The Public Interest and the Company in Britain and Germany

THE PUBLIC INTEREST AND THE COMPANY IN BRITAIN AND GERMANY

PROJECT FUNDED BY THE ANGLO-GERMAN FOUNDATION, 1998–1999

REPORT

Political Economy Research Centre, University of Sheffield Max-Planck-Institut für Gesellschaftsforschung, Köln

Report prepared by

Shawn Donnelly Andrew Gamble Gregory Jackson John Parkinson

Project Team

PERC Max-Planck-Institut

Ben Clift Gregory Jackson Shawn Donnelly Wolfgang Streeck Andrew Gamble Gavin Kelly John Parkinson

Political Economy Research Centre Max-Planck-Institut für University of Sheffield Gesellschaftsforschung Sheffield Paulstrasse 3 UK 50676 Köln S10 2TY Germany

June 2000

The Anglo-German Foundation for the Study of Industrial Society was established by an agreement between the British and German governments after a state visit to Britain by the late Presi- dent Heinemann, and incorporated by Royal Charter in 1973. Funds were initially provided by the German government; since 1979 both governments have been contributing.

The Foundation aims to contribute to the knowledge and understanding of industrial society in the two countries and to promote contacts between them. It funds selected research projects and conferences in the industrial, economic and social policy area, designed to be of practical use to policymakers.

The views and opinions expressed in Anglo-German Foundation publications are those of their respective authors, and do not necessarily represent the views of the Foundation.

Die Deutsch-Britische Stiftung für das Studium der Industriegesellschaft wurde im Jahre 1973 auf Initiative des damaligen Bundespräsidenten Dr. Heinemann durch ein Abkommen zwischen den beiden Regierungen ins Leben gerufen und durch Verleihung einer königlichen Urkunde besiegelt. Die Mittel wurden anfangs von der deutschen Regierung zur Verfügung gestellt; seit 1979 beteiligen sich beide Regierungen an der Finanzierung.

Die Stiftung sucht das Verständnis für die Probleme der Industriegesellschaft in den beiden Ländern zu vertiefen und Kontakte zwischen ihnen zu fördern. Sie unterstützt ausgewählte Forschungsprojekte im industriellen, wirtschaftlichen und sozialen Bereich, hauptsächlich bilaterale Vergleiche, die für Entscheidungsträger von praktischem Wert sein können.

Die Verantwortung für den Inhalt der Publikationen der Deutsch-Britischen Stiftung liegt bei den jeweiligen Autoren.

British Library Cataloguing in Publication Data. A catalogue record for this book is available from the British Library.

Anglo-German Foundation for the Study of Industrial Society/ Deutsch-Britische Stiftung für das Studium der Industriegesellschaft 17 Bloomsbury Square, London WC1A 2LP

CONTENTS

Summary 5

Introduction 7 PART I HISTORICAL PERSPECTIVES ON THE COMPANY AND THE PUBLIC INTEREST IN BRITAIN AND GERMANY

Introduction GERMANY 11 The Origins of Non-Liberal Company Law 12 Crisis and the Abandonment of Liberalism 13 Reform of 1937 16 Post-War Reforms 17 Co-Determination and the Origins of Industrial Citizenship within the Enterprise 18 The Institutional Legacies from the Coal Industry 19 World War I (1914–1918) 21 Weimar Republic (1918–1933) 22 Nazi Germany (1933–1945) 22 Post-War Democratisation and Reform 22 BRITAIN 23 The Origins of the British Company Law Approach 23 Politics of Industrial Relations 27 Conclusion 30

PART II THE PUBLIC INTEREST AND THE CONTEMPORARY FIRM

Introduction GERMANY 31 (i) Companies and Investors 32 Capital Market Regulation 32 Corporate Law 34 Accounting 36 Takeover Code 37

Corporate Governance Code 37 Politics and Change 38 (ii) Companies and Employees 38 (iii) Companies and the Community 40 BRITAIN 42 (i) Companies and Investors 42 (ii) Companies and Employees 47 (iii) Companies and the Community 50 Corporate Responsibility 50 Equal Opportunity and Equal Treatment 52 Environmental Protection 54 CONCLUSION 56

Appendix 1 EU Directives on Company Law: A Brief Summary 59

Appendix 2 Proposed EU Directives on Company Law 61

Appendix 3 Historical Outline of Corporate Law and Codetermination in Germany 63 Corporate law 63 Codetermination 64 References 67

Interviews Germany 74 UK 74

SUMMARY

· This study is principally concerned contrast the British model of the com- with public interest agendas in relation pany as a private association with the to the company and how far these dif- German model of the company as a fer in Germany and Britain. It is not constitutional association, and review concerned with the detail of external the evolution of public interest agen- corporate regulation, but with how the das in the two countries since the in- internal structures of the company are troduction of limited liability in Brit- constituted by particular political ain in the 1850s and the reform of understandings of the public interest, German corporate law in the 1870s, which become embodied in formal and how they have shaped the devel- and informal rules. opment of company law and regulation in response to changing economic · We examine factors which shape the and political circumstances. politics of the public interest in relation to the company: firstly, the role of · Company law in Britain has tended political ideas and interests in creat- historically to favour a ‘private asso- ing political coalitions which express ciation’ model of the company. In the a particular conception of the public UK the public interest in relation to the interest; secondly, the extent to which company has historically been identi- rules and norms embodied in institu- fied with the maximisation of profits, tions and legal cases shape subsequent the protection of small private inves- expectations of how the company is tors, and the reluctance of the state to related to the public interest, and how specify particular forms of company it should behave; thirdly, how the con- structure. Hence, company law has straints and opportunities of the glo- been primarily concerned with issues bal economy shape attitudes towards such as the fiduciary duties of com- the boundaries of legitimate interfer- pany directors and the obligation im- ence in company affairs; and fourthly, posed on all companies to disclose fi- whether European integration substan- nancial information and hold share- tially shapes company law in a way holders’ meetings. Corporate law that can be distinguished from national leaves a large scope for shareholders legislation. and managers to decide procedures for making decisions by contract. Where · Historically, we show how the politics the state intervenes, the emphasis has of the public interest in Britain and been on protection of minority share- Germany has defined the public inter- holder rights and on market-making est in relation to the company differ- rules such as accounting and disclo- ently, and set different limits of legiti- sure. Other social and economic con- mate state interference in the structure cerns, such as the treatment of employ- and behaviour of the company. We ees and the impact of corporate activ-

ity on local communities and the countries. The scope of public interest physical environment, have been obligations for Germany companies is viewed as issues external to the com- also wider than in Britain, incorporat- pany and company law. The interests ing a pluralist structure of interests of employees have traditionally been within company governance. The most protected through collective bargain- prominent example is codetermination ing, and legislation aimed at reducing (Mitbestimmung) of employees in adverse third-party effects assumed works councils and the supervisory until recently an adversarial relation- board (Aufsichtsrat) of companies. ship between the company and affected groups. Most perceived deficits · This report analyses the changing con- in the UK system have been addressed text for public interest agendas toward by a proliferation of voluntary Codes the company particularly in the 1990s. of Conduct in the 1980s and 1990s and This has three main aspects: the extent efforts to diffuse best practices through to which a more liberal global shareholder activism. economy creates pressures for conver- gence of institutional arrangements · By contrast, a ‘constitutional’ model of within capitalist economies; new pub- the company predominates in Ger- lic interest concerns advanced by pres- many. Constitutionalism is distin- sure groups and social movements, guished by the strong use of non-con- particularly concerning the environ- tractual rights and obligations of its ment and the rights of minorities; and members, rooted in public authority. pressure from the EU on member states Private actors are often obligated by to adopt uniform European rules and law to consider ‘public’ interests in practices. The report analyses the addition to the private interests they scope of public interest concerns. It represent. For example, works coun- shows how Germany and Britain dif- cils and management have the legal fer in the typical instruments of public obligation in the Works Constitution policy for pursuing public interest Act to work together in the interests of claims against the company. Three the company. The two-tiered board main aspects of the company in rela- structure also ‘constitutionalises’ share- tion to public interest agendas are ana- holder interests by specifying proce- lysed for both Britain and Germany: dures for shareholder representation companies and shareholders; compa- and monitoring in a more detailed nies and employees; and companies manner than board systems in most and the community.

INTRODUCTION

The company is a vital institution in all mod- shareholdings as against dispersed holdings ern economies, but its character as a social and reliance on the take-over market (Franks and economic actor and the legal rules that and Mayer, 1990). Recent research has also shape it vary considerably between national focused on the role of company law in ex- systems. In the UK the company is viewed plaining the divergent patterns of corporate as a private association, while in Germany ownership (La Porta et al., 1998; Schleifer the company has a ‘constitutional’ structure and Vishny, 1996; Berglof, 1997). This work stipulated by public authority. A well-estab- draws attention to the importance of the dif- lished comparative literature argues that the ferent legal foundations of the company in differences between these two conceptions shaping the relationship between companies, are so fundamental that they constitute dif- their constituent stakeholders, and society at ferent models of capitalism, reflecting dis- large. These different legal structures are tinctive sets of historical attitudes and insti- themselves highly contingent upon political tutional features (Shonfield, 1965; Albert, accommodations and settlements, which are 1993). More recently, this comparative po- specific to each country. litical economy literature has been concerned with the extent to which the different A particularly neglected issue in political and patterns of corporate organisation in Europe legal research on the company concerns the may be converging as a result of competi- relationship of the company to the public tive pressures in international financial and interest. Despite the criticism it has at times product markets and the harmonisation of received, the public interest has remained a regulatory systems (Streeck, 1997; Crouch central concept within modern politics and Streeck, 1997). Extensive though this lit- (Barry, 1964; Flathman, 1966). Public inter- erature is, there has so far been little work est concerns are ubiquitous, and the public systematically comparing the different politi- interest is constantly invoked to justify par- cal and legal assumptions on which the com- ticular interventions by governments in the pany is based in different countries and link- economy and the regulatory regime. But the ing this to different understandings of the term has a range of meanings, and once par- public interest with regard to company be- ticular cases are examined the complexity haviour and regulation which are found in of its use becomes apparent. Understandings different countries. The present study, funded of the public interest are also transformed by by the Anglo-German Foundation, seeks to economic and social change. All legal sys- fill this gap in respect of Germany and Brit- tems recognise the importance of public in- ain. terest issues, but the different understandings of what these entail and the inherently po- The diverse architecture of the company litical nature of these judgements have rarely across Europe has conventionally been ex- been drawn out. If the company is a public plained by differing structures of ownership institution constituted by legal rules and po- and control and governance mechanisms, litical decisions, how are public interest ob- particularly the roles of concentrated ligations defined, how do they adapt to eco-

nomic and social change, and what instru- concentration of resources in the hands of ments of public policy are used to enforce managers provides them with economic and them? social power that may undermine the public interest. In post-1945 Germany, for example, The main focus of this report is on these dif- law-makers justified checks on managerial ferent understandings of the public interest autonomy through employee in relation to the company in Britain and codetermination because in the 1930s au- Germany. In Part I we compare the political tonomous managers had used their economic and legal notions of the company in the two power to support the Nazi regime. Concen- countries as they have evolved since the tration of economic power has long been a nineteenth century. In Part II we analyse three significant political issue in the United States, key areas of contemporary regulation of the because it is seen as threatening democracy2 company in the two countries. as well as the ideals of free competition (Roe, 1994). Concentration of market power re- A company is an association which has a mains a concern in the perennial debates legal personality separate from its members. over the ‘power of banks’ (Macht der Banken) It raises finance, it contracts for various kinds in Germany. of services, and it organises production (Tivey, 1978). It is the central institution of A second argument focuses on the economic the modern capitalist economy. Although the consequences of corporate behaviour. Com- literature on law and economics has made panies impose externalities on other agents possible a more precise discussion on the in the community through their activities. legal and financial aspects of the company, Negative externalities arise in connection relatively little work analyses normative and with the monopoly power of large corpora- empirical aspects of how the company is re- tions (a traditional concern of liberals who lated to the public interest.1 How do legisla- have argued that there is a public interest in tors and administrators see the company’s preserving fair competition and protecting objectives when they make regulatory deci- consumers), environmental pollution, and sions? What makes a company legitimate? bankruptcy (especially when caused by in- Who has a right to participate in the compa- sufficient monitoring and the lack of effec- ny’s operation? How is power distributed tive governance structures). Positive exter- within the company? nalities arise through employment, economic growth, and innovation. States have become There are at least three broad arguments in increasingly concerned to use regulation to relation to the corporation which give rise promote internationally competitive business to a public interest agenda. The first is the environments and attract or retain corporate issue of the concentration of economic investment. power, and the political power which it con- fers. The economic power of corporations is A third argument is that corporate behaviour seen to have political consequences for also has broader social consequences which states, communities and individuals. The involve a public interest. Examples include labour unrest, income inequality, discrimination, or confidence in the financial system.

1 German-language literature on the public interest uses two overlapping concepts of öffentliches Inter- esse (public interest) and Gemeinwohl (common 2 In the USA, concern is often focused on political good), both of which are used in legal doctrine. campaign finance by corporations.

In Germany such concerns led to the demand that change in personnel and policies in for institutions centred on the corporation to poorly managed companies could be brought reduce individual risks through social insur- about by the workings of the market for cor- ance or encourage social peace through well- porate control and the ability of investors to defined participation rights within manage- exit. But it came to be recognised that the rial hierarchies (codetermination). In Britain, market for corporate control was unlikely to such concerns include frameworks for indus- work efficiently unless investors were able trial relations, and more recently concern to make informed decisions, for which they over gender and racial discrimination. needed high disclosure of information about the company’s financial management. As a Public interest agendas involving the com- consequence, efforts to deal with the con- pany are examined in this report with regard cerns of investors relating to corporate gov- to three principal relationships. The first is ernance have revolved around transparency the relationship between companies and in- and the auditing of information, as well as vestors, which refers most frequently, but not voluntary measures. Compared with Ger- exclusively, to shareholders. In Germany, the many, mandatory interference in the inter- relationship between companies and inves- nal constitution of the firm has been relatively tors has been viewed as problematic since limited. the introduction of limited liability in 1870. The agency problems of the modern corpo- The second relationship is that between com- ration, stemming from the incapacity of frag- panies and their employees. In Germany, mented shareholders to effectively monitor worker participation in corporate governance management, led to the introduction of a was promoted as an important objective, two-tier board system that ‘constitutionalised’ particularly during the Weimar Republic and relations between company bodies. This in the Federal Republic since 1949. How- measure was rooted in Germany’s experience ever, other public interest objectives existed of a speculative crisis in the 1870s, and went and continue to exist alongside the quest for together with a more general political break industrial democracy. The imperial govern- from the doctrine of economic liberalism in ment saw the nation’s productive capacity favour of non-liberal approaches to ‘embed- as a public interest in its own right that justi- ding’ the emerging market economy in order fied institutionalising cooperative decision- to preserve social stability (Streeck and making within the firm in 1905 and 1916. Yamamura, 2000). This approach guided le- The Federal Republic viewed industrial de- gal developments to the present day, and has mocracy as a means not only to checking survived recent shifts supporting more liq- the power of companies in its early years, uid capital markets and stronger protections but also as a means for ensuring the political for individual shareholders. In the UK, the legitimacy of the capitalist system in the mid- country’s political and legal leadership have 1970s. In Britain, in contrast, it was private traditionally viewed the relationship between ownership itself that was challenged in the the company as a private association name of controlling the company and legiti- (Parkinson 1993) and its investors as rela- mising the structure of the economy, rather tively unproblematic. Even as ownership than the internal structure of privately owned became more dispersed this attitude per- companies. There was a widespread assump- sisted, along with a concern with the effect tion that the company was a private associa- of increasing regulation on the competitive- tion that should either be left alone in ac- ness of British business. Minimal regulation cordance with laissez-faire principles, or was advocated because there was confidence abolished altogether in the name of social

justice. Compared to Germany, what is parative studies of national systems is to un- largely missing in the British debate is the derstand the nature of each national system idea of the company as an association whose more clearly by throwing it into sharper re- internal structures could be altered in order lief, asking unaccustomed questions of each to pursue pragmatic compromises between system, and exposing what is particular and capital and labour. what is common in the institutional pattern and policy responses of each country. The The third relationship is that between com- second objective is to provide a basis for panies and the broader community. This be- evaluating the success of particular patterns came a stronger public interest agenda in the of adaptation to external economic and po- 1970s, when public opinion in both coun- litical changes. Germany and Britain are par- tries focused attention on post-materialist is- ticularly suitable for this kind of comparison, sues such as environmental protection and both because of their broadly equivalent size, equal treatment for women and racial mi- wealth and importance within the European norities. In this case, attitudes about the de- Union, and because there is a long-estab- sire to promote these goals are not so very lished literature which has drawn attention different in Britain and Germany, but the to the different ways in which the legal sys- mechanisms by which they are pursued are tems, political systems, and economic sys- heavily influenced by patterns of (non-)in- tems are organised in the two countries terference in company affairs established to (Coates, 2000). Britain and Germany have manage relations with investors and with sometimes been represented as two contrast- employees. ing ideal types of economic and political organisation. Despite this, they also share a This report seeks to explain the differences number of important attributes and there are as well as the similarities between Britain and persistent calls in both counties for policy Germany in respect of the way the public borrowings in the design of economic and interest is conceived and implemented in political institutions and in the formulation relation to the company. The purpose of com- of public policy.

PART I HISTORICAL PERSPECTIVES ON THE COMPANY AND THE PUBLIC INTEREST IN BRITAIN AND GERMANY Introduction were the best judges of their own interests and the role of the law was to enable them Between 1844 and 1870, both Britain and to give binding effect to the business arrange- Germany changed their company and investments they wanted to adopt. This view was ment laws to encourage the development of buttressed by a property rights argument that joint stock corporations. The capacity of such resists intrusion into the internal workings of companies to pool capital, enter into con- the company. A series of financial scandals tracts as legal persons, and take advantage made clear, however, that providing ad- of limited liability as a safety net for entre- equate safeguards for non-managerial share- preneurial activity were seen as requisites for holders could not be left to private ordering. strong economic growth. It also facilitated The main response was to impose a regime management fraud, had the potential to ex- of mandatory financial disclosure, the details acerbate economic crisis, and opened up the of which have evolved over many Compa- prospect of corporate power being abused nies Acts and, latterly, in order to implement without proper accountability to sharehold- EC directives. Transparency is viewed as ena- ers or the community. bling shareholders to hold management to account through internal ‘voice’ mecha- In Britain, the company from the start was nisms, and – at least as important – as secur- conceived as a private association of share- ing the foundations of an efficient capital holders. The company was initially a ‘they’ market and associated mechanisms of con- – a ‘company of shareholders’ – rather than trolling management, particularly through the an ‘it’. This conceptualisation of the com- market for corporate control. pany changed during the course of the nineteenth century as the legal implications of In Germany, corporate law was approached separate corporate personality were worked in a very different way. While shareholders out, but the equation of the company with remained the principles of the company, a more its shareholders has continued. Groups con- regulative approach was taken regarding share- nected with, or affected by, companies have holder rights. The widespread fraud and eco- traditionally been regarded as ‘outside’ the nomic crisis in the 1870s shook the faith of company. If their interests needed to be pro- political elites in liberalism and prompted the tected by statutory intervention this would state to intervene in the internal structure of be by forms of regulation external to com- the firm. Rather than a voluntaristic approach pany law, applying to all forms of business, to shareholder control, public authority was whether companies or not, and consisting of used to ‘constitutionalise’ the interactions be- finite constraints on the business’s operations tween shareholders and management through rather than requiring a reassessment of the a densely regulated two-tier board system. The company’s goals. two-tier system delegated many supervisory tasks from the shareholders’ meeting to a newly For most of the Victorian period the predomi- created supervisory board (Aufsichtsrat), as well nant view was that the law should be prima- as separating management and supervisory rily facilitative. The members of a company functions. In contrast to Britain, the state

viewed measures as necessary to protect the limited liability, as well as protecting the internal functioning and stability of corporate public interest so that, given the ‘unusually organizations as a matter of public interest in large sums of capital brought together by protecting public confidence and the success stock, the financial power of such corpora- of the market economy. Over the next decades, tions is not used to the detriment of the gen- this ‘constitutional’ model of company deci- eral good or national industry’ (Makower, sion-making was gradually expanded to in- 1868). The state retained powers to revoke clude other stakeholders, particularly employ- corporate charters without compensation ees, through representation on the supervisory ‘given compelling reasons of the general board and works councils. This pluralistic and good’ (Makower, 1868), while posing re- procedural conception of the firm implies that quirements for company statutes. Corpora- all actors are obligated to consider ‘public’ in- tions were also required to establish a man- terests in addition to the private interests they agement board (Vorstand) to legally repre- represent. This part of the report traces this sent the corporation and provide a clearly evolution with regard to the development of identifiable management that could be held public interest agendas in both Germany and accountable to shareholders and the state. England. The concession system ended in 1870 with an amendment to the Commercial Code. The GERMANY departure reflected the view that the state could not exercise effective control over cor- The Origins of Non-Liberal Company porate investment (Horn, 1979). Rather, cor- Law porate law should seek to facilitate private The earliest corporations with limited liabil- actors in protecting their interests and to en- ity within the German states were established sure the technical functioning of the com- by state concession to undertake specific pany. The new law established a ‘normative activities in the public interest. Railways and system’, opening incorporation to all once trading ventures were among the sectors to certain organizational norms were met. establish corporations under the These normative stipulations remained rela- Eisenbahngesetz (Railway Law, 1838) and the tively mild, reflecting the economic liberal- Prussian Aktiengesetz (Joint Stock Corpora- ism of the Prussian bureaucracy. In place of tion Law, 1843). By 1861, a General Ger- state concession, a supervisory board was man Commercial Code was negotiated be- made mandatory. Its duty was to ‘supervise tween the German states as part of the Cus- the management of the corporation’, specifi- toms Union. The Code established general cally to examine the balance sheets and pro- guidelines for granting concessions for cor- posed distribution of profits in order to make porate charters following the Prussian exam- recommendations to the shareholders’ meet- ple, although the Hanseatic states were al- ing.2 The 1870 law thus introduced the ba- lowed to continue their liberal approach to granting charters without state concessions.1 The concession system was justified in or- 2 In contrast to the 1861 law, the supervisory board der to protect creditors under conditions of (rather than the management) had the power to call a shareholders’ meeting. The supervisory board was given information rights, as well as held accountable for certain damages if wrong-doings occurred 1 Representatives from Hamburg argued that their with their knowledge. However, the shareholders’ experience without state concessions had not led to meeting retained the direct power to appoint man- abuses and that state guarantees may in fact de- agement, set corporate statutes and intervene di- crease private responsibility and care. rectly in management decisions.

