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Class Struggle Inside The Firm: A Study of German Codetermination

"Under the German corporate governance system of "codetermination," employees are legally allocated some control rights over corporate assets, in the form of board seats. We empirically investigate the implications of equal board representation compared with one-third employee representation and find a 26% stock market discount on firms with equal representation. Employees redistribute the firm?s surplus towards themselves but may also prefer a different objective function for the firm, maximizing employee utility rather than shareholder value. We investigate the shareholder response to codetermination via higher leverage that commits more cash to leave the firm. We also examine the relationship between codetermination and the performance sensitivity of compensation for board members."

2000

Academic Paper

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Under German codetermination, firm resources are directed differently. The return on assets and equity decrease, as does the market-to-book ratio. Firms with equal representation on the supervisory board (parity codetermination) have a 26% decline in market-to-book ratio, compared to firms with one-third representation. Under German codetermination, employees use their power in equal representation firms (1/2 parity codetermination) to increase the employees-to-sales and wage bill-to-sales ratios. “ Laws on codetermination... have made European CEO's deeply committed to their employees, treating them more like partners in a long-term enterprise than anonymous factors of production. – Henzler, 1992”
Frank A. Schmid Gary Gorton
Codetermination
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