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Co-determination in Germany: A Model for the U.S.?

The American conception of the duty of loyalty requires that directors act solely in the best interest of the corporation.1 In Germany, however, corporations are perceived to serve a broad social function rather than simply aiming to serve shareholder interests, and there is significant freedom under German law for company directors to factor in considerations unrelated to profit maximization for shareholders when making decisions.2 This social welfare-oriented mission has gained prominence across Europe, especially in Germany, where certain companies have divided their boards into two separate structures: the management board (Vorstand) and the supervisory board (Aufsichtsrat). Under this structure, a scheme made possible by the German Codetermination Act of 1976, employees are represented on a supervisory board varying from equal representation to one-third representation depending on the type of company and the number of employees.3

Unitary boards delegate day-to-day business tasks to the CEO, management team, or executive committee, and is composed of both executive and non-executive members.4 This structure is often found in countries that have a common law tradition (e.g., the United States and the United Kingdom).5 Conversely, dual boards divide supervisory and management duties into two distinct bodies, with the supervisory board overseeing the management board. This structure is common in countries with civil law traditions (e.g., Germany, France, and several Eastern European countries).6

The supervisory board has two primary functions: (1) appointing directors to the management board and (2) supervising the management board.7 The adoption of a supervisory board has become a prevalent practice across the European Union, with at least another fifteen European countries having some provision requiring worker representation—known as “co-determination”—on boards of companies headquartered in their respective national territories.8

Supervisory boards in these countries also serve other functions, including the power to call shareholders’ meetings and to examine financial statements, and certain transactions may need supervisory board approval depending on the company’s articles of incorporation.9 The supervisory board may also inspect the company books and records at any time, and the management board must inform the supervisory board of its policies for the future conduct of business as well as report to the supervisory board regularly regarding company affairs.10 Simply put, the strong presence of employees ensures that shareholder value is not the exclusive priority of directors.11

Generally speaking, co-determination ensures that employees’ interests are represented at the boardroom level. Co-determination, as it is implemented in Germany, aims to informally prevent a sole focus on shareholder value. Additionally, German corporate law does not formally require that management take a shareholder value approach.12 On the other hand, while, as in Germany, members of management of corporations in the U.S. have no formal obligation to employees, they do possess a formal duty to shareholders. Due to this duty, as well as to decades of pro-shareholder value maximization common law precedent, the possibility of adopting a co-determination approach in the U.S. seems unlikely. However, this has not stopped discussion among legal scholars on this topic, and the implications of introducing such a corporate innovation in the U.S. would certainly yield fascinating results for practitioners and researchers alike.

  1. See Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003). 

  2. Florian Schwarz, The German Codetermination System: A Model for Introducing Corporate Social Responsibility Requirements into Australian Law? Part 2, 23 J. Int’l Banking L. Reg. 190, 191 (2008). 

  3. Id. 

  4. Types of Boards of Directors, International Center for Journalists, (last visited Nov. 23, 2017). 

  5. Id. 

  6. Id. 

  7. Frank Wooldridge, The Composition and Functions of German Supervisory Boards, 32 Company Lawyer 190-91 (2011). 

  8. Id. 

  9. Klaus Hopt, The German Two-Tiered Board (Aufsichtsrat): A German View on Corporate Governance, in Comparative Corporate Governance: Essays and Materials 3 (Klaus Hopt and Eddy Wymeersch eds., 1997). 

  10. Id. at 6. 

  11. Jean du Plessis et al., German Corporate Governance in International and European Context 14 (2012). 

  12. See Aktiengesetz [AktG] [Stock Corporation Act], Sept. 6, 1965, BGBI. I at 1089, last amended by Gesetz, May 10, 2016, BGBI. I at 1142 art. 5, § 93(1)-(2) (F.R.G.). 

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Victor Ghazal