sic features of the two-tier board structure in The Gründerkrise began a movement for Germany, with competences divided be- corporate law reform that took over ten years tween the shareholders’ meeting, the super- to complete (see Jackson, 2000a). The first visory board, and the management board. reform proposals by the Prussian Minister of The relations between the three organs re- Trade in 1873 were repeatedly delayed by mained loosely defined (see Appendix 3) and liberal state bureaucrats and the legislature. went little beyond codifying common prac- The liberal position against reform typically tices where shareholders voluntarily elected cited several arguments: the financial col- a small group of representatives to monitor lapse had many non-legal sources that could management. not be remedied, over-regulation would endanger entrepreneurship and individual re- Crisis and the Abandonment of sponsibility, and corporate law reform should Liberalism only be undertaken in conjunction with more Under the liberal 1870 law, the number of comprehensive reforms of the Commercial corporations quadrupled, while one in thir- Code and capital market regulation. Prussian teen went bankrupt and one in three were representatives continued formulating pro- liquidated. Shareholder losses totalled posals and pressuring the Reichskanzleramt, around half a billion Marks. This financial eventually outvoting the liberal Hanseatic collapse, referred to as the Gründerkrise, in- coalition in the Bundesrat in 1874. The state volved widespread fraud.3 Specific economic ministries nonetheless continued to drag their factors had fuelled speculation: a demand feet. By 1878, however, Germany’s political boom and economic expansion through Ger- coalition had shifted fully to nationalist con- man unification and from France, national- servatism, and began purging liberals from istic optimism, and excess financial liquid- the bureaucracy. Hermann von Schelling re- ity through high profits and French war repa- placed the liberal Heinrich von Friedberg as ration payments. The founding of new and State Secretary of the Reichsjustizamt in poorly governed corporations led to excess 1879. The Ministry was no longer able to capacity, price competition and quick bank- maintain its liberal ideals in resistance to ruptcies. The financial crisis resulted in wide- Bismarck’s new economic policies. spread public distrust of corporations generally, particularly regarding the short-term and The reform of liberal corporate law must speculative interests of shareholders therefore be seen in the context of a more (Hommelhoff, 1985). general break with the doctrine of economic liberalism and the rise of a new political discourse coalition among the state bureaucracy in support of ‘conservative social reform’ 3 As described in the preamble to the corporate law reform, ‘directly after the end of the state concession (Lehmbruch, 2000). This new discourse coa- system, a period of stock fraud began (…) these facts lition displaced the discourse of ‘bureau- suggest that in founding [corporations] the objec- cratic liberalism’ guiding economic policy tive need of the firms seldom played a role (…) In the through the Customs Union and early 1870s place of associations of people interested in the activity and growth of the enterprise and who in- (Langewiesche, 1988). The deflationary cri- vested their capital and sought the participation of sis and financial crash in 1873 shook the faith other capital for this purpose, there appeared so- in economic liberalism among German called syndicates who, for the purpose of forming a elites, and went along with a political rea- corporation, sought out some preferably nonde- script enterprise in order to create shares as a com- lignment. National-liberal party dominance modity on the stock exchange and then to sell them’ was replaced by a coalition of conservative (Reichstag, 1884: 412). and Catholic interests with the support of a

protectionist alliance between heavy indus- Reformers were sceptical about the effective- try and large agriculture. Starting around ness of shareholder democracy. Shifting ma- 1878, a new policy direction stressed state jorities of the shareholders’ meeting were not action to protect general welfare (state own- seen as enough to guarantee effective con- ership of railways and utilities, Bismarck’s trol over management, nor were elected au- social insurance schemes, and protectionist ditors. The 1870 law was criticized as rein- trade policies).4 Within this context, corpo- forcing the shareholders’ ‘natural’ passivity, rate governance reform was considered an since the contractual freedoms it allowed had important pillar of the ‘social question’. led to company statutes written by the founders in which nearly all effective shareholder The resulting Second Corporate Law Reform influence on company decisions was del- in 1884 represents several rounds of delib- egated to directors. For reformers, the alter- erations between 1880 and 1884 by the native of strengthening the individual rights Reichsoberhandelsgericht, the Ministry of of small shareholders was rejected for sev- Justice, an expert committee for corporate eral reasons: law reform,5 the Ministry of the Interior, the Bundesrat, and the Reichstag. Rather than re- · Small shareholders are unlikely to store the concession system or continue the monitor the corporation effectively due liberal system supported by Hanseatic rep- to their lack of expertise or long-term resentatives, reformers set about improving interests. The shareholders’ meeting and expanding the normative system of 1870 alone would not be enough to moni- in order to address the public interest conse- tor management, due its shifting ma- quences of ‘agency problems’ in the modern jorities and free rider problems. ‘Next corporation.6 The reformers developed a to a management board equipped with uniquely non-liberal approach towards cor- the most far reaching administrative porate property rights. powers, only a continuous organ can successfully realize the interests of the corporation and its creditors’ (Reichstag, 1884: 457). The remedy was seen in strengthening the role of 4 The most influential intellectual pioneer was Lorenz the supervisory board. Stein (1815–90). Stein was inspired by Hegel’s view that the achievements of the market economy must be balanced by a mix of administrative regulation by · Strong individual shareholder rights the state and self-regulation by organized interests were viewed as potentially disruptive. in containing its disruptive effects. As a ‘general Shareholders were viewed as having estate’, the bureaucracy was to be central in mediating social conflict in the public interest. only short-term interests that would be the source of possible disturbances to 5 The committee included members of the Ministry company management if individual of Justice and ten outside experts, including several rights were too strong.7 Direct and lawyers, public sector bankers and university pro- fessors. Prominent were founding members of the regular influence in company affairs Deutsche Bank, Adelbert Gottlieb Delbrück (1822– was not desired. For example, the 1884 1890), and the Verein für Socialpolitik, Adolph reform gave shareholders few rights to Wagner (1835–1917). While Wagner defended strong normative requirements, the committee generally moved to relax new requirements.

6 The Gründerkrise was also important in leading to 7 The responsibility of management would be im- the Stock Market Law (Börsengesetz) in 1896 to paired, management could be blackmailed by share- address many similar issues. holders’ who might disrupt decisions, etc.

change the agenda of the sharehold- making powers. For example, the power to ers’ meeting. Information rights for in- elect the supervisory board could not be del- dividual shareholders were not dis- egated9 and voting rights were guaranteed to cussed.8 all shareholders to ensure that true majorities were represented at the shareholders’ · German authorities viewed share own- meeting. Other measures were concerned ership as the domain of the wealthy with compensating for the aforementioned classes, due to its inherently risky and failures of the shareholders meeting itself. speculative nature and to the need to Perhaps most startling, the election of the ensure sufficient incentives for share- management board was not given to the holders to monitor management (Pross, shareholders’ meeting. The central reason 1965: 64). An important and contested was that electing management is a ‘techni- reform measure thus involved raising cal’ decision unsuitable for a large group with the minimum nominal value of shares shifting composition (Makower, 1868: 463). to DM1000 in order to ‘protect small The 1884 law left the method of election capital’ – in Britain, by contrast, no open to the company statutes – only the 1937 minimum value was set. reform finally required election by the Su- pervisory Board. Both laissez-faire and more ‘enlightened’ liberal approaches, such as promoting corpo- With many important functions of the share- rate disclosure and individual shareholder holders’ meeting now delegated to the su- rights, were thereby defeated in favour of a pervisory board, the monitoring responsibili- non-liberal alternative. The most important ties of the supervisory board were sharp- features of the 1884 reform aimed at reshap- ened.10 Individuals were forbidden from being the internal organization of the corpora- ing members of both supervisory and man- tion to strengthen the shareholders’ meeting agement boards. Control could be exercised and separate the responsibilities of the su- through a catalogue of decisions requiring pervisory board, management board, and supervisory board approval to be defined by shareholders’ meeting. company statutes, thus allowing for shareholder input. Its veto powers over manage- The shareholders’ meeting was viewed as the ment decisions could allow the supervisory central organ of the corporation. However, board strong ex ante control over manage- its contractual freedoms became greatly re- ment while maintaining a clear separation stricted. Some restrictions aimed at prevent- of monitoring and management functions. ing management from usurping decision- The law nonetheless left open the possibility that the supervisory board could issue direct instructions to management. The law also increased the liability and obligations of in- 8 The absence of individual rights was in stark con- dividual supervisory board members. trast to the prevailing English view of the time (Reichstag, 1884). Individual rights later were cat- egorically denied by a decision of the Reichsoberhandelsgerichts in 1892 (Grossfeld and 9 To ensure its independence from the founders, the Ebke, 1977). In England, derivative suits had devel- first supervisory board had to be dissolved after one oped as early as 1828, where individual sharehold- year, and a completely new board elected. ers succeeded in holding management liable. Such rights were restricted in a later court decision, but 10 Procedures for founding corporations were also were largely unrestricted under US law since an strongly regulated (see Appendix 3), but these can- 1855 Supreme Court decision. not be discussed in detail here.

In sum, the reform took a surprisingly mod- Aktiengesetz (Joint Stock Corporation Law) ern view of agency problems of the modern obliged the Vorstand to manage the corpo- corporation and attempted to resolve them ration for ‘the good of the enterprise, the through public authority. The non-liberal employees and the people and country’. The approach to protecting shareholders and en- first deviations thus were made from the ba- sure the functioning of business was by re- sic shareholder-sovereignty concept in cor- ducing the voluntarist and contractual nature porate law, helping to open the way to a more of the corporation. The internal procedures pluralistic view of the corporation. of corporate decision-making became ‘constitutionalised’ by law in order to pro- This public interest provision was influenced mote effective self-regulation by private ac- by the idea of a state- or council-run system tors. Here the concept of ‘constitution’ serves of economic democracy. One stream of left as an effective metaphor to describe non- political thought in Germany saw the ‘organ- contractual conditions that circumscribe le- ised’ nature of business as a step towards state gitimate decision-making procedures – that planning. Another strand posited that big is, the rules for rule-making. The 1884 re- business was not to be fragmented in order form had a lasting impact on German com- to promote market competition, but rather pany regulation, establishing the basic insti- to be democratised from inside or control- tutional features of today’s system, while led externally by the state. Under Nazi rule, defeating an early historical alternative along the public interest provision was interpreted a more liberal, private association view of through a narrow nationalist notion of a the corporation. Führerprinzip that opened management to direct Nazi party and state influence—po- Reform of 1937 liticising corporate governance. Corporate law was rewritten in 1937. Most of its substance was anticipated in the emer- Post-War Reforms gency decree of 1931,11 but was also the Post-war corporate law has incorporated sev- culmination of debates during the Weimar eral liberal elements while maintaining its ‘con- period starting in 1925. Most scholars agree stitutional’ character (Aktiengesetz, 1965). The that the law does not strongly reflect Nazi centrepiece of post-war reform was the ideology, and was left unchanged until 1965. Aktiengesetz (Joint Stock Corporation Law) of The reform focused on reducing shareholder 1965.13 Its preparation began in 1953 and led influence and introducing broad public in- to a draft statute in 1958 under the Christian terest provisions. A number of technical is- Democratic Union (CDU) (Jünger and Schmidt, sues were improved, particularly concerning 1965). A government draft was presented in corporate disclosure, auditors, and minority 1960, but debated until its passage in 1965. shareholder protections. The supervisory The 1965 reform was not motivated by a crisis board was now made exclusively responsible for electing the management board, and a maximum size for the supervisory board was set.12 But the core of the reform was to 12 Supervisory boards had often grown to unwieldy sizes during the vigorous period of concentration increase managerial independence from and cartellization of German industry. Merged com- shareholders. Paragraph 70 of the panies often retained all board members, and the introduction of works council delegates to the board fuelled the growth in size and reduced the effectiveness of monitoring. 11 Decree of 1 September, 1931, Reichsgesetzblatt, 493. 13 See Bundesgesetzblatt, 1089.

in the existing law. Its stated aim was to bring bent, the standards established were rather con- corporate law into line with basic post-war servative by today’s standards. Regulation did socio-political values, in particular that the right not address possible conflicts of interests by to private property is ‘only to be restricted in banks in voting shares. Nor did shareholders so far as it is required to ensure the functional- gain direct access to corporate books and ity and the realisation of the goals of associa- records. tion which the shareholder has voluntarily en- tered into, as well as the protection of More controversial was the removal of the superordinate economic and socio-political clause from 1937 binding the Vorstand to con- goals’ (Aktiengesetz, 1965). While reaffirming sider the public interest in managing the cor- the principle of shareholder control, the com- poration. ‘It is self-evident that the management plexity of the economic environment requires board must consider the concerns of sharehold- that corporate decisions have a ‘technically ers and employees in its actions, and therefore informed and empowered management (...) the this need not be explicitly determined by the consequence for the position of the individual law. The same concerns the interests of the shareholder is that he must accept restrictions general community’ (Aktiengesetz, 1965). The and submit his will to that of the majority in Bundestag claimed that the principle of social the interests of the jointly pursued goals’ responsibility was subsumed under the German (Aktiengesetz, 1965).14 Thus, the reform reaf- Basic Law,16 as well as a variety of other regu- firmed the model of a strong Vorstand and ex- lations. Thus, the proposal that the enterprise plicitly rejected abandoning the two-tier board be run with regard to the ‘good of its employ- system in favour of an Anglo-Saxon board ees, shareholders and the general public’ was model. The ‘collegiality’ principle in the defeated. Constitutional courts rejuvenated the Vorstand was also ensured, promoting consen- principle in the Feldmühle case, and the ‘in- sus decisions rather than strong chief execu- terest of the enterprise’ became an important tives. legitimation in debates over codetermination – although divergent interpretations exist that However, reformers saw the existing law as too stress public, pluralistic and procedural ways restrictive of shareholders’ rights in a number of defining the company’s interest. of areas (disclosure, control over the distribution of profit, procedures for the shareholders’ meeting, shareholder lawsuits).15 Accounting rules were changed to make valuations more 15 While beyond the scope of this report, a major stringent and disclosure more detailed to im- component of the reform dealt with so-called ‘related companies’ in order to protect minority shareholders prove shareholder influence in determining the and creditors in subsidiary companies, as well as amount of profit to be distributed. Shareholder increase transparency. Its aim is to regulate conflicts of rights in the AGM and proxy rules were interest between controlling companies and outside strengthened. Despite their pro-shareholder shareholders in a more predictable way than under American case law. The ‘prevention against abuse of economic power’ was an important rationale.

16 The Basic Law sets out a catalogue of liberal rights, 14 The law rejects giving management responsibili- but differs from the US Constitution, for example, by ties to the shareholders’ meeting in the name of explicitly linking private property rights to obligations shareholder democracy. ‘A corporation is not a to support the public interest. Article 14, Paragraph 2 miniature state, the management board not a gov- of the Basic Law states: ‘Property carries obligations. ernment, the shareholders’ meeting not a parlia- Its use should simultaneously serve the public good.’ ment. A corporation should, as under existing law, The importance of this clause related to the notion of be managed by a small number of technically expert ‘socially limiting’ or embedded classic rights, and persons’ (Aktiengesetz, 1965: 96). giving the state the duty to limit freedoms.

Co-Determination and the Origins of gles to avoid nationalisation. At the end of Industrial Citizenship within the both world wars, employers sought to stabi- Enterprise lise their own legitimacy by collaborating Parallel to the state intervention into company with employee representatives. Hence, for decision-making to protect shareholder inter- various reasons, maintaining ‘social peace’ ests, codetermination reflects a long tradition with the company became a widespread of using public authority to intervene in com- political concern within German politics. pany labour relations as a matter of public interest. Employee interests are distinctly inter- The idea of ‘codetermination’ nalised in the governance structure of compa- (Mitbestimmung) pre-dated both corpora- nies through rights to information, consultation tions and labour unions. Its origins have com- and codetermination in works councils, and plex roots and variants in Christian, socialist through representation on the supervisory and romantic philosophies, as well as the boards of corporations. Worker representatives notion of parity (Parität) and economic de- are obligated to work for peaceful cooperation mocracy (see Teuteberg, 1961; 1981). Un- in the interests of the company as a whole. This der the rubric of Organisation der Arbeit and reflects a strong public interest commitment to the concept of Association, many diverse ‘social peace’ within the firm (Jackson, 2000a). ideas for a constitutional or democratic eco- While it cannot be discussed here in detail, nomic order were debated during the Frank- codetermination must be understood in the furt Assemblies in 1848–49. Codetermination context of associational governance in German in various forms became central to German industrial relations. A variety of governance is- discourse on the social question. The com- sues, most notably wage bargaining and occu- mon thread was state-sanctioned parity rep- pational training, are negotiated by industry- resentation of labour. Codetermination rep- wide employers’ associations and unions. By resented a socially integrative alternative to promoting quasi-public standards across com- revolution or socialism, analogous to de- panies, many conflictual issues are taken out- mands for constitutional rights in the politi- side company-level institutions. ‘Cooperative’ cal sphere, recognising that the freedom of firm-level institutions developed historically in entrepreneurs within a liberal economic or- tandem with powerful industrial unionism and der also requires obligations to prevent so- corporatist institutions outside the firm – again, cial ills. another difference with respect to British industrial relations. The Institutional Legacies from the Coal Industry This section addresses the impulses to state Organizational impulses for codetermination intervention in the employment relation. To came only much later in the nineteenth cen- an important degree, state intervention re- tury, particularly in the coalmining industry. flected political interest of the state in simul- Both due to its significance as an early in- taneously repressing and coopting organized dustrialising sector and the national interest labour in Germany. Later, participation rights in natural resources, state intervention in the in companies also developed into a political coal industry institutionalised standards and programme of organised labour, thereby ‘de- practices that later served as models for other mocratising’ earlier state-led institutions. economic sectors. Employers often vehemently opposed ceding managerial prerogatives to employee rep- Through the mid-nineteenth century, both resentatives, while at other times employers publicly and privately owned mines were became an ally of labour in political strug- governed by direct state control in the areas

of hiring and dismissals, working time, and trepreneurs effectively usurped state author- social insurance. The Prussian Mining Re- ity and developed an autocratic management forms (1851–1865) finally yielded control style without the paternalistic protections over work organization to private entrepre- formerly guaranteed to miners under the preneurs.17 State intervention was restricted to reform laws. The partiality of state bureau- cases of ‘compelling reasons of public inter- crats increased the aggressiveness of entre- est’ (Fischer, 1974: 142).18 Despite a new lib- preneurs in promoting their interests and led eral tone, Prussian reformers retained con- to an underlying political instability. Liberal siderably more scope than did English or contractual principles resulted in a perceived French law in allowing state intervention, ‘proletarianisation’ of their social status, as particularly concerning safety, workers’ well as living and working standards that re- health, and protection of machines. The state sulted in strikes during 1872, 1889 and retained the right to unilaterally change the 1905.19 Crisis renewed the non-liberal pat- work plan without the consent or consulta- tern of state intervention, as the state adopted tion of the mine’s owners. Intervention was a policy of cooptation. Despite Bismarck’s linked to a prevention principle, unlike Brit- opposition, Kaiser Wilhelm II had taken a ish mining inspectors until 1860 who could special interest in the social question and in only warn workers and thereafter only issue the councils that had been demanded by fines for safety violations. The Prussian re- strikers in 1889. In 1890, Wilhelm declared form combined elements of ‘freedom of con- that factory rules should ‘no longer be de- tract’ under a shadow of hierarchical state cided unilaterally by employers, rather intervention. agreed upon with representatives of the employees’ (Teuteberg, 1961: 372). The coun- These privileged state protections for miners cils were expected to take on board the grow- also went together with severe restrictions on ing working-class demands and diffuse their freedoms that subordinated miners to state radicalism. discipline. Infractions of mine work rules were criminally punishable, unlike other More generally, the political climate had contractual relations. And employees had shifted in Germany after the 1889 strike and little influence over work rules, lacking the with the rise of the Social Democrats in the right to organise which was collectively en- 1890 Reichstag elections. The forced brutally under the Socialism Law. En- Gewerbeordungsnovelle was passed in 1891, legally institutionalising workers’ councils (Arbeiterausschüsse) with limited consulta- 17 In Prussia, free use of private property was guaran- tion rights (Teuteberg, 1981). The regulations teed in 1807, but the mining and iron industries had little practical influence, but established remained exceptions. The Prussian mining reform a principle that employment relations were consisted of 14 individual measures adopted be- to be regulated in the public interest. In 1892, tween 1851 and 1863 that aimed to both liberalise existing regulation and unify rules across the Ger- a further mining reform required firms to es- man territories. These measures were consolidated tablish work rules for the mines that required into the Allgemeines Berggesetz für die Preußischen Staaten in 1865.

