employee representatives on the supervisory board. In particular:

  • Companies with a number of employees ranging from 500 to 1,999 must ensure that one-third of the supervisory board seats are held by employee representatives, according to Article 4(1) of the German Law on One-Third Participation (Gesetz über die Drittelbeteiligung der Arbeitnehmer im Aufsichtsrat, or “DrittelbG”);
  • Companies with more than 2,000 employees must ensure that half of the supervisory board seats are held by employee representatives, according to the German Co-Determination Act (Mitbestimmungsgesetz or “MitbestG”) of 1976.

Co-determination applies to all four forms of corporate organisation available under the German corporate law: stock company (Aktiengesellschaft, “AG”), partnership limited by shares (Kommanditgesellschaft auf Aktien, “KGaA”), limited liability company (Gesellschaft mit beschränkter Haftung, “GmbH”) and Societas Europaea (“SE”).

Thanks to a special election procedure, the chair of the supervisory board is normally a shareholder representative; in case of a tie, the chair is entitled to a double vote. Employee representatives are elected from three groups: workers who have been employed by the company for at least one year, members of trade unions that are represented within the company and managerial employees.

According to Article 96(2) of the German Stock Corporation Act, German publicly-listed companies with 2,000 or more employees are also required to ensure that at least 30% of supervisory board seats are held by directors of each gender. In principle, this diversity quota is to be achieved by the board as a whole. In light of the Co-determination Act, however, shareholder and employee representatives can opt to achieve the quota separately.

Work Councils

In addition to board representation, German employees are able to participate in the company’s life through the works council (“Betriebsrat”), which shares many of its functions—and often its members—with traditional trade unions. However, members of the works council can be elected also among other employees, who are not representatives of a trade union. Works councils, which can be formed both in private and in public companies, include a number of members set in proportion to the number of employees; works councils cover all employees, apart from senior managers, who are represented by separate bodies. The councils are also subject to proportional representation rules to distinguish between manual and non-manual employees and to guarantee equal gender representation.

Employee Ownership Status Quo

While employee representation is firmly entrenched in Germany’s economic and legal development, employee ownership is less common.

The tax exemption regulations in Germany do not favour employee share participation plans. In fact, the current exemption threshold for German employees amounts to €360, which was already increased from €135 in 2009, but remains significantly below the thresholds applied by other European countries, ranging between €2,065 and €6,000, with spikes of €12,000 and €12,700 in Spain and Ireland, respectively.

At the moment, at General Meetings, employee ownership is normally only touched upon in proposals on the increase in conditional capital linked to the introduction or amendment of an equity-based incentive plan. Such plans, often awarding options, are usually directed to a large group of participants, including management board members and selected key employees.

Ownership Day & Berlin Appeal

Many prominent voices in the German corporate governance world are currently advocating for regulatory changes apt to promote stronger employee participation. In particular, two significant conferences named “Ownership Day” (“Tag der Teilhabe”) took place in 2015 and 2017, while in 2017 a total of 60 company representatives, academics and experts signed the “Berliner Appell”, calling for fiscal and legislative updates. In practice, the appeal asked to raise the tax exemption threshold to €3,000, to avoid taxing dividends and interests for ten years, to simplify regulations and to ease the cross-border implementation of these measures thanks to a direct intervention of the European Commission.

Together with fiscal disadvantages, in fact, bureaucracy is the other main factor mentioned by experts as an obstacle to the spread of employee share-based plans in Germany. Furthermore, there is uncertainty around the pension treatment of such plans and their effective potential to substitute long-term contribution schemes.

The Appeal reported that only approximately 14% of Germans invest in shares, while about 1.1 million employees of large-cap listed companies and just as many employees of small- and mid-cap companies participate in their own employer’s share schemes; moreover, only approximately half of DAX 30 companies offer employee share participation plans, with small and medium enterprises offering a total of approximately 3,500 schemes.

The Ownership Day’s website describes employee ownership as a “highly practicable tool for employee recruitment, retention, and motivation.”

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One Comment

  1. michael schewel
    Posted Thursday, January 23, 2020 at 9:59 am | Permalink

    To state the obvious, worker ownership in American public companies used to be much higher than today through the common circumstances of pension plans that invested in company stock and other worker stock participation plans. Any such plan purchases of company stock are now frowned upon and put plan trustees at risk. In order to achieve greater worker ownership of companies, this issue must be addressed. Our worker ownership of our company has shrunk over the past 20 years for this very reason – we have encouraged them to disinvest from their ownership position in our shares through their pension plan and 401(k) accounts because our legal and pension advisors tell us to do so.

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