Path dependence
Ultimately, the question needs to be addressed as to why the institution of codetermination was not only continued but also extended to cover the entire German corporate landscape (of companies having more than 1000 employees).
The answer has to be given in different parts. To start with, two common misperceptions have to be avoided. The first misperception concerns the firm’s capital access at the time when codetermination was introduced. Henry Hansmann (1996, p. 2) writes:I can, however, hazard a theory of my own: that the firms involved would probably have to raise new capital at some point, and that they might want to sell large amounts of stock for the purpose - stock that would dilute the worker’s earnings and control.
Codetermination assured them 50% control, and through that control they could assure themselves wages yielding an appropriate fraction of the companies’ earnings.
This alternative theory is factually wrong on two points. First, companies for some time to come had no access to capital markets and therefore had to rely on self-financing. International capital markets were not accessible to German corporations (at the time of the deliberations still suffering under denunciations) and domestic capital markets were extremely thin during 195055. Second, codetermination did allow workers control over the investments in terms of siting and (through co-decision making in the works councils) the technologies used, and therefore could indeed have been used in order to shape any specific capital increases through issuing new stocks or bonds. Codetermination, however, does not allow any access to decisions over wages.
Hence, in order to explain the further extension of codetermination, we have to stick to the specific German case, which is not generalizable as it depends on a historical starting point not to be found anywhere else in the industrialized world.
The first part concerns the act of 1965, which was part of the corporate reform act needed because the national socialist government had written the leader principle into corporate law. This complicated reform package also included all those elements of codetermination that the speaker of the Free Democratic Party in the parliamentary debate had outlined in 1951, including the one-third representation of labour in the supervisory boards. That act covers every joint-stock company with more than 1000 employees.The act of 1976 was different. It was the result of the big coalition between the original two large parties that had in 1949 supported codetermination, although only one of them had been part of government. The price for taking part in government that the Social Democrats exacted was the extension of codetermination over all industries beyond coal and steel. Here the echelon was finally decided to be a minimum of 2000 employees. However, Karl Biedenkopf as early as 1965 had found that codetermination in the industries covered worked, in that it did not lead to frictions and, conceivably, had benefits. Since 1965, companies had been aware of the pending legislation. Easy escape routes were built early on. The act requires specifically corporate forms which can be changed, it is only applicable to corporations of a specific size which can be undercut by reproportioning or regrouping enterprises, it requires a location of the seat of the company within the German jurisdiction which can be easily avoided (for instance by locating headquarters in German-language Switzerland) and even a simple change in the by-laws of the supervisory board can render codetermination under the act of 1976 meaningless. All of these activities took place to a certain, but not very large, extent.
When the act was passed in 1976 with more than 90 per cent of the vote in parliament, and without even a hint of union action, it was widely perceived as a logical evolutionary development in German corporate law.
No perceptible effect on the stock exchange has ever been documented. There was litigation surrounding the implementation and there was litigation before the constitutional court in order to test the future of such legislation. However, the general perception is that there is not going to be a future in this legislation. Codetermination as a part of German corporate law is firmly in place, and the only point of further argument is to defend it against future developments in corporate law initiated by the European Commission or the European Parliament. Since, under the Maastricht Treaty, that treaty has to be read through the German Basic Law, and since codetermination has been tested against the German Basic Law, through the constitutional court case against the codetermination act of 1976 and the ensuing verdict, codetermination has been chiselled in stone for the time being and under the restrictions mentioned above.The further development of codetermination after 1951 can only be partly seen as path dependent. The other and more important part is the experience the German industry has gained with the institution of codetermination, and that experience has not varied much from the original conditions. Since in Germany the different stakeholders are expected to invest heavily in the company (the stakeholders, including the workers, the local community, capital owners), of course title needs to be given to all these investment commitments. Since such title is difficult to imagine, codetermination may have proved to be the most adequate vehicle to protect investments that can be jeopardized when industrial strife, antagonism, intolerance or managerial hubris endanger specific assets, these being either specific human capital investments or specific capital investments.