18 Initial reform drafts specified obligations for state officials to intervene in the ‘economic interests of 19 Issues of working time, treatment by supervisory the state’. The residual of the old state tradition personnel, and so-called ‘zero-cars’ (where super- remained Paragraph 196, which spoke of ‘protec- visors refused to count mining cars not sufficiently tions against effects to the detriment of the common filled with coal) were central issues in labour con- good’. flicts (Fischer, 1974).

state approval. After the 1905 strike, cover- as well as less indirect promotion of indus- ing roughly 75% of mining workers and last- trialization. Whereas regulating labour rela- ing nearly six weeks, employers were forced tions was a necessary component of German to retreat from a Herr-im-Haus standpoint industrial policy, the lack of direct state in- and to accept state intervention (Weisbrod, volvement in British industry meant that la- 1989). While employers appealed to the gov- bour regulation would involve direct intru- ernment to crush the strike militarily, sion in existing domains of private autonomy. Reichskanzler von Bülow declared such a British entrepreneurs viewed their firms as struggle against social democracy would not largely private affairs rooted in civil liberties, serve the ‘public interest’. A mining law re- and remained sceptical of state interven- form was announced to address the strike tion.21 Second, Britain granted the right to demands, hence ending the strike without organise roughly 50 years earlier than Ger- employers ever directly negotiating with the many. The state promoted the private media- labour unions. The 1905 regulation required tion of interests within the context of collec- work rules to have the consent of a workers’ tive bargaining. For example, the British council (Arbeiterausschuss), and particular strike in 1893 led to the introduction of the rules were directly banned by state author- ‘National Board of Conciliation’ that could ity. These mandatory factory councils both mediate between class interests. In Germany, significantly restricted employer preroga- by contrast, the union movement remained tives, as well circumventing existing labour politicised within the non-democratic politi- unions. The councils represent an important cal situation, meaning that support of unions step in the development of codetermination would have threatened governing political and served as a model for councils during coalitions. Third, the British civil service gen- World War I. The institutional legacy of the erally lacked the institutional capacity for in- coal-mining reform also includes the princi- tervention possessed by the German state ple of mandatory social insurance with com- bureaucracy.22 State intervention thus gen- pulsory participation of the employer, which erally came later in Britain: for example, lim- 20 years earlier had served as a model for its on the working day, restrictions on the Bismarckian social insurance legislation. banning of female and child labour, and minimum wage laws. But German state au- This situation differs in important respects thorities were more likely than the British to when compared with industrial relations in take the side of the company in implement- British coal-mining. State intervention in labour relations remained relatively weak in Britain for a number of reasons (see Berg, 21 The ideology of entrepreneurs was different in 1984). First, the earlier start of industrializa- Germany, where strong networks between state tion and slower pace of economic growth led bureaucracy and entrepreneurs strengthened the to less direct state engagement in industry,20 consciousness of their activity as a national service that should be actively supported by the state.

22 The German bureaucracy was very large and independent compared to the British civil service. In 20 British firms developed with lower capital inten- the course of late national unification, Prussia de- sity and, given their lower fixed costs, could adjust veloped an extensive state bureaucracy with exten- to business cycles largely via employment fluctua- sive technical training. The British civil service was tions without the need for further integrative mecha- very different for a variety of reasons: greater re- nisms. In smaller firms, personal relations between sponsibility to a democratic parliament, less direct labour and owner entrepreneurs persisted longer involvement in law-making, less bureaucratised rules than in German firms, where a technically trained and careers, less specialised technical training, and white-collar workforce was more widespread. greater social openness in recruitment (Cohen, 1965).

ing safety regulations or mediating industrial stone in building ‘economic democracy’ conflict. through Soviet-style councils. Employers resisted implementing the law and emphasised World War I (1914–1918) the temporary character of the councils as a A wartime ‘industrial truce’ integrated the wartime institution, while organised labour social democrats and labour unions into oriented itself to the retention and develop- mainstream political life (Feldman, 1966; ment of councils (Teuteberg, 1981). Marks, 1989: 107–111). The end of unilat- eral employer authority occurred with the Weimar Republic (1918–1933) passage of the Gesetz über den The end of the war, the collapse of the Impe- vaterländischen Hilfsdienst in 1916. As the rial state, the development of a revolution- war effort intensified in anticipation of US ary council movement,23 and the role of so- intervention, the Hindenburg Programme cial democratic politics and unions in the obliged all non-military men between the Weimar Republic cannot be discussed here ages of 17 and 60 to take up employment in detail. These factors led to the anchoring and forbade those working in war-related of codetermination in the Weimar Constitu- industries to leave their jobs without a spe- tion and the passage of the Works Councils cial permit. Fearing a wave of strikes, the Law in 1920. The new state sought to limit state sought ways of compensating for these the impact of the revolutionary council restrictions of civil freedom so as to main- movement by incorporating a less radical tain order in industrial production. The law notion of works councils into company prac- required workers’ councils to be elected by tice. The law mandated the formation of secret ballot. Drawing upon the mining re- works councils in all commercial and pub- form law of 1905, the controversial Para- lic establishments with over 20 employees graph 12 gave councils consultation rights to be made up of equal numbers of elected regarding the ‘demands, wishes and com- blue-collar (Arbeiter) and white-collar em- plaints of the work force with regard to the ployees (Angestellte). The supplementary law factory, wage and other employment condi- passed in 1922 allowed the works council tions and the social welfare policy of the firm’ to also send a maximum of two employees (Teuteberg, 1961: 511). While councils had as Aufsichtsrat representatives. The laws in- no rights to information or codetermination, stitutionalised many features of the contem- their power was greater than anticipated. porary German model: the works council’s Paragraph 13 had provided for mediation by obligation to work towards peaceful coop- a council with parity composition and eration in the interests of the firm, the sepa- chaired by a representative of the War Min- ration of collective bargaining from the ac- istry. As the committee subjected the em- tivities of the works council, and ployer to binding decisions, employers of- codetermination rights in the social affairs ten preferred to negotiate solutions with their of the firm. The works council had its basic councils. institutional form: a ‘dual’ role in protecting

The councils thereby fell out of employer control, and became increasingly linked with an independent labour movement. Unions 23 ‘Revolutionary’ councils were often loyal to their were extremely influential in the formation firms, and had a generally cooperative orientation. and practice of the councils. Radical labour Their demands often included: the end of authori- unions began to see a revolutionary poten- tarian management styles, codetermination in wages and personnel issues, rights to company informa- tial, while others saw councils as a corner- tion, and profit-sharing.

and representing the independent interests Vertrauensräte or ‘councils of trust’, con- of workers while supporting the business in- ceived as plant-level cells of the Nazi party. terests of the employer. Despite the rapid The councils were to strengthen trust within diffusion of works councils in large plants, the enterprise community. Nazi efforts largely employer acceptance of the law remained broke down during the war, and the regime uneven in practice. For example, a pragmatic increasingly resorted to terror to control la- and cooperative stance towards works coun- bour. cils existed in the electronics and chemical industries, while the steel industry employ- Post-War Democratisation and Reform ers and associations continued to bitterly Codetermination re-emerged as part of post- oppose them. war democratisation and was institutionalised by the law on Montanmitbestimmung in the Nazi Germany (1933–1945) coal and steel industry during 1951. The Nazi party destroyed all autonomous Codetermination was closely related to the labour organizations through arrests, confis- project of political democracy and addressed cation of property, and dissolutions. Work- socio-political concerns about the political ers were reorganized under the party-run abuse of economic power under the Nazis. Labour Front (Neumann, 1944). The labour Codetermination thus enjoyed a wide spectrum market came under state control – changes of political support, becoming part of the con- of employment became illegal without per- stitution of many federal states, supported by mission of the labour exchanges, and wages platform papers from the conservative CDU, were set by state trustees. Nazi ideology pos- and also receiving the support of employers in ited a harmony of interests between capital the hope of gaining union support in stalling and labour – work was portrayed as honour- Allied plans for socialisation of heavy indus- able national service. The Gesetz zur tries. The Allies also sought to incorporate un- Ordnung der nationalen Arbeit in 1934 in- ions into their restructuring plans in the ab- stitutionalised a plant community ideology: sence of a functioning German state and given ‘In the plant, the entrepreneur as the plant the mistrust of industrialists due to their war- leader and the salaried employees and work- time collaboration. Works councils were en- ers as the followers work jointly to further couraged by the Kontrollratgesetz, but their the aims of the plant and for the common rights were left to plant-level negotiated agree- benefit of the people and the state.’ This prin- ments. In the coal and steel industry, unions ciple restored managerial prerogatives and were able to gain representation in the the personal authority of managers. Nazi Aufsichtsrat, develop strong works councils, management ideology contained paternalis- and directly elect a labour director to the tic elements, and new company rules stressed Vorstand. The specific motives of the British the obligations of employees to follow the powers for introducing codetermination remain will of their superiors in good faith. Likewise, unclear (Müller, 1987). The Allies later the mandate of management under corpo- thwarted the ambitions of unions and German rate law was to manage ‘in the interest of political parties to socialise heavy industry, the firm, its members, and the general ben- restoring ownership rights in heavy industry in efit of the people and the Reich’. The 1933 1948. By 1950, under the new German state, Gesetz über die Treuhänder der Arbeit trans- firms fell under German corporate law that pro- ferred codetermination rights to a single state vided no codetermination rights. The metal- representative (Teuteburg, 1981: 41). Works workers’ union called for a strike in 1951, councils were abolished and replaced with which led to the direct involvement of Chan- new employee councils, now called cellor Konrad Adenauer regarding

codetermination, resulting in the 1951 law that BRITAIN preserved the parity model of Aufsichtsrat representation in heavy industries. The Origins of the British Company Law Approach A weaker model of codetermination devel- Incorporation became freely available on oped outside the coal and steel industries due registration in 1844, though under the earli- to opposition of the liberal party (FDP) and est legislation shareholders had unlimited employers. Unions were unable to exert suf- liability for the company’s debts. Previously, ficient pressure to reproduce the Montan incorporation (with or without limited liabil- model, and the 1952 law only mandated one- ity) had been available only by specific Act third of Aufsichtsrat seats for labour, more of Parliament or royal charter and was limited rights for works councils, and had no viewed as a special privilege, granted, for provisions for a labour director in the example, where there was a need to raise an Vorstand. The 1972 reforms under the so- unusually large amount of capital, as with cial democrats (SPD) formalised new rights railways and other utilities, and an obvious for works councils, and the 1976 revision public benefit. Pressure increased for wider widened Aufsichtsrat representation, al- access to incorporation with the growing though remaining weaker than the Montan need for capital in new branches of industry model in several regards. where the partnership form, or the unincor- porated joint stock company (itself in law a In conclusion, despite its diverse ideologi- partnership) created practical problems. cal and institutional origins, codetermination Much political and legal opinion still resisted aimed to ‘democratise’ what had historically the idea that registered companies should be been recognised as a relationship of author- allowed to trade with limited liability.24 The ity within enterprises rather than as a pure coalition which led to limited liability be- market exchange. The state viewed the regu- coming available on demand (in 1855) relation of this relationship as a matter of pub- lied on two main arguments. First, that lim- lic interest due to its socio-political conse- ited liability was necessary to give security quences. The impact has been to widen the to small investors, whose capital otherwise scope of stakeholders to which companies would not be mobilised and who would be are accountable, and promote a concept of debarred from participating in the success of ‘company interests’ that (even if vaguely de- the new industries. Second, that if parties fined) are not reducible to shareholder inter- wanted to contract with one another under ests alone. Particularly Aufsichtsrat represen- terms of limited liability, they should be free tation introduced management accountabil- so to do and the state should not stand in the ity to employees, and thereby altered the way (Hunt, 1936). constitutive interests of the firm towards a ‘dual’ logic of balancing multiple groups in These two arguments pulled in opposite di- the interests of the firm as a whole. While rections. The first principle conceived of the related to political democracy, company as a little republic, a miniature codetermination did not institute pure democratic principles into capitalist enterprises but ‘constitutionalised’ the relations between stakeholders in a regime of participation that 24 The ruling doctrine emphasised the importance of implies a sharing of responsibility and mu- individual owners taking full responsibility for all tual obligations. their actions, which meant unlimited liability. Any encroachment on this principle was regarded as an erosion of the moral basis of capitalist enterprise.

political system in which all its members, the were uninvolved in management or in per- shareholders, had rights to representation, forming governance functions, was relatively information, and ultimate decision-making slow in the UK. It was not unusual in the through the annual general meeting. The di- early years of the twentieth century, particu- rectors had to be accountable to these share- larly in manufacturing, for family interests to holders. The second, laissez-faire principle, predominate even in companies that had by contrast, was much less concerned with publicly floated. This was sometimes the rights of shareholders and much more achieved by issuing to the public non-vot- with the possibilities which limited liability ing preference shares. Companies in which provided for large-scale enterprise and mana- shares were widely held were, however, gerial autonomy. common in all sectors by the 1930s. By then it had been recognised that the idea of share- The laissez-faire principle was dominant for holder democracy in such companies, in much of the nineteenth century. While the particular shareholder control over the com- 1855 legislation had provided for mandatory position of the board, was largely a myth. publication of accounts and auditing, these One of the curiosities of the British story is requirements were removed only a year later. the apparent absence of any significant po- There were doubts about their effectiveness, litical challenge to this dispensation. The but at least as important was the view that if reasons for this are complex and cannot be shareholders (or creditors) wanted these safe- explored in detail here, but important fac- guards, they could contract for them. There tors include: was no case for state intervention in private commercial relationships. This highly un- · the structure of the UK financial sys- regulated environment prevailed for the rest tem, particularly the resulting relation- of the century. Thereafter, a financial disclo- ships between the banks and industry sure regime was imposed in stages over many in the UK which prevented the kind of separate pieces of legislation, often in the concentrated share ownership of com- face of objections from those opposed to state panies seen in some other countries, ‘interference’. The relevant measures usually particularly Germany.25 This ensured followed a major corporate collapse or scan- the lack of incentive for universal dal, facilitated by the laxity of the regulatory banks to organise a challenge to cor- framework. Similarly, disclosure was relied porate boards. on to combat fraudulent promotions, which were a common hazard faced by potential · the dominance of laissez-faire princi- investors in the Victorian era and after. Pub- ples rather than individualist, libertar- lic policy in this period can be regarded as ian principles in British political having two main objectives: to protect out- economy in the last decades of the side shareholders, mainly through publicity, nineteenth century. Laissez-faire argu- from dishonest and incompetent promoters ments were not based on individual and managers; and to increase confidence rights for shareholders and were often in equity markets and thereby facilitate the flow of finance to industry.

The transformation from an economy made 25 Recent research has shown that banks have exer- up largely of companies subject to personal cised supervisory and monitoring functions over or family control, to one in which compa- some British companies more than is sometimes nies had widely dispersed shareholders who thought (Bowden, 1999a; 1999b).

employed to sanction non-interference came the principal mechanism to en- with existing economic interests, and sure that the divergence between the in particular were used to justify and interests of managers and the interests underpin the emerging corporate of shareholders did not become too economy (Hunt, 1936). The traditional extreme. An effective market for cor- inherent property rights doctrine was porate control allows hostile as well employed to legitimate the new forms as voluntary takeovers to take place. If of corporate property, which came to managers underperform, the assets un- be seen as in principle no different der their charge become underpriced, from individual owner-managed assets. and this opens the way for a corporate This allowed corporate property to be raider to make a bid for the firm by treated as a private association, which offering existing shareholders substan- should have the minimum of govern- tially more than the existing value of ment regulation and interference, de- their shares. An active market for cor- spite the legal privilege of incorpora- porate control has been defended as a tion having been granted. better guarantor of shareholder interests than assigning shareholders strong · the lack of political interest in the le- political rights over the board because gal framework for companies. The it gives all shareholders the option of Conservative Party, the dominant gov- exit if the shares become underpriced, erning party in the UK for two-thirds while the exercise of shareholder rights of the twentieth century, accepted the relies on the option of voice, which, assimilation of corporate property with however, can only be effective if the private individual property, and be- collective action problem in getting came in practice a staunch defender sufficient shareholders to mobilise and of the corporate economy. It saw no turn up to vote can be overcome (Stern- need for a reform programme: the berg, 1996). ‘Gladstonian company’ remained as relevant to the late twentieth century · the lack of political or economic cri- as it was to the mid-nineteenth cen- ses strong enough to put the political tury. The Liberal Party did become in- and economic foundations of company terested in many aspects of corporate autonomy in question. Unlike the Ger- organisation and produced many new man economy, where the 1873 crash ideas (Gamble, 1983), but the Liberals called the country’s productive capac- were a minority-third party force after ity and manager competence into the 1920s and for most of the time had question, the British economy and po- no influence on government. Perhaps litical system was able to weather the most importantly of all, the Labour pressure of the depression relatively Party, which might have been expected well (Gourevitch, 1986). to push through corporate law reform, always gave it a very low priority (Clift The reaction of law reform bodies to the ‘il- et al., 2000). lusory nature’ (Cohen, 1945) of shareholder control was largely that the remedy lay in · the emergence of an effective market the hands of the shareholders themselves, for corporate control, which, in the ab- who had powers to control management, if sence of a strong shareholder democ- they chose to use them. These were rein- racy to hold managers to account, be- forced in the Companies Act of 1948, which

provided that the shareholders should be able against statutory intervention (Parkinson, to remove the directors by simple majority 1993). (previously directors were often entrenched in office). By this stage, with shareholdings Politics of Industrial Relations widely dispersed, it was accepted that such Working-class demands on the political and matters could not simply be left to bargain- economic systems were met in Britain from ing between the parties. Further interventions the 1880s onwards through a combination were proposed by the Jenkins Committee in of political participation through extension 1962. The Committee accepted that the of the franchise, early incorporation of work- scope of management discretion was in gen- ing-class issues into the political system eral best left for determination in the com- through the Liberal Party (Luebbert, 1991: pany’s articles, but noted also that it was 227), and until the 1906 Trade Disputes Act, possible for the directors, without commit- through court-sanctioned repression. Com- ting any breach of the law, ‘to make use of panies had no legal incentive to admit or- their powers for the purpose of diverting the ganised labour into the governance process company’s assets without the knowledge of before the inter-war period of the twentieth the shareholders’ to uses to which the share- century. Union formation was repressed un- holders might object (Jenkins, 1962). Simi- der criminal law until the repeal of the Mas- larly, there were concerns about the breadth ter and Servant Act in 1867, and union ac- of the directors’ discretion to issue new tivity deterred under tort law until the 1906 shares. Proposals to limit the powers of di- Trade Disputes Act (Bowers, 1997: 3–4); and rectors to make significant asset disposals cooperation remained rare afterwards. The were never implemented (though there are Master and Servant Act, in conjunction with restrictions in the Stock Exchange Listing the Combination Act of 1825, made it a crime Rules), and those on share issues had to wait to conspire to act collectively for the pur- until the 1980s and the impact of EC direc- pose of demanding wages or working con- tives. ditions. The Taff Vale case of 1900 made organised workers liable for the financial con- A key area of governance, in contrast with sequences that a strike had on the employer. Germany, left almost entirely to private or- Still, in 1906, employers remained free to dering was (and remains) the structure and refuse union recognition and to fire union- composition of the board. While legislation ised employees. Nor did unions want man- requires companies to have directors, it does datory participation in cooperative govern- not set out their functions, nor does it recog- ance (Ewing, 1997). Consequently, the ex- nise a distinction between executive and isting liberal sense of the public interest in non-executive directors or the office of chair- preserving the right of the individual to man. In so far as the case law acknowledged choose relationships freely (without refer- a duty on directors to monitor each other, ence to the context in which that decision is the content of this duty was minimal. A pub- made) was preserved. The Trade Disputes Act lic policy interest in the composition of the was a significant change, but only in that it board, particularly in relation to the presence stopped official repression of worker asso- of ‘independent’ directors who could perform ciations. strategic and monitoring roles, did not begin to take shape until the 1970s. Even then, the When the opportunity came to introduce unique circumstances of individual compa- cooperative decision-making between firms nies, the need for flexibility, and the dangers and their employees, the concept of com- of prescription were influential arguments pany autonomy from internal, mandatory

regulation was so strong that the government gain freely, treating them as private voluntary resorted to an indecisive and transitory in- associations with some legal immunities from troduction of corporatism, with no firm le- the provisions of the common law, counterbal- gal rules. During World War I, the govern- ancing the treatment of companies as, in ef- ment pursued a course of labour–employer fect, private voluntary associations consultation that was marked by its (Wedderburn, 1993). The main departure from voluntarism, and reliance on executive au- this (until recently) was the pressure which built thority on the part of the state rather than up in the Labour movement in the 1960s and statute. The 1916 New Ministries and Secre- 1970s for greater industrial democracy and taries Act gave the minister of labour the re- which led to the appointment of the Bullock sponsibility to promote the formation of con- Committee. The political strength of this com- ciliation councils and joint industrial coun- mittee was, however, undermined by the divi- cils, which would bring together unions and sion of opinion within the British trade unions management at the firm and industry levels, and the Labour Party as to the desirability of respectively. However, the government re- having worker directors on company boards. fused to mandate them for all firms, prefer- The employers’ organisations were implacably ring to threaten employers with the imposi- opposed (Clift et al., 2000).26 tion of a council if the economic sector was considered important. While this achieved Labour policy conflict since 1945 has taken results between 1918 and 1922, creating 73 place on issues that reflect the polarised na- councils, it allowed the number of councils ture of company–employee relations, and its to shrink to 20 by 1939 (Ewing, 1997: 15– manifestation in confrontations that are distinct 25). Parallel to the councils were industrial from those found in Germany at the time. Nei- courts, which were provided for through the ther the Labour Party nor the Trade Union Con- 1919 Industrial Courts Act. Again, use of the gress (TUC) was able to fully accept anything dispute settlement mechanism remained vol- less than full power parity with company man- untary and underused (Bowers, 1997: 4). agers for employees. Nor, until about 1974,

The Labour Party favoured securing its conception of the public interest through public ownership, legislation on monopolies and 26 There is an interesting contrast in historical devel- mergers, and legal support for trade unionism opment between Britain and the United States, the rather than structural changes to the company. two supposed citadels of shareholder value. In the USA the rise of the corporate economy was politi- Consequently, the Labour Party let two oppor- cally contested much more than it was in Britain, tunities pass during which it could have chal- and regulatory measures were introduced to break lenged Tory minimalism on company law re- up trusts and to prevent concentrated share owner- form. The 1945 Cohen Committee report on ship of companies by financial institutions. Share ownership became highly dispersed as a result, but company law rejected calls for more extensive some commentators have argued that this was a measures to introduce a republican mode of direct result of the imposition of regulation (Roe, governance for the firm, and its mild adjust- 1994). Although this prevented concentration of ments were adopted relatively uncritically in ownership, it did not prevent concentration of production or the rise of the corporate economy. The 1948 as the Companies Act was overhauled. invocation of shareholder value in this case, as with The 1962 Jenkins Committee on company law Britain, meant ceding a large degree of autonomy to also took a minimalist approach. Most signifi- managers, since if shareholdings are highly dis- cantly, it remained committed to the voluntarist persed the collective action problems in making shareholder power a reality are formidable; the tradition in industrial relations, which meant initiative tends to lie with the management, what- maintaining the ability to trade unions to bar- ever the formal procedures may be.

was either side prepared to endorse the pros- The TUC reversed its hostility to pect of institutionalised codetermination. They codetermination gradually between 1968 expected that large sectors of the economy and 1974, as a result of changing grassroots would fall into state receivership after a period opinion in the party, and spurred on by the of increasingly poor performance. As a conse- Fifth EC Company Directive in 1972 that quence, the Labour government that assumed mandated works councils (McIlroy, 1995). office in 1945 faced a union federation that Still, the Labour government and the TUC was not only refusing to push codetermination were divided on the Bullock Committee rein the company, but also positively hostile and port of 1977 that recommended a change to pursuing other goals (Clift et al., 2000). These the fiduciary duties of boards of directors of included permanent employment guarantees public sector companies to reflect the im- and, most importantly, the establishment of an portance of employee interests (Clift et al., authoritative macro-level corporatist frame- 2000).27 The Confederation of British Indus- work that would provide the TUC with an ef- try (CBI) dismissed power sharing as an un- fective veto on national economic policy acceptable form of interest group represen- (Shonfield, 1965: 113–119, 153). The Labour tation within the board, a means by which Party was consequently unwilling to legislate collective bargaining might become a real- beyond conditions which would improve the ity, and a dilution of managerial profession- right of unions to form, represent workers and alism. For its part, the TUC wanted a guar- collect membership dues (Bowers, 1997: 1– antee of half of the seats on the board, so as 11). Similarly, unions heavily and successfully to realise the legitimacy of the enterprise for opposed Labour initiatives in 1968–69 to employees through industrial democracy achieve labour peace by instituting binding (McIlroy, 1995). collective bargaining arrangements in which government would have a substantial role (Do- The role of labour in the company in the UK novan, 1968; McIlroy, 1995). At the firm level, underwent some major changes from the the TUC opposed joint decision-making as a 1970s onwards as a result of the structural vehicle to dilute union independence and in- adjustments in the economy brought about fluence (McIlroy, 1995). by a combination of global economic trends and the policies of national government and While the Labour Party was reluctant to intro- the EU. British industrial relations were al- duce partnership arrangements, the Conserva- ways characterised by a high level of tive Party was intent on establishing the pri- voluntarism and a minimum of formal legis- macy of individual rights and voluntary con- lation. Both sides of industry preferred col- tract negotiation in industrial relations, and lective bargaining to be ‘free’ and voluntarist, restricting the right to strike. The 1971 Indus- and there was resistance to legal framework trial Relations Act attempted to restrict the right for industrial relations which was common to strike, but was shown to be ineffective by elsewhere and which would have necessar- the industrial unrest of 1972 (McIlroy, 1995) ily embraced the role of labour in the com- The Thatcher and Major governments ended pany. (Wedderburn, 1971). As far as the Brit- mandatory union recognition introduced during the second half of the 1970s, and succes- sively promoted restrictions on industrial action on the grounds of individual rights to en- 27 It recommended that British companies keep the ter into contracts unimpeded by third parties single-tier board system, with a ‘2x + y’ representation system. This meant an equal number of direc- (Donnelly, 1999). tors elected by shareholders and unions, plus a smaller number of expert directors from outside.

ish trade union movement was concerned, to be fully incorporated into economic institu- it adhered to an adversarial model of indus- tions and more directly involved in the formu- trial relations in which there was a sharp di- lation and implementation of the public inter- vide between the interests of capital and of est. The various attempts to create forms of labour, and good industrial relations de- corporatist intermediation in the UK in the pended on keeping that distinction clear. This 1960s and the 1970s,28 and the campaign for enabled trade union negotiators acting for industrial democracy which culminated in the organised labour to get the best possible deal Bullock Report of 1977, were inspired partly from the owners of capital. Many British trade by the need to improve British economic per- unionists looked with suspicion on attempts formance, and partly by the evidence from in- to create works councils or employee repre- dustrial relations systems elsewhere. sentation within companies, fearing they would dilute the ability of trade unions to represent the interests of their members. An- Conclusion other feature of labour representation in the UK is that many unions have been general The historical development of public inter- unions rather than industrial unions, so that est agendas in German and the UK shaped not only have there been a very large number corporate governance in different ways. First, of trade unions, but in many sectors the em- liberalism dominated British politics from the ployees have been split up among several nineteenth century to the present day, but different unions. was rejected politically in Germany in the wake of the 1873 economic collapse. That One of the consequences of the tradition of anti-liberal tradition did not recover in the voluntarism in industrial relations was that Weimar Republic, nor did it fully reassert it- there was always a potential conflict between self in the Federal Republic. the stipulations of common law and the actions of trade unions, since the latter often Second, the most durable and extensive in- lacked any formal legal basis for their activi- stitutions in the UK were legal principles, ties. This problem was resolved by the Trade often found in case law regulating the bounds Disputes Act of 1906 and subsequent legis- of good behaviour on the part of managers lation, which provided immunity to trade and employees. In Germany, however, the unions from the provisions of common law in respect of damage done to the interests of employers and third parties by activities such as strikes. Trade unions were treated as pri- 28 The key public interest dispute in British labour vate associations with special legal privi- relations remained whether unions should be recognised to represent all employees in a bargaining leges. unit, or whether the law should preserve the right of individuals and firms to engage freely in contracts. The modus vivendi worked out between the Mandatory recognition procedures were in place power of organised capital and the power of between 1975 and 1980, and two key institutions were established to manage recognition and volun- organised labour was sometimes praised for its tary arbitration, the Central Arbitration Committee flexibility and its acknowledgment of the fun- (CAC) and Advisory, Conciliation and Arbitration damental and irreconcilable conflict between Service (ACAS), respectively. ACAS was set up to labour and capital which exists at the heart of ensure the good offices of a third party without interference from politicians, and to oversee indus- every modern capitalist economy (Kahn- trial tribunals and the CAC. Both the CBI and the Freund, 1969). But it was also increasingly criti- TUC valued its role because it ensured that wage cized by those who wanted organised labour negotiations remained unregulated by law.

early example and precedent of the Supervi- Fourth, the public interest agendas held by crit- sory Board to aid in the governance of firm– ics makes a significant difference in the devel- investor relations was adapted and extended opment of corporate governance arrangements. to other issues in the twentieth century not The position of Britain’s Labour Party and the yet legitimated, such as employee represen- TUC during this period ensured that corporate tation. governance debates were suppressed in favour of a public ownership agenda, whereas the Third, company failures and threats of failures German Social Democrats could commit them- had stronger policy consequences in Germany selves to the social market economy and focus than in the UK historically. Germany had cri- on the internal governance of the private firms ses leading to change, or caused by monumen- whose existence they accepted after the Bad tal political changes in 1872, 1916, 1934–37 Godesberg declaration. Consequently, the La- and 1953. Britain had a sense of limited crisis bour Party let several opportunities pass in the in 1878 (in the banking sector). post-war period, when it could have challenged the Conservative, Gladstonian view of the company (Clift et al., 2000).

PART II THE PUBLIC INTEREST AND THE CONTEMPORARY FIRM

Introduction ter the negotiation of the Single Euro- pean Act in 1985. The new approach We now turn to the development of public led to the mutual recognition of na- interest agendas in relation to the company tional law under the principle of in Britain and Germany during the 1990s. subsidiarity rather than harmonisation Debates over corporate governance reform under a supranational structure. A have proliferated in the last decade, centred number of directives have been on the notion of internationalisation, particu- passed, particularly seeking to ensure larly of capital markets. However, domestic that shareholders across the EU have political concern over corporate accountabil- access to sufficient and reliable infor- ity has also been renewed through the prob- mation on companies (see Appendix lems of executive compensation, corporate 1). The objective of this strategy is to failures, and concerns of local communities ensure that all EU states impose the over pollution and racial and gender equal- same regulatory or structural require- ity. Among the forces for change in public ments on their companies, thereby lev- interest agendas on the company have been: elling the competitive playing field. However, the adoption of common · Internationalisation. International capi- rules has progressed at a modest pace tal mobility has placed national finan- and the establishment of a Europe- cial systems under growing competi- wide corporate form has yet to emerge. tive pressure to provide comparable This process of Europeanisation can be risks and returns. This increases the understood as ‘negative integration’ ‘exit’ options of domestic investors, (removing barriers) and the expansion and has particularly increased the en- of markets through intergovernmental gagement of Anglo-American institu- agreements and bureaucratic agencies tional investors in less open markets rather than positive political integra- such as Germany. Regulatory regimes tion with uniform sets of rules. ‘The re- also face pressures from market actors sult is a multi-level political economy, and from intergovernmental institu- where politics is decentralized in na- tions to make corporate governance tional institutions located in and con- systems ‘transparent’ and ‘open’ to strained by integrated competitive market actors. markets extending far beyond their ter- ritorial reach, and where · European integration. The political supranationally centralized institutions process of European integration has are primarily dedicated to implement- also played a major role in the evolu- ing and maintaining those markets’ tion of public interest agendas. After (Streeck, 1998). While it has proven 1968, the European Commission for- politically impossible for Germany to mulated a series of directives on com- ‘export’ its employee-oriented model panies. A new impetus developed af- to Europe, due in no small part to Brit-

ish opposition, Germany has thus far Together, these factors lead to several new been central to blocking any version challenges for the shaping by domestic po- of the Societas Europaea that would litical institutions of public interest agendas undermine the existing pluralistic ap- with regard to the corporation. Several im- proach to the company domestically. portant questions will be explored in the next Thus, despite the economic arguments section. To what extent has the public inter- for a uniform European company form, est agenda changed in relation to the corpo- agreement on the proposed Fifth Di- ration? To what extent has Germany liberal- rective (see Appendix 2) remains elu- ised its ‘constitutional’ model in response to sive.1 The issue of codetermination in market pressures, changing political coali- the supervisory board as a major bar- tions, and the process of negative integra- rier to the Fifth Directive will be dis- tion in the EU? To what degree is the British cussed below. model evolving to accommodate other stakeholder concerns? · Post-materialist concerns. Concerns over the company’s role in community affairs have been increasingly formalised. They include environmental concerns, as well GERMANY as issues of equal treatment in employment for women and for racial and eth- (i) Companies and Investors nic minorities. Country-specific patterns The public interest agenda regarding the cor- can be observed in how these issues poration in Germany has shifted notably in become addressed within the context of the 1990s. This process is closely linked with existing corporate governance institu- the internationalisation of capital markets – tions, leading to the adoption of differ- the growing number of foreign investors in ent instruments of public policy. For ex- Germany, the growing use of foreign markets ample, works councils in Germany by German companies, and the associated proved themselves remarkably adapt- political process of market-making and lib- able to incorporating new concerns of eralisation. As is well known, German cor- workplace safety and equal treatment porate governance is characterised by con- that were not envisaged in the existing centrated ownership, narrow equity markets legislation, while the growing legal re- and a strong governance role for banks quirement for designated company of- (Schmidt et al., 1997; Jackson, 2000a). Ger- ficers responsible for specific issue ar- many has relatively few listed companies, eas such as environmental protection low market capitalization, and less reliance have been key to furthering specific pub- on the stock market to discipline manage- lic interest agendas. This development ment. Efforts to broaden and deepen these contrasts strongly with the rise of exter- markets have culminated in a number of nal regulation in the UK, where compa- complex regulatory measures, including: nies lack this mechanism. three Financial Market Promotion Acts (in 1989, 1994 and 1997); the Law on Small Public Companies (1994); the Investment Facilitation Act (1998); and the Law on Con- 1 Presently, companies operating in Europe must trol and Transparency (1998). The earliest establish complex networks of holding companies measures were introduced in the context of and subsidiaries in the 15 member countries, each operating under different legal principles and creat- the EC’s decision in the Single European Act ing direct administrative costs. to promote economic integration by liberal-

ising capital markets and ensuring equal pro- new insider trading rules and disclo- tection for small investors across member sure requirements on large blocks of states. It is significant that most of the major equity. Previously, this had been the changes in the 1990s have come in the area responsibility of the Länder govern- of capital market regulation rather than cor- ments. porate law – whereas the distinction between the two legal areas has become increasingly · The Third Law of 1998 sought to in- fuzzy. crease both the supply and demand for risk capital by reducing the costs of Capital Market Regulation securities issues (for example, reduc- Three Financial Market Promotion Acts ing prospectus liability)4 and authoris- sought to liberalise German capital markets, ing a broader range of investment funds as well as implement a number of EU direc- and transactions. Further important tives.2 changes include capital gains becoming tax-free after one year (rather than · The First Law introduced secondary six years), loosening rules on the mini- capital markets for the first time, mak- mum number of shareholders, and re- ing it possible for investors in company moving the obligation that investment debt to trade bonds. Secondary capi- companies go public within 10 years. tal markets had been banned in the 1890s, and only permitted in a limited Parallel to these changes, the Deutsche Börse form since the 1970s. AG created the Neuen Markt or New Market in 1997 to promote the flotation of next-gen- · The Second Law, introduced in 1995, eration high-technology companies. The focused on increasing transparency, market has expanded rapidly to around 120 protecting small investors, and allow- companies in June 1999, although with a ing more types of investment funds. relatively small share price capitalisation These measures helped bring German despite its fast growth. In order to promote practice in line with international investment in young companies, rules of dis- standards as expressed in EU directives closure are stricter (for example, quarterly (Lütz, 1996).3 The law established a reports in German and English) and more Federal Securities Trading Commission shareholder-friendly than those that apply to (Bundesaufsichtsamt für companies listed on the regular official ex- Wertpapierhandel) to monitor securi- change. While this measure does not influ- ties trading – particularly to enforce ence the governance of existing corporate bodies, the standards used in the New Mar- ket are more typical of a market-oriented US- style approach to governance concerns.

2 A Fourth Law was discussed under the Kohl administration to introduce more extensive private pension provision. No agreement was reached considering the social (and particularly income-distribu- tive) implications of subsidising the establishment 4 For example, the 30-year period of liability for of private pension funds with tax expenditures and investment information was shortened to three years. a smaller public system. While for the ostensible protection of shareholders, such restrictions made it unlikely that shareholding 3 These EU directives include those on insider trad- would spread beyond the modest core of listed ing (89/595/EC), transparency (88/627/EEC) and in- companies and banks or firms with private informa- vestment services (92/22/EEC). tional advantages.

These changes in capital market regulation reform to improve transparency and moni- represent an important departure in the his- toring over the Vorstand. These concerns for torical public interest agenda in Germany. transparency and disclosure were later ex- Investor protection had been historically expressed in terms of being necessary for the pressed in a ‘constitutional’ model of the competitiveness of German firms in the glo- company that favoured banks as monitors bal capital market. Both financial and remu- and remained sceptical toward small indi- neration instruments should be moved to- vidual investors. The new measures sought wards international standards. FDP policy- to level the playing field for all investors and makers also consulted with international in- stress information disclosure in order to cre- vestors outside the traditional German policy ate more effective markets. Such measures circles (Ziegler, 2000). serve the interests of small investors, as well as foreign institutional investors. Rather than The reform process gained further momen- seeking to limit the scope of markets and tum from the perennial debate within Ger- correct for their failures through other insti- many about the ‘power of banks’, amidst tutions, the new regulatory paradigm puts public outcry over several high-profile cor- renewed stress on market mechanisms. This porate governance failures. Close relations entails reducing the advantages of private with large private banks had been enjoyed information gathered by large shareholders by industrial concerns such as such as banks. Market-promoting regulation Metallgesellschaft and KHD, and had also has reinforced secular trends toward owner- come to light in high-profile affairs such as ship fragmentation and towards a more the Schneider real estate scandal. In the wake Anglo-Saxon pattern. Liberalising markets, of these corporate failures, German legisla- however, is far from wholesale deregulation. tors decided that the supervisory boards were Rather, free markets often require more rules providing ‘too little supervision and too lit- (Vogel, 1996). Within the multi-level Euro- tle counsel’ to the executive board. Holding pean polity, capital market liberalisation en- multiple seats, particularly by bankers, was tailed bringing investor protection ‘up’ to viewed to lead to a ritualisation of meetings Anglo-American standards. That decision and ill-prepared discussions. The SPD ex- was important because it made it more diffi- pressed particular concern about the possi- cult to continue the set of insider relation- ble abuse of economic power and influence ships among a hard core of investors that held by the universal banks.5 Concern with distinguishes the structure of German com- the power of banks has a long history within pany ownership (Deutscher Bundestag, German left thinking (Hilferding, 1911). The 1995). Similar shifts can be seen in several present public interest concerns of the SPD other areas of regulation, namely corporate centred on two issues. The accumulation of law, takeover codes, and accounting. bank influence is argued to create severe conflicts of interest. In the words of the SPD Corporate Law draft law, ‘the rights of shareholders in the The most important change in the 1990s was public company are factually restricted the Law on Control and Transparency through the dominating position of large (KonTraG) passed in 1998. The law had its banks and company administrations’ origins in the 1994 coalition negotiations between the CDU and FDP. The small coalition partner, the liberal FDP, controlled the 5 Bank influence has several channels: direct share Ministries of Justice and Economics and be- ownership, exercise of proxy votes, supervisory gan to consider a moderate corporate law board representation, and role as a lender.

(Deutscher Bundestag, 1995). Bank influence proposed to strongly curtail bank influence is also argued to place the management of through a number of measures: to limit bank Germany’s largest companies outside of ef- ownership to 5% stakes, prohibit the exer- fective control, while the absence of a mar- cise of voting rights stemming from cross- ket for corporate control and competition for shareholdings, cap the number of supervi- management positions is said to dampen the sory board mandates at five per person, and innovativeness of German industry. In this prohibit proxy voting by banks. While the sense, significant overlap existed between SPD proposal was supported by the trade traditional left concerns regarding economic union federation, the Deutscher power and critiques by neo-liberals and US Gewerkschaftsbund (DGB), on this issue of institutional investors of Germany’s ‘insider’ bank power, the industry and banking asso- system. ciations opposed the draft as too severe (Ziegler, 2000). Thus, none of the severe re- However, the final draft of the KonTraG strictions on bank influence found their way places its emphasis on transparency and into the final law passed by the CDU and monitoring, rather than direct concern with FDP. The final draft only obliges banks to banks. The law aims to heighten transparency choose between voting their own shares and through auditors appointed by the supervi- exercising proxy votes for their customers sory board rather than management, disclo- when their own block exceeds 5%. Further- sure of multiple supervisory board member- more, while the draft proposal sought to re- ships, disclosure of ownership stakes exceed- duce the size of supervisory boards, German ing 5%, and improving the operation of the labour unions were particularly opposed to auditor. Shareholder influence was increased this change. While a smaller supervisory through several measures, also designed to board would retain the parity between capi- curtail the dominance of banks in exercising tal and labour, reducing the absolute number shareholder rights: increased accountability of members on the labour bench would up- to shareholders in the use of proxy votes, set the usual balance of representatives be- elimination of multiple voting rights and vot- tween inside employees and outside union ing rights restrictions, limits to proxy votes members. exercised by banks where direct shareholding exceeds 5%, and increased The law nonetheless represents a departure obligations for financial oversight by the su- from the ‘constitutional’ approach to corpo- pervisory board. KonTraG also contained rate law, in line with the 1965 reform in in- other important changes to the way compa- troducing liberal elements into the system. nies can use their equity. First, the law re- The stated principles of the law were to avoid moves restrictions on share buy-backs that increased regulation of the company and rely had been designed to prevent fraud and share on increasing the incentives for self-organi- price manipulations. Second, stock options zation by the existing company institutions are now permitted for compensating man- and particularly by markets. Furthermore, agement and employees. Both mechanisms law-makers sought actively to assist firms in are typical ‘solutions’ to principle-agent prob- meeting the expectations of international fi- lems in the USA, but depart slightly from the nancial markets. conservative public interest agenda in Ger- many. Accounting Rules introduced in the Investment Facilitation Politically, KonTraG represents a compromise Act (Kapitalaufnahmeerleichterungs-gesetz) in between competing interests. The SPD draft 1998 allow listed German companies the flex-

ibility to publish their accounts according to stance of the SEC have prevented the emer- standards set either by the GAAP system (US gence of a more conservative international generally-accepted accounting practices) or by standard. German firms were initially divided the International Accounting Standards (IAS) over the issue. Large companies had a grow- system (widely accepted outside the United ing interest in raising capital overseas but also States). The law seeks to ‘recognise the expec- enjoyed the advantages of the existing sys- tations of investors’ to base their investment tem. Slowly a shift in favour of market-ori- decisions on internationally recognized ac- ented standards has occurred due to share- counting principles. The measure was justified holder pressure and the linking of executive as a necessary step to protect the competitive- pay to stock prices. ness of German firms in international capital markets. Thus, it is particularly salient for firms The political solution was to allow German listed on foreign (particularly US) stock ex- firms to tailor their accounting rules to their changes or having a high proportion of foreign needs in accessing international capital mar- ownership. kets, or continue a more creditor-oriented approach. However, at present the law is lim- This step away from German accounting stand- ited to six years’ duration, in anticipation of ards was sparked by the listing of Daimler-Benz a fundamental reform of German account- on the New York Stock Exchange (NYSE), and ancy law in order to adapt to a uniform glo- the subsequent listing of Deutsche Telekom in bal standard.6 However, given the conserva- 1996. Given the requirements of the Securi- tive nature of German accounting, interna- ties and Exchange Commission (SEC) for ac- tionalisation again represents a substantial counting, these firms were forced to maintain shift in the notion of public interest from two sets of calculations for their NYSE listing creditor protection and stability of the com- and for tax purposes in Germany. The large pany, towards a more shareholder-oriented discrepancies in the profit calculations of model promoting competitive selection DM2.5 billion at Daimler-Benz led to bad pub- among companies. licity and encouraged scepticism of the Ger- man standards. In addition, firms had to con- Takeover Code sider the direct administrative costs of multi- Germany has no law to specially regulate ple book-keeping. takeover bids, and proposed European directives on takeovers have not been passed (see Both GAAP and IAS are significantly more Appendix 2 on the Takeover Directive). shareholder-oriented than German account- Agreement on the Takeover Directive has ing rules. Traditionally, German accounting become more promising as EU member has stressed very conservative prudence rules states, including Germany, see the value in (Vorsichtsprinzip). These rules favour credi- mandatory rules. The obstacle in the medium tors by allowing firms to build substantial term, however, remains disagreement among reserves through conservative valuation of European governments over thresholds, and assets and allowing up to 50% of profits to the requirement of a bidding company to be used as internal reserves with shareholder offer to purchase 100% of the outstanding approval. US rules, by contrast, stress mar- shares. ket valuations and a more precise definition of profits. While many commentators stress 6 the dangers of going too far towards market- The International Accounting Standards Commit- tee and the International Organization of Securities valuation principles, the attractions of the US Commissions are currently negotiating to bring the capital market and the uncompromising IAS and GAAP together.

In the meantime, Germany introduced a vol- resentatives from a small shareholders’ asso- untary Takeover Code in 1995 to protect ciation, the Deutsche Schutzvereinigung für shareholder interests in the event of a takeo- Wertpapierbesitz (DSW). The stated goal of ver bid. The Code was developed by a com- the Code is to assist in achieving ‘a respon- mittee within the Ministry of Finance sible, value-oriented management and con- (Börsensachverständigenkommission), and trol’ in German companies. The Code makes was unusual in being developed by a small reference to the published OECD corporate group of individuals without input from a governance principles in stressing several large number of companies and associations items: protection of shareholder rights, equal such as the Bundesverband der Deutschen treatment of shareholders, and disclosure and Industrie (see Vitols et al., 1997). The Takeo- transparency. The Code spells out responsi- ver Code was strongly influenced by the Brit- bilities for the Vorstand and Aufsichtsrat. The ish code, and is monitored by an Office of Vorstand should stress stock-market-oriented the Takeover Commission (Geschäftsstelle compensation, rapid disclosure, and regula- der Übernahme-kommission). Compliance tions for conflicts of interests and insider trad- with the Code has been weak, with around ing. The section on the Aufsichtsrat discusses 38% of listed companies participating and the selection of members, their role, the for- only 75% of the DAX 30 companies. Low mation of committees (particularly strategic, compliance may relate to some problematic accounting, management personnel, market legal issues in the Code, as well as the lack and credit risks, and personnel issues), and of effective sanctions as in Britain. For ex- again regulations for conflicts of interests and ample, companies cannot be delisted for fail- insider trading. Despite its cautious language ure of compliance. Thus, a renewed discus- (for example, ‘value-oriented’ rather than sion emerged about the need for a statutory ‘shareholder-value-oriented’ or wanting to code. A statutory approach was slowed both promote the confidence of both sharehold- by the preference of the business commu- ers and employees), the thrust of the report nity for a more flexible voluntary approach, is a change to more market-oriented mecha- as well as anticipation of European-level nisms of control through disclosure and regulation. In short, despite the bipartisan stronger share-related incentives for manage- support for legal regulation, Germany had ment. The consensus behind the Code re- decided to wait until negotiations over the mains unclear, although the DSW plans to EU directive were completed. Germany still promote its use through shareholder activ- opposed a proposed EU rule requiring a ism. buyer to make a bid for all outstanding shares rather than just a controlling stake, as this Politics and Change raises the cost for effective corporate con- No single force can be viewed as driving trol. However, since the takeover battle over these changes in public interest agendas in Mannesmann in 1999, German legislators Germany. EU directives have exerted a strong appear to be moving towards a new legal pressure to change national law, but these regulation. alone do not explain the pattern. Some measures may also be viewed as a response to Corporate Governance Code the prospect of a single European currency. A ‘code of best practice’ was published by a The Euro raised concerns about the competi- small panel on corporate governance in Janu- tiveness of Germany as a financial centre, ary 2000. The 10-member group consists of given the increasing competition from Lon- several prominent German academics, man- don. In addition to Europeanisation, particu- agers from VEBA and SGL Carbon, and rep- lar events such as corporate scandals and the

perceived success of venture capital markets tion, a new public interest agenda emerged in the USA have prompted political attention to promote capital-market-oriented rules and to corporate reform. a greater shareholder-value orientation among large companies. This agenda differs Societal actors such as corporations, banks substantially from the previous non-liberal and international investors also exert pres- approaches to shareholder protection and sure to change corporate regulation in some stakeholder integration described in Part I as areas, while opposing change in other areas. ‘constitutionalism’ in company governance. Corporate ‘global players’ have a growing interest in uniform rules, or easing access to (ii) Companies and Employees international markets as seen in the Invest- A high level of national consensus exists ment Facilitation Act. However, other busi- about the strengths of German nesses perceive continued advantage to the codetermination both at the supervisory conventional German approach to account- board and works council levels (see ing. Likewise, despite their changing strate- Kommission Mitbestimmung, 1998). Given gies, German banks opposed forced change its contested history, codetermination has an in bank–industry relations proposed by the important symbolic value in post-war politi- SPD and were able to lobby against many cal culture. The public interest in social measures. Another example of unsuccessful peace is widely seen as supporting the com- change is the Takeover Code, which lacked petitiveness of German industry by its affin- acceptance among a wide spectrum of cor- ity with a high-skill, high-quality production porate actors. model in export industries. Large firms have been very successful in adapting In addition to these pressures, political par- codetermination to their competitive needs, ties and institutions also played a major role and thereby reshaped institutions from hav- in shaping change. The Ministries of Econom- ing a defensive and status-protecting func- ics and Justice were both controlled by the tion towards supporting management in the liberal FDP party until late 1998, and were implementation of competitive strategies. No able to gradually liberalise capital markets. crisis has developed around the legitimacy The party’s position was more market-ori- of codetermination that would open a dis- ented than the more conservative CDU, cussion about wide-ranging deregulation, as which could only be persuaded to reform on there has been with the German system of a more piecemeal basis and in the context collective bargaining. This is despite the fact of EU pressure. However, stronger proposals that codetermination remains widely misun- to directly dismantle old institutions such as derstood by foreign investors, who view it tight bank–industry relations or conservative as a serious infringement of investor rights. accounting rules either failed or were not generated within the political system. In this In practice, the nature of codetermination has sense, change has remained incremental gradually evolved in response to economic rather than wholesale. And continuity may trends and pressures. Codetermination prac- be observed alongside very important tices have become increasingly changes. contractualised in large German companies (Jackson, 2000b). Firms have developed quite Outcomes were thus shaped by pressures of heterogeneous practices fitted to sectoral and internationalisation and domestic political company-specific needs. Adaptation often institutions. Rather than dismantling well- leads to a gradual erosion of codetermination established institutions of company regula- rights (through concession bargaining over

investments, the centralisation and decen- several countries, particularly Germany. The tralisation of decisions away from most recent proposal would introduce a prin- codetermined institutions, etc.) Employers ciple of ‘highest standards’: company are therefore content to let codetermination stakeholders would either have to agree vol- evolve on its own under competition pres- untarily to a new codetermination model, or sures, rather than mount political efforts to the highest level of the two countries would deregulate. In addition, the diffusion of works remain in force. This codetermination à la councils has been slow in some new indus- carte might be a way of overcoming opposi- trial sectors and in eastern Germany. tion to European regulation, but may lead to a long-term erosion process for Despite the relative stability of national in- codetermination to the degree that manag- stitutions, codetermination has proved im- ers are likely to negotiate lower standards on possible to generalise as an international a firm-by-firm basis. model of governance. Codetermination is a central issue in the discussion of a European- In contrast to the blockage regarding Euro- wide corporate form. Most member states pean corporate law, the European Works have, at least in principle, perceived advan- Council Directive succeeded largely because tages in European-level corporate regulation: it did not interfere with national systems of giving firms greater certainty during European company interest representation, but rather mergers, since the post-merger firms could supplements them with firm-specific institu- adopt the European legal form rather than tions to represent non-domestic European choosing one of the two national forms – not workers at the headquarters of multinational least in avoiding the associated psychologi- companies. European regulation is proce- cal consequences for the new ‘corporate dural, and stresses both voluntarism and the culture’. While tax questions plagued the principle of subsidiarity. In practice, Euro- early debates, progress of European regula- pean works councils are institutions worked tion is perceived to be blocked by the ques- out through company-level negotiations and tion of German codetermination in the thus strongly shaped by the home-country Aufsichtsrat. Early attempts to generalize this practices (Bonneton, 1996). Thus councils model for Europe through the Fifth Company have different consequences for national re- Law Directive (see Appendix 2) failed due to gimes. In Britain, European regulation gives opposition by Britain. Conversely, German unions a foothold to strive for ‘higher’ stand- unions oppose any measures that would al- ards, and helped renew debate in Britain. low German firms to migrate to other coun- German works councils, by contrast, see the tries in avoidance of codetermination re- European institutions as a way to extend their quirements. Indeed, the danger would be real influence transnationally. In both cases, out- if firms could maintain German headquar- comes are shaped by both EU and national ters while adopting a European legal form. institutions. The result is to set European- However, other countries do not favour mov- wide minimum standards of employee par- ing ‘up’ to German standards of ticipation in large firms. The case shows both codetermination. the difficulties in moving standards ‘up’ and the resistance to measures that lower stand- A renewed debate over the Societas Europaea ards – because EU regulation would either was initiated through the Davignon Commis- directly interfere with national institutions or sion, whose report (Davignon Commission, increase the exit options of actors from those 1997) addressed several key questions. How- institutions. ever, the recommendations were opposed by

(iii) Companies and the Community new industrial developments are likely to Since the 1970s, community concerns have have on the surrounding area and broader been a growing part of the public interest environment, with periodic updates to cover agenda. Social movements have been an changes to the business’s operations. Early important force in increasing corporate ac- environmental law covering water pollution countability to society. This section looks (Wasserhaushaltsgesetz) and emissions briefly at two issue areas: environmental pro- (Bundesemissionsschutzgesetz) required tection and gender discrimination. Public German companies to designate company interest concerns related to the environment officers responsible for monitoring compli- include both the economic externalities of ance with emission standards and impact corporate pollution, as well as broader qual- assessment requirements for new operations. ity-of-life issues. Gender discrimination concerns the socio-political consequences of Such environmental regulation has become corporate hiring and promotion practices that more prevalent and costly in the 1990s. For affect the social equality of men and women example, companies have been required generally. since 1995 to reduce waste by taking back packaging that customers do not want, un- German corporate law recognizes a general less they participate in a national recycling obligation of companies to consider the pub- system for which they must pay a fee. Since lic interest, but generally leaves such obli- 1998, automobile manufacturers have also gations undefined and open to further spe- been required to take back cars that are taken cific legislation. When compared to Britain, off the road, with no direct cost to the con- the wider legal scope for accommodating sumer. Partly in fear of even more intrusive public interest concerns in Germany has lead regulation, the German business community to a greater internalisation of public interest chose to offer government the prospect of issues into company governance. Compara- participation in environmental protection ble issues have been dealt with by external schemes that focused on corporate govern- regulation in Britain, while the legal defini- ance itself, if, in return, participation were tion of directors’ duties has remained more voluntary, and the scheme were organised exclusively linked to accountability to share- by the Chamber of Commerce. holders. In the 1990s in Germany measures to mandate internal officers were taken in The result was the EMAS system, also known both the areas of environmental protection as the EU’s Eco-Audit system. The EMAS sys- and gender equality. A company officer tem was introduced in 1993 and works on the serves as a liaison between the firm and third basis of voluntary environmental auditing and parties. The outside advocate of the policy dissemination in the form of an environmental in question may be a government depart- statement. The audit rates companies on their ment, or a designated non-government ac- business practices and makes recommenda- tor with an interest in the issue who inter- tions for improvements. There are no set stand- acts with a specific company officer or body. ards, and the business community successfully prevented the federal government from estab- State governments are the traditional regula- lishing a regulatory body, or allowing the Fed- tors of environmental issues, though much eral Environment Agency to carry out regula- of the legislation is federal, dating back to tion. Instead, the process relies on positive the 1970s. Most commonly, the legislation publicity to encourage businesses to improve requires German companies to submit re- their profile by demonstrating their commit- ports to state authorities on the impact that ment to the environment.

Audit teams involve employees (3–15 in evaluated into the 1990s. German unifica- Germany) and at least two external auditors. tion rekindled debates over discrimination Often responsibility for environmental pro- issues. Discrimination in pay and work prac- tection is lodged with senior management, tices is outlawed under the constitution, but who take part in the audit procedure and defined in practical terms by unions and place great importance on the assistance of employer associations. Court cases at both the external auditors. Meanwhile, broad par- the national and EU levels began challeng- ticipation of the workforce varies widely, and ing these standards in the years leading up specific environmental protection training is to 1996, supporting changes in some collec- not prominent (Umweltbundesamt, 1998a: tive bargaining agreements 75–84). Nor has EMAS been incorporated (Bundesministerium Frauen, Senioren, into the widespread quality management sys- Familien und Jugend, 1998; DGB, 1996; tems (ibid.: 86). In this sense, while partici- 1998). The 1994 Women’s Promotion Act pating firms are designating environmental required that companies appoint an officer protection officers, they often perform a sup- responsible for women’s issues in the plementary function to company policy workplace, and that all levels of government rather than an integrative one which injects appoint a similar officer to supervise progress environmental protection concerns into all within their jurisdiction. These representa- company policies. Nevertheless, more and tives should ensure that gender issues will more companies are doing so, and many be internalised within company governance, companies find it practical to aid implemen- beginning with pay and discrimination is- tation of environmental protection measures sues, but now extending to harassment and through information disseminated along with soon to include measures that make work and workplace health and safety issues parenthood more compatible (Deutscher (Umweltbundesamt, 1998b: 95–99). In the Bundestag, 1998). Since these policy areas 1990s, however, federal and state govern- fall into the realm of the employer–employee ments also rely more heavily on a system that relationship, they also require cooperation combines appointed environmental officers from management, unions and works coun- within the firm and environmental impact cils. audits conducted by approved non-government agencies to monitor and target improve- Finally, in its last term the Kohl administra- ment of the company’s pollution reduction tion promoted making motherhood more policy. This arrangement suits both the au- compatible with the workplace. Many pro- thorities, which may then devote fewer revisions are external to the firm, such as the sources to direct regulation, and businesses, right to day care. The principal in-firm meas- which prefer the audit approach to direct ure is the right to extended leave of up to regulation. five years with a guarantee of re-employment under the 1995 Mothers’ Protection Act Equal treatment is entrenched in the Federal (Mutterschutzgesetz). In addition, the govern- Republic’s constitution, but equal treatment ment encourages businesses to allow for flex- in hiring and workplace policy was not a high ible working arrangements to accommodate priority either for unions or employers until expectant mothers, extending to the context the 1990s. Their constitutionally guaranteed of collective bargaining in the works coun- mutual responsibility for managing cil (BMFSFJ, 1998). In doing so, the govern- workplace affairs without interference ment hoped to improve the quality and sta- (Tarifautonomie) led to little outside interven- bility of relations between firms and their tion and allowed female work to be poorly employees, and that firms would recognise

gains in productivity and corporate image as BRITAIN a result of their commitment. (i) Companies and Investors Environmental and equity issues illustrate the It has been recognised since at least the growing scope of public interest agendas in 1920s that in many companies, because of the last decades. While the regulatory de- collective action problems, shareholder details are complex and cannot be covered mocracy rarely works. Company legislation here, this section stresses the internalisation has nevertheless continued to operate on this of public interest concerns within German basis, adding regularly to the matters on company governance. This differs from the which shareholders are entitled to vote. At- British pattern. For example, equal treatment tention in recent years has focused on insti- issues have been absorbed into structures that tutional investors, who now collectively own existed to handle employer–employee rela- over 70% of the companies listed on the tionships, widening the scope of activities of stock market, as a means of restoring integ- the works councils to address new concerns rity to the model of shareholder control. They and becoming incorporated in the regulatory are coming under political pressure (with the concept due to their role in hiring, classifi- present government having raised the possi- cation and pay issues. bility of making voting mandatory) to vote their shares and involve themselves in a gov- Equal treatment and environmental protec- ernance role. tion issues have become more similar in that legislation sets up the possibility of an ongo- Statutory regulation in relation to the gov- ing relationship with an established company ernance function of directors is limited, apart officer responsible for a particular policy from the various legal provisions targeting area, and a government department or a sur- improper conduct and negligence. While the rogate appointed in its place, such as an en- Companies Act requires companies to have vironmental audit group. While being less directors, it does not set out their functions. intrusive on corporate governance than a This is left to the company’s articles of asso- supervisory board or a works council, inter- ciation, which invariably provide that man- nal positions nevertheless increase the ex- agement powers are vested in the board. ternal accountability of companies for their There is, then, no distinction recognised in activities and their exposure to public inter- statute between executive and non-executive est concerns. The strength of such an ‘inter- directors, nor is a monitoring duty explicitly nal’ approach is that particular public inter- set out. Companies listed on the stock ex- est concerns are incorporated into everyday change are, however, required to have at decisions and organisational norms and rou- least one-third of non-executive directors tines. Companies appear nonetheless to have (NEDs) on the board, a majority of whom failed to internalise commitments to environ- must be independent of management. This mental protection measures in corporate gov- is stipulated by the Combined Code (Com- ernance and environmental reporting as in- mittee on Corporate Governance, 1998), herently positive and worthwhile activities. which is a distillation of the earlier Hampel In the opinion of the Federal Environment (1998), Greenbury (1995) and Cadbury Agency, management is more likely to view (1992) reports and codes (Parkinson and concern for these issues as restricted to a Kelly, 1999). In fact, it has always been com- small core of academics and pressure groups mon for companies with outside sharehold- than to the broader public. ers to have what we now term NEDs, but historically these were often titled or public

figures designed to add lustre to the board where they considered that improvements but not to perform a meaningful governance were needed. The Code covers the structure role. and composition of the board, including the need for NEDs who are independent of man- The movement towards encouraging boards agement, procedures for setting directors’ to appoint people who are reasonably com- remuneration, the need to establish proper petent and independent, and so able to per- internal controls and the establishment of an form a monitoring function, began in the audit committee to liaise with external audi- 1970s with backing from the Bank of Eng- tors. Complying firms would ensure that the land. There was at the time a perception, board of directors acquired clearly defined which has continued, that executive manage- rights, responsibilities, and resources to ment was insufficiently accountable. It was monitor and check the power of the compa- a series of major financial scandals that ny’s executive management, that NEDs7 re- prompted the more formalised approach in view and report on company finances with Cadbury, but even before this it was widely the aid of independent audit committees, and accepted that proper board supervision was that shareholders gain the right to reliable important to economic performance. In the information about finances, and regular op- 1970s and 1980s there had been initiatives portunities to vote on directors.8 by the institutions and by the CBI, as well as the Bank of England, to improve board struc- Cadbury was followed in 1995 by the set- ture and performance. ting up of the Study Group on Directors’ Re- muneration (the Greenbury Committee), and Following the financial scandals of the 1980s then by the Hampel Committee on Corpo- the corporate and investment communities rate Governance, which reported in 1998. proposed a code of best practice, in part to The former was established in response to pre-empt pressure for more formal require- public disquiet about the scale of directors’ ments. The Cadbury Committee on the Fi- remuneration in privatised utilities, where nancial Aspects of Corporate Governance directors were being paid considerably more produced the first Code of Best Practice in than they were before privatisation for argu- 1992. The provisions of the Code were not mandatory (even in the context of a non- statutory system). Subsequently, however, 7 they were made a condition of stock ex- PRO-NED published a voluntary code of practice in 1987, requiring NEDs for large companies, which change listing. The listing rules imposed an the Cadbury Committee adopted by requiring NEDs obligation on companies to disclose in their on audit and remuneration committees. Unlike the annual accounts whether they were in com- proposed EC Fifth Company Law Directive, they do pliance, and if not, the reasons for not con- not have powers of appointment to the executive board. Parkinson, 1993: 193–196. At the time he forming to the Code’s requirements. The in- was writing, the stock exchange had not adopted the tention was to preserve flexibility: the as- Code into its Listing Rules. sumption being that compliance with the 8 Code would in most cases be appropriate, The Cadbury Committee advocated that audit committees’ capacity for independence should be but that particular circumstances of a com- promoted informally through the Auditing Practices pany might justify a departure. The disclo- Board, which would propose standards for the busi- sure requirement would make governance ness community. This was designed to set a standard arrangements transparent, and shareholders which shareholders can demand the company adopt, or which companies can adopt in anticipation that would be able to put pressure on manage- the investor market will either demand it or demand ment, through the market or by other means, a premium for non-compliance (Cadbury, 1992).

ably carrying out much the same role. A great about governance, and of participating in deal of adverse publicity was also being at- dialogue with management, though there are tracted by the very generous terms and con- no means of enforcement for these recom- ditions awarded to directors in other areas. mendations. The establishment of the Greenbury Commit- tee (by the private sector, but with govern- In 1998 the newly elected Labour government encouragement) was an attempt to deal ment launched a fundamental review of com- with an issue that was bringing the privatisa- pany law. It indicated that it believed that tion policy into disrepute and a response to codes of practice were in general an appro- mounting criticism about ‘fat cats’ more gen- priate way of dealing with governance issues, erally. As with Cadbury, it was a more flex- but did not rule out the possibility of statu- ible, but also more ideologically palatable tory intervention where the present approach alternative to state intervention. The main needed a legal underpinning or was seen not recommendations of Greenbury were that to be working (Department of Trade and In- pay and other conditions should be set by a dustry (DTI), 1998a). These matters are cur- remuneration committee comprised entirely rently under consideration (DTI, 2000). Rel- of independent NEDs, and that more detailed evant issues concern whether the monitor- information should be publicly disclosed ing (as distinct from advisory or strategic) role about pay and its determinants. of non-executives is effectively carried out and whether boards have enough, particu- The perception that this approach was not larly independent, NEDs to be able to disci- working (if anything, pay was rising at a faster pline an intransigent management. As regards rate, among other factors, because disclosure remuneration, the government has come was stimulating a ‘catching up’ effect) was round to the view that the private sector ini- one reason for the appointment of the tiatives have not succeeded and is planning Hampel Committee. More generally, its func- some form of legislative intervention. The tion was to review the operation of the possibilities on which it has consulted in- Cadbury Code and look at the role of share- clude increasing shareholder control over holders in governance. Despite some criti- pay by requiring a shareholder vote on re- cism of an over-emphasis in the way in which muneration policy, or requiring the chairman Cadbury was being applied on the monitor- of the remuneration committee (to be put on ing role of NEDs, at the expense of their con- a statutory footing) to be elected each year tribution to strategy, the Hampel recommen- (DTI, 1999a). dations, now contained in the Combined Code, somewhat strengthen the Cadbury pro- The other main governance mechanism is the visions relating to monitoring. In particular, hostile takeover. This was not a deliberate the Combined Code provides for a lead in- invention of public policy, but evolved with dependent NED to be identified in the an- changing attitudes in the 1950s (going over nual report, and for a third of the board to the head of the board with an offer to the comprise non-executives, a majority of shareholders having previously been re- whom are to be independent (as opposed to garded as ‘ungentlemanly’), and in particu- three non-executives, in Cadbury). Reflect- lar the availability of reliable financial infor- ing long-standing criticisms that the institu- mation on the target company after the re- tions were failing to take seriously their gov- forms in the 1948 Companies Act. The takeo- ernance responsibilities, the Code stresses ver mechanism was subsequently substan- the importance of shareholders exercising tially bolstered by the self-regulatory City their voting rights, of evaluating disclosures Code on Take-overs and Mergers, the main

concerns of which are to secure the equal nouncing the Review, the government invited treatment of shareholders in the target com- consideration of whether arguments that di- pany and to prohibit defensive tactics on part rectors should have regard to a wider range of the target management that would have of interests than those of the shareholders the effect of depriving the shareholders of the were just ‘interesting philosophical ideas and right to determine the outcome of a bid.9 ideals’ or ‘whether they lead to concrete pro- There has long been doubt about the effec- posals that should be pursued’ (DTI, 1998a: tiveness of takeovers as a means of disciplin- para. 3.7). The background to this invitation ing management, about their broader eco- was the interest expressed by the Labour nomic effects, for example as possible con- Party before the 1997 general election in tributors to short-termism, and their social stakeholder approaches to the company and consequences (redundancies and increased society more generally. In the light of the insecurity). Nevertheless the City has lobbied terms of reference of the Review, the issue very effectively to prevent intervention in the has been approached by examining whether takeover market. Proposals by Labour when economic performance might be improved in opposition to reverse the burden of proof by broadening the range of groups whose in references to the Monopolies and Merg- interests directors must consider, and busi- ers Commission (now the Competition Com- ness responsibility/accountability questions. mission) were dropped in office, for exam- The intention has not been to use company ple, and the Takeover Panel has mounted law for redistributive purposes, nor has ineffective opposition to the EC Takeovers Di- creasing employee participation in decision- rective, notwithstanding its marginal impact making been recognised as desirable in its in the UK. Perhaps the outstanding feature own right (DTI, 1999b: ch. 5). in relation to public policy and shareholding/ governance has been the willingness to leave The economic case for moving away from major issues to self-regulation. The positive an exclusive shareholder focus has centred interpretation of this is that the system is ba- on the problems of fostering long-term co- sically sound, but will benefit occasionally operative relationships between companies from technical adjustments which can be and their employees, customers and suppli- made ‘flexibly’. A more critical interpreta- ers. Concern has been expressed that many tion is that the political will to remedy quite British companies fail to take advantage of major defects in the system has been lack- the value-creating potential of such relation- ing. ships and are overly reliant on short-term, arm’s-length dealings. Studies by the Tomor- Another important issue for the Company row’s Company project (Royal Society of the Law Review instigated in 1998 is whether to Arts, 1995) and the Commission on Public retain the exclusive shareholder orientation Policy and British Business (1997) identified of company law in the UK, or to move in the this as one among various reasons (such as direction of a ‘stakeholder’ model. In an- low investment in research and development) for the large proportion of British companies that underperform compared to their overseas competitors. The responsibility/account- 9 A controlling interest is defined as 30% of the ability debate centres on whether it is suffi- voting rights. The Panel reserves the right to approve cient to rely on ‘external’ forms of social con- partial bids that fall under the 30% threshold, or under the 50% threshold if the offeror states a trol over companies, such as environmental distinct target, and 50% of the voting shareholders and consumer law, or whether these should approve. be supplemented by imposing more compre-

hensive responsibilities on directors through effectively regulated itself in 1999, and the company law to take account of the impact Blair government’s intention to establish a of the company’s actions on others. As re- standards and certification body independ- gards both the competitiveness and respon- ent of the profession was still being negoti- sibility issues, it looks as though the recom- ated at the time of writing in order to instil mendation will be to retain an overall respon- more confidence in investor protection in the sibility to shareholders, but that this should UK (DTI, 1998a). In general, pressure from be understood in an ‘inclusive’ way (DTI, the EU was important in bringing about 2000: ch. 5). In relation to directors’ duties, change, and the need to bring the UK more this would not involve a major change in the into line with European developments was law, but it is proposed that for the first time one of the reasons for the setting up of the these should be made explicit by putting Company Law Review in 1998. But British them into legislation, and in a form that governments remained opposed to the idea draws specific attention to the importance of drawing up a model constitution for the to the success of the business of fostering European company. relationships with participants, moderating adverse environmental and community im- (ii) Companies and Employees pact, and protecting the company’s reputa- The Conservative governments between tion. The counterpart to these proposals is 1979 and 1997 abandoned the attempts, disclosure of information on performance in whose high point was reached in the Bul- each of these areas where material. The in- lock Report, to incorporate trade unions into tention is that the obligation to disclose will the decision-making processes of the com- increase company sensitivity and strengthen pany, and instead brought in a raft of new the position of interested parties to put pres- laws designed to curb the powers of trade sure on companies to improve performance. unions, and to reassert the authority of man- Whether the government will adopt these agers within companies. In this bid they were proposals will not become clear until after largely successful. Aided by high levels of the final report of the Review in 2001. unemployment, the collapse of traditional industries, privatisation, and victories in a EC directives designed to enhance investor number of high-profile strikes, the govern- confidence in European capital markets in- ment effectively withdrew most of the troduced the first statutory accounting and immunities which trade unions had enjoyed reporting standards in the 1980s. Require- since the beginning of the century, and trade ments to report ‘true and fair value’ were first unions were shut out from political influence introduced in 1981 to comply with the EC’s at the national level10 (Marsh, 1992). Under Fourth Company Law Directive. The 1985 the Conservatives trade unions were seen as Companies Act further encouraged account- having nothing to contribute to the public ants to establish a standards-setting body to interest, and it was hoped that they would provide some consistency to accounts, and wither away as the economy became reor- directors’ and auditors’ reports, as required ganised on more individualist and entrepre- by the new law. In the absence of such a neurial lines. The only public interest which body, the 1989 Companies Act mandated an the government acknowledged in respect of Accounting Standards Board to regulate ac- companies was shareholder value, and al- counting association standards, company though it displayed some interest in em- auditor qualifications, and their practices in ployee share ownership, it showed little con- compliance with the EC’s Eighth Company cern with providing channels of representa- Law Directive (84/253). The profession still tion within the workplace or providing a le-

gal status for employee rights. At best it as- The changes associated with New Labour can sumed that well-managed companies would be traced back to the far-reaching policy re- pay proper attention to the needs of their view inaugurated under the leadership of employees. The only public interest it ac- Neil Kinnock in 1987, and which was fur- knowledged was the preservation of the free- ther developed under his successors, John dom of individuals and firms to act without Smith and Tony Blair. The new approach interference from unions and the state. emphasized individual rights as the basis of industrial relations and labour protection. These attitudes came under pressure both There was no question of returning to the from the European Union, most of whose former adversarial voluntarist arrangements, member states had very different attitudes nor any desire to experiment again with towards industrial relations and trade unions, corporatist institutions. But there was a firm and from domestic political changes, in par- intention to introduce a durable and less one- ticular the growing political challenge from sided legal framework for industrial relations, a revived Labour Party with new ideas about which would bring Britain closer into line industrial relations. The pressure from the EU with other EU member states. One of the first came through the European courts, which actions of the Blair government elected in trade unions in Britain had learnt how to 1997 was to sign the Social Chapter of the exploit, and through attempts to deepen the Maastricht Treaty. It also introduced a mini- process of European integration by harmo- mum wage and, after wide consultation, pub- nising institutional arrangements in areas lished its proposals on industrial relations in such as labour law. An example of the latter the Fairness at Work White Paper (DTI, was the Social Chapter of the Maastricht 1998b) which gave significant new rights to Treaty, which proposed some (fairly general) both individual workers and trade unions, social rights to be applied across all mem- including setting out conditions under which ber states. This was too much for the Major firms must agree to trade union representa- government, which insisted on an opt-out tion (Taylor, 1998; Gamble and Kelly, 2000). from this clause. But the government also made it plain that it did not want to impose legal constraints on companies which might reduce flexibility and significantly increase costs. Like its pred- 10 Between 1980 and 1993, successive revisions of ecessor, it therefore remained opposed to any labour legislation removed mandatory recognition, more radical suggestions from the EU mak- restricted the right to strike and enhanced the capacity of individual employees to challenge unlawful ing it obligatory for companies to establish industrial action and financial management by mak- works councils or to provide major statutory ing them liable for economic losses incurred. The improvements to working conditions, such 1993 Trade Union and Labour Relations (Consoli- as the length of the working day. New La- dation) Act restricted the right to strike. The Trade Union Reform and Employment Rights Act (1993) bour adopted an enlightened shareholder- provided new deterrents to strikes by giving indi- value model of the company and was pre- viduals the right to seek legal redress for the with- pared to legislate to ensure that minimum drawal of goods and services because of unlawful standards and rights were protected. But it industrial action. Legal aid is also made available to them. In addition, the law instituted the office of a did not favour a more proactive stance. Commissioner for Protection against Unlawful In- dustrial Action. Until 1999, employers were not The 1999 Employment Relations Act intro- obligated to recognise unions, consult or negotiate duced procedures for union recognition and with them or with employees. Restrictions on union activity were tightened throughout the 1980s and collective bargaining that increase the like- until 1993 (Bowers, 1997: 9–10). lihood of organised employer–employee re-

lations at the plant level for all firms with 20 pension provisions (Bowers, 1997: 432–4). or more employees, although it is too early The codes do not have legal force, but serve to tell what impact the Act will have on Brit- as a benchmark in disputes that are concili- ish industrial relations. The Act provides for ated or brought before an industrial tribunal. mandatory employer recognition of unions Finally, the Employment Relations Act imple- under the direction of the Central Arbitra- ments the EU Working Time Directive, which tion Committee, CAC-imposed collective business opposed on account of its restric- agreements if the parties are deadlocked af- tions on the capacity of firms and employ- ter three months of negotiations, and a three- ees to negotiate their terms of employment year moratorium on employer applications individually. Employers have also been dis- to withdraw recognition from the union in mayed by the need for a regulatory body that question. However, initial provisions for sets rules. rapid recognition of a union without a formal ballot were removed to satisfy employer A stronger public interest agenda is evident concerns about due process. Taken together, in legislation on health and safety matters, these measures demonstrate a strong concern and, with some reluctance, on information on the part of the government that employ- and consultation on redundancies. Health ers should take organised labour seriously as and safety protection regulations changed partners in the workplace, where the employ- British corporate governance in the 1970s ees wish to be represented. The formula with the 1974 Health and Safety at Work Act struck the middle road between business in response to a report on workplace haz- opposition to mandatory recognition, which ards. For the first time, employers had a re- went unheeded, and union desire to achieve sponsibility to prevent accidents causing recognition rights similar to those in other harm at work, rather than merely being li- parts of the EU (TUC and CBI, 1998). The able to pay damages. The Act established the CBI opposed mandatory recognition on the Health and Safety Executive to advise the grounds that collective bargaining was not government on detailed regulations and in- practicable when only one partner was will- form businesses on compliance (Barrett and ing to engage in it (TUC and CBI, 1998), and Howells, 1995: 50–1). It also provided for they received political support from the Con- employee participation in the form of safety servatives. representatives, but did not mandate them. Regulations passed in 1977 allowed recog- The legislative agenda does not extend to nised trade unions to appoint safety repre- requiring all companies to inform and con- sentatives to participate on company com- sult their employees over company policies mittees (Barrett and Howells, 1995: 52). and operating procedures, as many German companies do through works councils. Un- The 1992 Management of Health and Safety ions must be consulted on health and safety at Work Regulations11 built on these princi- issues, discussed below, and other issues ples, and were designed to implement EC mandated by EU regulations, provided that the union is recognised. Otherwise, voluntary consultation is based on ACAS-issued codes of practice on disclosure, including a 11 Workplace (Health, Safety and Welfare) Regula- depiction of the company’s production and tions 1992; Provision and Use of Work Equipment financial profiles, pay, benefits, information Regulations 1992; Personal Protective Equipment at Work Regulations 1992; Manual Handling Opera- on the situation of employees in the plant, tions Regulations 1992; Display Screen Equipment as well as on health and safety issues and Regulations 1992.

directives passed in 1989 to ensure company ernment has resisted the initiative, citing the responsibility for safety in the workplace. argument that subsidiarity allows countries They went further, however, in that they ob- to manage industrial relations at the national ligated employers to train employees and level (European Industrial Relations appoint competent safety officers for the first Observancy (EIRO), 1998a). time. The Regulations are given further substance by the Approved Code of Practice for The Blair government has taken the same ap- the management of health and safety at work, proach to European works councils. The gov- issued by the Health and Safety Commission. ernment tabled a proposal to break the dead- Failure to comply with the code is not an lock on developing a European Company Stat- offence, but employers who violate it may ute along the lines of the Davignon Report on be held accountable to its standards as a company structure (1997) by proposing a new criminal violation under the 1992 regulations formula for negotiations between employees or the 1974 Act. This underlines the decen- and employers of European companies, which tralised nature of enforcement, and the re- would allow, but not mandate, the develop- luctance to set up regulatory bodies with en- ment of works councils and codetermination forcement powers. The employer is given the (EIRO, 1998b). Under this proposal national responsibility to assess risks and hazards to differences would persist. The TUC has con- health and safety in the workplace, to pre- cluded that the prospect of codetermination is vent and minimise risks, to inform and train a political non-starter in the UK. It decided that employees and to monitor their health dur- calling for some form of codetermination or ing working hours while taking advantage of works councils would clash so strongly with new technology. Employers are required to prevailing opinion in government circles that assign staff with sufficient resources and time it would endanger less controversial objectives to do the job (Health and Safety Commis- that the TUC wished to promote. The key to sion, 1992). the future of employee–employer relations in British corporate governance depends on un- The 1992 Trade Union and Labour Relations ion recognition, since consultation and coop- (Consolidation) Act required employers to in- erative decision-making depend on whether or form employees about work conditions and not unions are recognised. The Blair govern- employment policies, but only if the comment has introduced measures that promote pany recognised trade unions. In 1995, the stable industrial relations and cooperative de- European Court of Justice forced the Major cision-making, and make it easier for unions government to implement EU measures re- to gain recognition. But this new approach only quiring companies to consult with employ- extends for the moment to those companies in ees in the case of redundancies, whether or which unions are recognised, and is vulner- not it recognised unions (Bowers, 1997: 11).12 able to reversal once more, should the Con- The European Commission has tried to widen servatives return to office, since they continue this requirement, by proposing that all Euro- to oppose any measures that facilitate union pean companies inform and consult their recognition. As the German case shows, the employees on a range of issues whether or acceptance by companies of new responsibili- not these employees belong to unions and ties depends significantly on the political re- the unions are recognised. But the Blair gov- solve of government to pursue a public interest agenda, and to enlist support for it. The kind of industrial consensus that still exists in Ger- 12 Commission of European Communities v. UK many on the responsibilities of companies is [1994] IRLR 412. much weaker in Britain.

(iii) Companies and the Community Given the diversity of enterprises in terms of In the traditional view of the Anglo-American size, legal status and sector, it is inevitable company wider community interests, such as that corporate responsibility towards com- equal treatment of customers and employ- munities covers a continuum of activities and ees or protection of the environment, are best approaches. Two broad perspectives can be served by companies pursuing the interests identified. First, there are those firms for of shareholders within a competitive market. which corporate responsibility translates into If there are adverse ‘third-party’ effects then a commitment not to undertake socially un- these should be addressed through externally acceptable practices (for example, using sup- imposed regulation. There is little attention pliers who employ child labour). Second, given either to the creation of governance there are those firms which espouse the mechanisms within the firm to resolve pub- widely cited ‘business case’ for developing lic interest issues, or to the role of govern- and monitoring sustainable relationships ment in providing incentives to firms to en- with key stakeholders such as employees, gage in particular modes of behaviour. On suppliers and local communities (RSA, 1995). specific public interest issues, the govern- These relationships can provide companies ment urges publicity and transparency on with a store of popular legitimacy and trust companies, but only imposes cooperative – a ‘licence to operate’ – which constitutes a decision-making procedures, in the way that source of competitive advantage. Conse- Germany does, when implementing EU di- quently, there is no long-run trade-off be- rectives. tween the interests of stakeholders and shareholders (Grayson, 1996). A more complex Corporate Responsibility notion of this business case argues that com- There is, however, a long tradition of corpo- panies are institutions which need to be gov- rate responsibility towards local communi- erned by a set of rules and values which en- ties, reflecting the view that enterprises sure legitimacy even if this occasionally en- should operate according to the same ethi- tails sacrificing short-term profit-maximising cal and social norms as the rest of society. It behaviour (Kelly and Parkinson, 1998). used to be thought of in terms of charitable donations and ‘good works’, in line with the This second perspective is clearly of rel- traditional American ideal of corporate phi- evance to efforts to integrate new public in- lanthropy, but over the last decade in par- terest considerations into the evolving ticular there has been an increase in the agenda on corporate responsibility in the UK. number of executives in large and medium Corporate responsibility is interpreted firms who believe that corporate responsi- proactively; the company has a positive re- bility in relation to local communities im- sponsibility to adopt, rather than avoid, cer- plies behaviour different from corporate phi- tain norms of behaviour in relation to com- lanthropy and mere compliance with formal munities. It makes corporate citizenship a legal and regulatory obligations (Cadbury, central issue for business strategy, particu- 1992). There is, however, little consensus as larly as regards policy on human resource to the form that these additional measures management and recruitment policy. It also should take, the rationale for adopting them, assumes that this ‘licence to operate’ will not or the extent of their coverage. Moreover, be static. As social trends and attitudes evolve survey evidence suggests that only 31% of so will the terms of the licence. This widen- senior executives agree that they have a ing of the scope of corporate responsibility wider responsibility to ‘society and commu- does not mean, however, that the traditional nity’ as well as to shareholders (MORI, 1996). UK mode of dealing with public interest is-

sues has been superseded. The new approach eas the legal imposition of minimum stand- is far from being accepted by all firms. There ards remains critical. Two are given particu- is a wide variation of opinion both within lar consideration here: equal treatment issues and between different sectors as to how com- and environmental protection. panies should relate to the community. Nev- ertheless a change of view is discernible. This Equal Opportunity and Equal Treat- widening of the understanding of corporate ment responsibility in relation to the community The 1970 Equal Pay Act made it unlawful to reflects a number of factors: shifts in attitudes offer men and women different pay or con- towards the involvement of the private sec- ditions for the same work; this was extended tor in areas which have traditionally been to work of equal value by the 1983 Equal the domain of the public sector; a change in Pay Regulations. The Equal Opportunities the policy agenda coming from government; Commission (EOC) is responsible for over- and a recognition by companies that the im- seeing compliance, investigating complaints, provements in popular legitimacy which can and for administering a Code of Practice on flow from a strong community profile can be Equal Pay. The 1975 Sex Discrimination Act a source of commercial advantage. (SDA) broadened the prohibition on discrimination to cover employment and business The new thinking is reflected in the DTI’s transactions, both direct and indirect – the Company Law Review (1998–2001) which letter understood as unjustified rules which is considering the merits of extending direc- are formally applied to all persons, but which tors’ duties to stakeholder groups such as the make it difficult or impossible for one sex to local community, as well as in the White comply. However, business won exceptions Paper on competitiveness (DTI, 1998c) where sex could be deemed a genuine oc- which stresses the importance of highlight- cupational qualification for the job,14 and ing best practice on corporate responsibil- where positive action is taken to help men ity, and the 1998 Pre-Budget Statement which or women compete on equal terms in the announced a review of fiscal incentives labour market. With respect to these issues, which might foster the involvement of companies with the community. Another important area of policy deliberation in this regard is the Inland Revenue’s Review of Charity Tax 13 In addition to policy initiatives aimed at imposing which will help determine the tax treatment or promoting modes of behavior across all firms in relation to the wider community, there are a number of giving and (perhaps more importantly) giv- of policy debates and instruments which apply only ing in-kind by companies.13 In all these in- to particular sectors. This is particularly the case in stances government is seen to have a major relation to the privatised providers of key utilities role to play in influencing the development (water, electricity, telecommunications), but also to the providers of basic services such as banking and of corporate responsibility. In relation to insurance. Here the ‘community’ in question con- non-employment issues, the main trend has sists of customers excluded from key services due to been towards the use of a variety of mecha- low income or some other form of disadvantage. A nisms to influence corporate behaviour range of policy options are being considered to broaden access to these services, ranging from bind- which do not impose legal obligations: for ing universal service obligations on firms, to the instance, moral suasion involving the ‘nam- empowerment of consumer groups within the struc- ing and shaming’ or ‘naming and praising’ of ture of the company, and to the threat of regulation individual firms; and the use of a spectrum if companies do not adopt voluntary codes. (See Kelly and McCormick, 1999). of fiscal instruments such as subsidies, tax credits or and tax holidays. But in other ar- 14 To be defined on a case-by-case basis in tribunals.

the Acts are negative in their prescription, The 1976 Race Relations Act (RRA) deals since they require no standard operating pro- with direct and indirect discrimination on the cedures or structural features within the com- basis of racial, national or ethnic origins. pany, and are limited in their impact, since Complaints are handled through industrial corrective action takes place on individual tribunals in the case of workplace disputes. application to industrial tribunals. The SDA As with the SDA, the RRA applies to all em- also outlaws sexual harassment and holds ployers, with a few notable exceptions in employers responsible for the actions of their which race is deemed a ‘genuine occupa- employees in some cases. Companies must tional qualification’. At present, this means develop an internal policy on harassment, acting jobs, but also working in cafés and including grievance procedures and coun- restaurants and delivering personal social termeasures to protect themselves from liabil- services to a particular racial group. The RRA ity in the event of a complaint. In 1994, the also forbids affirmative action programmes Criminal Justice and Public Order Act opened or measures aimed directly at hiring or pro- up the possibility that sexual harassment motion. The Commission for Racial Equality could be treated as a criminal offence. (CRE) investigates complaints provided that reasonable grounds for suspicion of discrimi- An important area of indirect discrimination nation are present. The CRE also sees itself pertains to rights associated with maternity as an active agent in promoting new attitudes leave. Employers are required to uphold the toward discrimination. Residents are encour- terms of an employment contract when an aged to know their rights, and to complain employee returns from maternity leave, and when they feel abused. The CRE is not satis- must show that redundancy decisions were fied with the RRA’s effectiveness among Brit- not motivated by the employee’s absence. ish firms, and lobbied Parliament in 1998 to However, the law allows loopholes such as adopt EU directives to bring the treatment of whether it is ‘practicable’ to offer the em- racial discrimination in line with that for ployee similar employment, and requires sexual discrimination. It also sought greater plaintiffs to seek redress from employment powers for itself to monitor discrimination tribunals on the basis of a breach of contract, and initiate prosecution, and to impose on which can be difficult to enforce. The 1999 public and private managers a duty to com- Employment Rights Act introduced a longer bat discrimination. maternity leave (unpaid) and implements the EU parental leave directive, which aims to Discrimination against people with disabili- help reconcile the responsibilities of work ties is managed along the same pattern as and parenthood for both sexes. Employees sex and race discrimination, in the 1995 Dis- gained the right to time off for family emer- ability Discrimination Act. The Act estab- gencies, and easier access to the qualifying lished the National Disability Council (NDC) period for extended maternity leave – from under the Secretary of State for Employment two years to one (EIRO, 1998c). This in part and Education to establish and develop a reflects pressures from the European Union code of practice on discrimination that does (e.g. directives on parental leave, and the not confer direct legal liability on discrimi- proposals in the Partnership for a New Or- nators for their actions, but may be used in ganisation of Work Green Paper (EC Com- hearings at industrial tribunals to provide a mission, 1998, DG-V). The treatment of other reference point for rulings. By 1 October equalities issues is also starting to shift the 1999, companies were required to change traditional mode of external regulation. policies and practices that deter disabled customers or potential employees in accord-

ance with the code (NDC, 1999). The NDC and the Regions (DETR), 1998a). The public must consider the costs of its recommenda- must be notified of the proposed develop- tions, and devotes much of its activity to ment, have access to the environmental state- developing partnerships with businesses and ment, and have the opportunity to comment associations to develop role models for the (DETR, 1998b; Cullingworth and Nadine, rest of the corporate community. In its 1999 1997: 181). annual report, the NDC called on companies voluntarily to develop policies and prac- A different approach, and one which better tices to allow disabled people equal access reflected the thrust of EU policy, was first and employment opportunities, but consid- evident in the Environmental Protection Act ered more intrusive regulation an option if 1990, which introduced the first require- firms failed to oblige. One side-effect of the ments for integrated pollution control – a partnership approach, however, is that a pat- change of corporate governance practices tern of industry-specific codes is developing. with the intent of reducing and preventing The DDA covers trade associations as well pollution – applicable to a limited range of as employers, and details a wide number of businesses, in response to recommendations means by which discrimination may take by the 1976 Royal Commission on Pollution. place in the modern workplace, both in hir- However, it applied the less stringent standing practices and in membership rules. To ard of Best Available Practice Not Entailing date, however, research conducted on the Excessive Cost (BATNEEC), rather than the NDC’s behalf shows that 43% of UK busi- standard preferred by the Royal Commission, nesses have not complied with the code, the Best Practicable Environmental Option, even when contraventions have been pointed which in itself remained less ambitious than out to them (NDC, 1999). the European Commission’s preference for a Best Available Technology standard Environmental Protection (McEldowney and McEldowney, 1996). It Protecting the environment became a mat- thereby underlined the importance of mini- ter for external regulation affecting compa- mising the cost and intrusion on business nies in the Town and Country Planning Act activities (McGuinness and Richards, 1999: 1948, which required local authority clear- 27). Interaction between public authorities ance for certain types of new developments and companies was also kept to a minimum and installations. Until 1990, new versions by relying on prosecutions and fines for pol- of the Act did not interfere with the internal luters under the polluter-pays principle operations of structure of companies, but (Cullingworth and Nadine, 1997: 171). simply extended the scope of application. Even the 1988 Town and Country Planning The 1995 Environmental Protection Act cre- Regulations, which implemented EEC Direc- ated the Environment Agencies15 after the tive 85/337 mandating environmental assess- Major government acquiesced to long-stand- ments of installations, only served to widen ing demands for more stringent controls on the scope of operations subject to manda- companies by the environment lobby. On this tory requests for assessments. They obliged occasion, industry offered to cooperate with companies to assess the environmental ef- the regulators if they were given a one-stop fects of proposed new developments on natural resources, all forms of life, the landscape, climate and the area’s cultural heritage, and 15 Two agencies were created: the Environment to suggest means of mitigating the impact Agency for England and Wales; and the Scottish (Department of the Environment, Transport Environmental Protection Agency for Scotland.

shop at which they could sort out their envi- IPPC, and are made substantial for compa- ronmental responsibilities (Cullingworth and nies through a series of permits that specify Nadine, 1997: 173). The Environment Agen- emission limits, performance standards and cies gained the power to investigate the ap- annual reporting requirements (Environment plication of Integrated Pollution Control in Agency, 1999). 1996 (focusing on emissions), and to publicise the names of companies which had been The Environmental Impact Assessment (EIA) fined for environmental damage Regulations 1999 implement another EU (McGuinness and Richards, 1999: 22–28).16 Council Directive (97/11/EC), and came into A significant upgrading of corporate respon- force on 14 March 1999. This formalises the sibilities, with implications for internal gov- relationship between companies and plan- ernance, was first passed with the Pollution ners by requiring that local planning authori- Prevention and Control Act of 1999. The Act ties give notice in writing, with a public jus- implemented the European Union’s Inte- tification, that a company is required to un- grated Pollution and Prevention Control dergo the EIA. The directive allows each (IPPC) Directive (61/96), which regulated a member state to set the thresholds at which significantly wider range of pollution sources, an assessment is deemed necessary, and re- and consequently, a larger number of British quires it to publish its standards, so that trans- businesses than previous legislation. parency of standards in Europe is achieved. The directive also makes assessments man- From 1999 the Environment Agencies have datory in 14 areas that focus on resource been responsible for monitoring and enforc- extraction, infrastructure projects, handling ing the IPPC Directive. It adds to the UK’s and processing of chemicals, and any proc- existing Integrated Pollution Control system ess that impacts on water resources (DETR, to cover noise, vibration and environmental 1998c). accidents. It applies to entire production sites rather than specific processes within it, ap- Despite the environmental concern of the Blair plies for the first time to heat, noise, light, government, and Conservative claims that the vibration, energy consumption and accident government paid little attention to the cost of prevention, and is extended beyond indus- the new measures,17 cost still plays an impor- trial operations to food-processing facilities tant role in committing national businesses to and landfill sites (McGuinness and Richards, environmental protection. Implementation of 1999: 33; Environment Agency, 1999). Com- the EC Packaging Waste Directive leaves con- panies are required to commit themselves to siderable room for interpretation at the national using best available techniques rather than level, leading to less stringent application in the BAPNEEC standard to prevent pollution Britain than Germany’s packaging recycling and waste, recycle where possible, conserve laws (Environment Agency, 1997). The Blair energy, prevent accidents and return the site government was also a central player, in con- to its original condition at the end of opera- junction with the Schröder government in Ger- tions. This represents a significant departure many, in delaying and minimizing the cost of from the cost orientation of previous legisla- an EU directive requiring car manufacturers to tion. The last three items are new under the recycle used cars.

16 IPC existed since 1991, but regulation had been 17 Lord Jenkin, quoted in McGuinness and Richards dispersed to a variety of agencies. (1999: 41).

The initiatives on environmental protection more liberal capital markets. In the process, and on equal opportunity reflect an impor- many fundamental questions of the rights of tant shift in the understanding of the role of investors and shareholders have been revis- government in influencing how firms display ited. The older constitutional model of deci- corporate responsibility to the wider com- sion-making has not been overthrown, but it munity. But these trends do not yet signify a has been placed in a new context. The core shift towards a German-style institutions of the supervisory board and constitutionalisation of public interest issues codetermination have been left intact, but the inside the firm. The increased role of gov- context in which they operate has been ernment, however, in assuming responsibil- changed through the adoption of measures ity for providing incentives or regulations promoting corporate disclosure, market-ori- which make companies more responsive to ented accounting, performance-oriented ex- evolving public interest issues does mark a ecutive remuneration, and more flexible use significant departure from the traditional UK of corporate equity. These regulatory changes model. have reinforced the trends which already existed towards declining bank influence. In Britain, where liberal capital markets have been well established for much longer, the CONCLUSION direction of change has been towards the recognition of the need for more explicit forms This report has argued that there are impor- of external regulation of companies, as well tant differences in the way in which the pub- as the beginnings of consideration of how lic interest is understood in relation to the internal practices should be reshaped to re- company in Britain and in Germany. These flect public interest concerns. differences are the result of different paths of historical development which resulted in These changes do not amount to conver- different legal and political assumptions for gence of the two systems (Vitols et al., 1997). the company in the two countries. These dif- What seems to be emerging is an increasing ferences continue to shape current policy split within each economy between two debates on the public interest in relation to kinds of firms. In Germany there have been the company. As Part II of this report dem- important structural changes which have onstrates, many of the central features of both meant an increasingly diverse pattern in the the British and the German company perform of companies. The constitutional firm sisted through the 1990s. The idea of the continues to dominate, but tends to be company as a private association was still weaker in the new growth sectors, which are highly influential in Britain, while the idea most exposed to international capital mar- of the company as a constitutional associa- kets, as well as in the new states of the former tion, built around cooperative decision-mak- GDR, and is so far showing few signs of taking, still shaped attitudes in Germany. ing root there. In Britain there is a sharp divide between companies which recognise Despite this continuity, however, this report unions and those which do not. The former has nevertheless demonstrated how public are characterised both by the degree of con- interest agendas in relation to the company sultation with employees which takes place have shifted in both countries, although so as well as by their acknowledgement of their far perhaps more so in Germany than in Brit- wider corporate responsibility. The advent of ain. In Germany, pressure has been increas- a Labour government in 1997, and the raft ing from many sources in the last decade for of new legislation on public interest issues,

including labour laws, which it introduced, the assumptions of their own national legis- suggested the possible growth in the number lation, while Germany sought to have works of ‘stakeholder’ companies, whose ethos, ori- councils and codetermination introduced as entation, and internal structure are markedly part of the model constitution for the Euro- different in important respects from the tra- pean Company. ditional model of the company as a private association. Nevertheless the traditional The report also demonstrates how important model is far from dead, although it is cur- is the role of government in negotiating, de- rently under more pressure than it has been fining, formulating and implementing the for some time. Labour’s Employment Rela- public interest. Governments have many dif- tions Act of 1999, with its support for many ferent tools at their disposal; they can use of the structures, such as union recognition, public speech and public persuasion; they which underpin the stakeholder company, can draft new laws, and seek compliance has the potential to reinforce the divide be- with them through legal and administrative tween different kinds of British companies authority; they also increasingly seek to still further. Under the Blair government the achieve their aims indirectly by empower- idea of the company as a private association ing other bodies to act on behalf of the pub- is weaker than it has ever been. If its poli- lic interest. Such bodies can be both public cies succeed, it will bring employer–em- and private, and include regulatory agencies ployee relationships closer in line with those and professional bodies such as private au- in Germany and with other countries in the diting associations. The increasing range and EU. complexity of the regulatory state is one of the key developments of modern govern- One of the strongest pressures and rationales ment. Regulation itself now takes many for change in both countries has come from forms. Examples include environmental au- the EU. Where European directives exist, diting, which is incentive-based rather than British governments are generally ready to obligation based. Companies gain goodwill act. The government is keen not to burden from commitment, good performance and British firms with regulations and responsi- publicity. It replaces more traditional com- bilities that their EU counterparts do not pany obligations to adhere to environmen- have, but is also increasingly willing to tackle tal protection standards and equal treatment issues of broad concern to the public inter- in the workplace and on the labour market. est in concert with its European partners. The This is an alternative to direct regulation – European Union has therefore emerged as a often only a company officer responsible for crucial arena for the definition and imple- a particular policy area interacts with the mentation of the public interest in relation regulatory body. These forms of self-regula- to the company. This works in a number of tion, however, do not necessarily mean a ways. Both the European Commission and relaxation of stringency in standards and individual member state governments take application. They may under certain condi- initiatives. The Commission is responsible for tions enhance performance above and be- formulating and promoting directives, while yond what is required by law. This form is individual member states often seek to relatively new in Germany in the case of project their own national practice as the environmental regulation, and also in the European norm. Britain and France, for ex- case of equal treatment issues, which are ample, supported EU directives on more handled principally, though not exclusively, open financial markets and on the impor- through the works councils. Although it re- tance of shareholder value which reflected mains much less dominating than the super-

visory board and works councils, the will- coming less representative of their respec- ingness of the German state to impose its tive economies, but they are still important presence in this fashion is a departure from for understanding characteristic attitudes to its traditional policy of allowing firms and the public interest in both countries employees to sort out many matters on their (Parkinson et al., 2000). Both are still recog- own. nisable as providing very different institutional patterns for the modern company. They Another important difference as to how the underpin the dominant consensus in each public interest is implemented in relation to country about how the public interest should the company in Britain and Germany derives be defined in relation to the company in re- from the extent of company independence spect of the three key relationships examined from works councils and policy officers. The above: companies and investors; companies greater the independence, the more reliance and employees; and companies and the com- has to be placed on external regulation by munity. In Germany the preference, although the state. This is often a sign of state weak- increasingly under threat, is still for public ness rather than state strength, because many interest issues to be handled through institu- of the public interest provisions that apply tionalised cooperative decision-making. The to the company through EU directives (and system has evolved as new sorts of public most recently this applies to various forms interest issues have emerged. On some is- of employee protection in the workplace) sues, such as environmental protection, the require considerable interpretation to be fit- interaction with management is less with ted to the circumstances applying to compa- unions than with the state itself or some regu- nies in different regions and types of busi- latory agency or professional body empow- ness. In Germany, legislators translate the ered by the state. In Britain voluntarism and principles into national law and then allow self-regulation, exemplified by the extensive the works councils to implement the meas- use of codes of practice, dominates company ures in a way appropriate to the firm, or even relationships with investors, employees and plant, in question. In companies without the broader community. But this has been ac- councils industrial tribunals take care of en- companied by increasingly systematic exter- forcement in a slow, pragmatic manner that nal regulation, and by the acknowledgement resembles the British treatment. In Britain, of many large companies of their wider re- legislation is equally incapable of spelling sponsibilities both to employees and to the out all the standards, but, without works community. In some areas, such as financial councils, it is forced to rely on secondary leg- services, the old era of self-regulation is pass- islation and administrative regulations gen- ing, and the same may be true of other ar- erated by central government departments eas, after the Employment Relations Act and such as the Department of Trade and Indus- the legislation that may follow the Company try. This leaves it vulnerable to political Law Review. Britain, however, remains a long charges that government is presiding over a way from Germany in the way the public monolithic and inflexible bureaucracy which interest is conceived. The degree of public is heaping regulatory burdens and their as- involvement with the firm, and the expecta- sociated costs on to companies, and reduction that the company exists to carry out pub- ing the competitiveness of the economy. lic purposes, is still widely resisted in Brit- ain. But there is a stronger impetus in Britain The traditional model of the German firm as than at any previous time for the a constitutional association, and of the Brit- constitutionalisation of the firm, and the ac- ish firm as a private association, may be be- ceptance of its wider role as an instrument

of public policy, while in Germany there is to become more flexible and autonomous, now greater acceptance that companies need to succeed in global markets.

APPENDIX 1 EU DIRECTIVES ON COMPANY LAW: A BRIEF SUMMARY

The First Company Law Directive (68/151) assets according to national tax purposes. required member states to establish some The Directive also sets out common rules for form of companies’ register to collect infor- certifying qualified auditors. The directive is mation from companies revealing their lo- justified by the protection that minimum in- cation, articles of association, names of di- formation standards provide to investors rectors, amount of subscribed capital, and a dealing with a limited company. This direc- balance sheet showing profits and losses for tive was implemented by the Companies Act each financial year, and to make it available in the UK in 1981. The Fourth, Seventh and on request. Eight Directives were implemented by Ger- many in the Bilanzrichtliniengesetz in 1985. The Second Company Law Directive (77/91) required member states to introduce com- The Sixth Company Law Directive (82/891) mon standards for maintaining, managing duplicated these merger and acquisitions and reporting on the company’s capital, with requirements of the Third Directive, but ap- mandatory shareholder ratification of plied to company divisions. changes by a two-thirds majority. This was intended to promote investment across bor- The Seventh Company Law Directive (83/ ders through reassurance of minimum share- 349) closed a reporting loophole in Fourth holder rights standards. Directive. It requires that conglomerates present consolidated accounts when either The Third Company Law Directive (78/855) the parent or subsidiary is a joint stock cor- regulates mergers within the same member poration, according to the same standards state by requiring parties involved in merg- that apply in the Fourth Directive. ers and acquisitions to publicise the terms and reasons, and to observe high quorums The Eighth Company Law Directive (84/253) for ratifying such actions (two-thirds of those required member states to harmonise quali- represented, or a simple majority if at least fications for auditing accountants by ensur- 50% of shareholders are represented). This ing a rigorous theoretical education in addi- directive, along with the Sixth and the pro- tion to professional training. Member states posed Tenth Directives, does not generally retain the right to approve individuals with- affect mergers undertaken through takeover out the theoretical training, however. Spe- bids, as are common in the UK. cial reference is made to the Fourth Direc- tive, and to the requirement to corporate The Fourth Company Law Directive (78/660) groups to submit consolidated reports under set minimum legal requirements for compa- the Seventh Directive. nies to publish financial information, based on a true and fair view of company assets. The Eleventh Company Law Directive (89/ The valuation principles are influenced by 666) further extended the same information British law, causing numerous changes for requirements developed for companies and other member states where accounts reported subsidiaries to their branch locations abroad,

which had previously not been covered. The importance of the branch plant or office may justification is that the economic and social easily be as important as that of a subsidiary.

APPENDIX 2 PROPOSED EU DIRECTIVES ON COMPANY LAW

The Fifth Company Law Directive aims to set election of supervisory board members. The standards for the structure of public limited most recent Commission amendment stands companies and establish equivalent protec- since 1991. Unlike other company law ditions regarding employee participation in rectives, the provisions for employee partici- management. The proposal includes meas- pation mean that this directive requires ures to enhance the powers of shareholders unanimous consent before it can be passed. and the influence of employees over key (Other directives require a simple majority.) company decisions. First, measures are to be Since the Davignon Commission Report introduced to strengthen the capacity of (1997), attention has focused on the Euro- shareholders to exercise their voting rights, pean Company Statute (below) as a means and to introduce fair weighting (for exam- of making progress on this issue (likely be- ple, the one share one vote principle, limit- cause it also addresses shareholder issues in ing preference shares). Second, companies a logrolling approach). will submit their activities to annual audits by independent accountants, who will pub- The Ninth Company Law Directive was pro- licise their results for shareholders before posed in 1974 to ensure standards for cor- every annual meeting. Third, supervision of porate group law in the EU. Only Germany management is to be ensured through either and Portugal have explicit corporate group a supervisory board or non-executive direc- law. Following German rules, the directive tors. The shareholders meeting shall appoint would protect minority shareholders and two-thirds of the board members, while em- creditors of subsidiary companies by defin- ployees (or employee representatives such as ing when control is apparent, and ensuring works councils or unions) elect the remain- their compensation. ing one-third.1 They will have responsibilities regarding plant closure, transfer, partial At present, conflicts arise when a parent com- shutdown, reorganisation, and strategic part- pany promises to use surpluses in profitable nerships with other firms. The European subsidiaries to subsidise others in financial Commission will monitor compliance and difficulty, and particularly when the subsidi- report to the Council of Ministers and the aries are in different countries. The European European Parliament. Court of Justice ruled in Rabobank v. Mediasafe in liquidation (C-104/96) that na- Before the first parliamentary reading in tional law must apply, not the First Direc- 1982, the draft directive only proposed a tive. two-tier system and employee participation from a 500-employee threshold through the The Tenth Company Law Directive proposes to harmonise laws on cross-border mergers of public limited companies. In substance, it applies many provisions of the Third Direc- 1 This codetermination right applies to companies tive to international mergers. First, sharehold- with over 1000 employees. ers of both the target and acquiring compa-

nies should approve the merger by a two- The Twelfth Company Law Directive con- third majority, after the submission of an in- cerns permitting single-person private lim- dependent report on the offer by an expert ited liability companies throughout member appointed by a judicial or state administra- states. Germany, among other countries, al- tive body. Second, protection for creditors lows such companies already. should also be guaranteed. Third, both companies shall produce a report on the impact The Thirteenth Company Law Directive the merger on their employees. This direc- (Takeover Directive) was first drafted in 1989 tive was drafted in 1985, but not submitted to regulate procedures for takeover bids, as to parliament. The potential impact on em- well as defensive tactics of management. ployee participation has remained a major sticking point for Germany.

APPENDIX 3 HISTORICAL OUTLINE OF CORPORATE LAW AND CODETERMINATION IN GERMANY

Corporate law First Corporate Law Reform, 1870 (1. Aktienrechtsnovelle, 1870) created new Early corporations: Trading ventures and framework for corporations after German railways were among the sectors to estab- unification. lish corporations through the Eisenbahngesetz (Railway Law, 1838) and the · Ended the state concession system. Aktiengesetz (Joint Stock Corporation Law, Established a ‘normative system’ allow- 1843). The latter established the framework ing corporations to be formed if cer- for a ‘concession system’ in Prussia, where tain organisational norms were met. the state could grant limited liability in establishing corporations under strict guide- · Supervisory board was made manda- lines concerning the company’s purpose and tory to ‘supervise the management of organization. the corporation’, specifically to examine the balance sheets and manage- General German Commercial Code (1861) ment-proposed distribution of profits in (Aktienrecht des allgemeinen Deutschen order to make recommendations to the Handelsgesetzbuches) established as part of shareholders’ meeting. the customs union between German states: · Required publication of balance sheet · Established general pattern for the following four rules: value of stocks to granting of state concessions for cor- be reported at maximum of their present porations with limited liability, while market value; administrative costs to be the state retained the power to revoke listed under costs; paid-in capital and corporate charters without compensa- reserves to be listed as liabilities; and tion at its discretion ‘given compelling profits or losses from subtracting current reasons of the general good’ (Makower, assets from liabilities to be reported as 1868). an additional item.

· Required the establishment of a man- Second Corporate Law Reform of 1884 (2. agement board (Vorstand) to legally Aktienrechtsnovelle) in response to the finan- represent the corporation. cial crash of 1873. Abandoned liberal approach, along with the rise of a new politi- · Required company statutes to specify: cal discourse coalition (conservative and the purpose and duration of the cor- Catholic interests with the support of a pro- poration, the form of the shareholder’s tectionist alliance between heavy industry meeting, voting rights, methods for and large agriculture) among the state bu- electing the management board, and reaucracy in support of ‘conservative social the preparation and certification of the reform’. balance sheet.

· The procedures for founding corpora- board on a mandatory basis, and a tions were improved. Disclosure rules maximum size for the supervisory were extended, the independence of board was set. the company from its founders was heightened through supervisory func- · Paragraph 70 obliged the Vorstand to tions, and the temporal aspects of manage the corporation for ‘the good founding procedures were improved. of the enterprise, the employees and the people and country’. · Individual and minority shareholder rights were improved as a ‘last resort’ Corporate Law, 1965 (Aktiengesetz 1965). for emergency intervention. Individual The 1965 corporate law reform strove to re- shareholders were given the right to store shareholder rights in several areas in recourse to the law if management response to EU directives: acted illegally or contrary to the statutes of the company. Furthermore, · Accounting rules: more stringent valu- 20% minorities were allowed to de- ation rules, more detailed disclosure, mand compensation in order to avoid consolidated accounting statements, collusion between management and and increased shareholder control over shareholder majorities. the distribution of profits.

· The internal organisation of the cor- · Shareholders’ rights: stress on propri- poration was changed to strengthen the etary nature of the corporation re- shareholders’ meeting and sharpen su- newed, inspired by model of the SEC pervisory board responsibilities. Gen- in the USA, notification required re- eral shareholders’ meeting becomes garding the agenda of the sharehold- the sole ‘will’ of the organisation, with ers’ meeting, and proxy voters (banks) extended mandatory rights and respon- must solicit voting instructions. sibilities. Supervisory role of the Aufsichtsrat strengthened by banning · Groups of related companies: A major dual board membership and creating component of the 1965 law was the in- a catalogue of decisions requiring troduction of a whole set of regulations board approval. dealing with so-called ‘related companies.’ The major features included pro- Corporate Law, 1937 (Aktiengesetz 1937). tection of minority shareholders and Corporate law was revamped in 1937 as the creditors in subsidiary companies, as culmination of numerous debates during the well as increased transparency. Weimar period starting in 1925. Most scholars agree that the law does not strongly re- · Management board: Public interest flect Nazi ideology, and indeed the law was clause of Paragraph 70 removed, left unchanged after World War II until 1965. collegiality principle of management board affirmed. · Improvements in corporate disclosure, the system of auditors, and some minority shareholder protections. Codetermination

· The supervisory board was made re- Early impulses: Nineteenth-century origins sponsible for electing the management in Christian, socialist and romantic philoso-

phies, as well as the notion of parity (Parität) elected blue-collar (Arbeiter) and and economic democracy as discussed in the white-collar employees (Angestellte). 1848 Frankfurt National Assembly. Codetermination represented a socially in- · Established many modern features of tegrative alternative to revolution or social- the German model: obligation to ism, analogous to demands of constitutional peaceful cooperation, separation of rights in the political sphere. councils from collective bargaining, and genuine codetermination rights. Early Institutional Influences: The Gewerbeordungsnovelle (1891) had little · Supplementary Law in 1922 allowed practical influence, but established the legal two works council representatives on principle of intervening in enterprises in the the Supervisory Board. public interest. Councils were later mandated in the coal industry in 1905 to solve prob- Gesetz über die Treuhänder der Arbeit, lems of labour unrest. Other influences in- 1934 abolished independent labour repre- clude the self-administration of social secu- sentation in the firm. rity funds by worker representatives. · Transferred co-determination rights to Gesetz über den vaterländischen a single state representative. Hilfsdienst, 1916 established during World War I. · Works councils replaced with new employee councils, now called · Mandated workers’ councils Vertrauensräte or ‘councils of trust’, (Arbeiterausschüsse) elected by secret conceived as plant-level cells of the ballot. Nazi party.

· Adopted Paragraph 12 of the mining Coal and Steel Codetermination Law, reform law (1905) to give councils con- 1951 (Montanmitbestimmung) codified pre- sultation rights regarding the ‘de- war practices under Allied occupation for the mands, wishes and complaints of the coal and steel industries. workforce with regard to the factory, wage and other employment condi- · Parity representation for employees on tions and the social welfare policy of the supervisory board. the firm’. · Employee representatives hold veto · Provided for mediation by a council over appointment of labour director with parity composition and chaired by (Arbeitsdirektor). a representative of the War Ministry. Works Constitution Law, 1952 Works Councils Law, 1920 (Betriebsverfassungsgesetz) generalised a (Betriebsrätegesetz) represented compromise weaker form of codetermination to other in- between competing visions of councils. dustries.

· Mandated the formation of works · One-third representation for employ- councils in all commercial and public ees on the supervisory board in firms establishments with over 20 employ- with over 500 employees. ees to be made up of a parity between

· No provision for labour director. · One-half representation for employees on the supervisory board in firms with · Weaker powers for works councils than over 2000 employees, with share- under Montanmitbestimmung. holder representatives holding a cast- ing vote. Co-determination Law, 1976 (Mitbestimmungsgesetz) · Labour director must be appointed.

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Interviews

Interviews were conducted in Germany and the UK between April and November 1999 with the following people:

Germany Dr. Alexander Barthel, Head of Economy, Finance and Taxes, Bundesvereinigung der Deutschen Arbeitergeberverbände (German equivalent to Confederation of British Indus- try).

Reinhard Dombre, Head of Secretariat, Deutscher Gewerkschaftsbund (German equivalent to Trades Union Congress).

Rainer Funke (FPD) Secretary of State, Ministry of Justice 1990–98, Member of Parliament.

Stefan Gebauer, Deutsches Aktieninstitut.

Markus Herdina, Deutsches Aktieninstitut.

Reinhard Pelgau, Senior Scientific Officer on Environmental Management, Federal Ministry of the Environment.

Thomas Schmidt (SPD), Economics Expert.

Dietmar Schreiber, Deutsches Aktieninstitut.

Wolfgang Steiger (CDU), Member of Parliament.

Thomas Weissgerber, Association of German Banks.

Alfred Wisskirchen, Head of Employment Law, Bundesvereinigung der Deutschen Arbeitergeberverbände.

Uwe Woetzel, Deutsche Angestellten-Gewerkschaft.

Peter Wiesner, Head of European Law, Bundesverband der Deutschen Industrie, Brussels.

UK Dominic Johnson, Confederation of British Industry.

Sarah Veale, Trades Union Congress.

Janet Williamson, Trades Union Congress.

Information also received from: Jutta Reiter, Head of Women’s Issues, Deutscher Gewerkschaftsbund.

Angela Browning (Conservative), MP, House of Commons.

David Perfect, Research and Resources Unit, Equal Opportunities Commission.

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Performance-related pay and the public services: A comparison of recent approaches to reform in Germany and Great Britain David Marsden, Dieter Sadowski, Stephen French and Karin Richertz In Germany and Great Britain, public sector pay systems, pay determination and public management have been put under severe pressure by the drive to increase efficiency and the squeeze on public expenditure. This study examines the nature and effectiveness of the new policies on pay systems and performance management in helping to achieve these objectives in the two countries. April 2000 ISBN 1-900834-21-9 39pp £12.00

High-level skills, knowledge transfer and industrial performance: Electronics in Britain and Germany Geoff Mason and Karin Wagner This report explores why Germany has fared less well in high-tech industries such as electronics than in traditional manufacturing industries such as mechanical engineering, motor vehicles and chemicals and why the reverse is true for British industry which has recently shown a greatly improved trade and innovation performance in electronics. March 2000 ISBN 1-900834-20- 0 43pp £12.00

Innovationsmanagement in deutschen und britischen produzierenden Unternehmen Rolf Pfeiffer und Keith Goffin Der immer intensivere internationale Wettbewerb erfordert für produzierende Unternehmen mehr Innovation. Dieser Bericht vergleicht Innovationsmanagement in deutschen und britischen Unternehmen und gibt klare Empfehlungen für Manager, Forscher und Politiker, wie die Innova-tionsleistungen eines Unternehmens zu verbessern sind. This is the German version of „Innovation Management in British and German manufacturing companies”. Februar 2000 ISBN 1-900834-18- 9 90pp £12.00

Von Großbritannien lernen? Wohlfahrtsstaatsreform im Zeichen des Dritten Weges – Das Beispiel aktivierender Sozialhilfepolitik unter Blair Lutz Leisering und Bernhard Hilkert Deutschland und Großbritannien stehen unter Druck, ihre Wohlfahrtsstaaten umzubauen. Deshalb haben sich Gerhard Schröder und Tony Blair zu einer Politik des „Dritten Weges” bekannt. Die Studie zeigt, daß sich hinter diesem Begriff ein neues Modell zwischen neoliberalem und versorgendem Staat abzeichnet und untersucht anhand der Reform der Sozialhilfe als Schnittstelle zum Arbeitsmarkt das Konzept einer „aktivierenden” Sozialpolitik für Großbritannien und seine Übertragbarkeit auf Deutschland. Februar 2000 ISBN 1-900834-19-7 54pp £12.00

Innovation management in UK and German manufacturing companies Keith Goffin and Rolf Pfeiffer Due to strong international competition, companies have to become more innovative. This report focuses on how the difficult and complex task of innovation is managed in the UK and Germany, and gives clear recommendations on how managers can improve their companies‘ performance and on how policy-makers can help to create an innovative environment. December 1999 ISBN 1-900834-17-0 72pp £12.00 76