A system of shared corporate governance between shareholders and workers, codetermination has been mostly ignored within the U.S. corporate governance literature. When it has made an appearance, it has largely served as a foil for shareholder primacy and an example of corporate deviance. However, over the last twenty years—and especially in the last five—empirical research on codetermination has shown surprising results as to the system’s efficiency, resilience, and benefits to stakeholders. This Article reviews the extant American legal scholarship on codetermination and provides a fresh look at the current state of codetermination theory and practice. Rather than experiencing the failures predicted by our law-and-economics framework of shareholder primacy, codetermination has fared better than alternative systems, particularly with respect to the ravages of the Global Financial Crisis. At a time when corporate leaders, politicians, and academics are rethinking the shareholder primacy model, the Article presents an updated perspective on codetermination and invites U.S. scholars to reexamine their prior assumptions.
Codetermination was born of consensual agreement at a time when labor and capital had roughly equal bargaining power, and only later became enshrined in law. As a result, they developed a system that is dramatically more employee-oriented than Anglo-American corporate law. The standard thinking in U.S. corporate circles would predict—and has predicted—the failure of this deviant system. But German firms have not been paralyzed by more heterogeneous board electorates. And they have not been destroyed by voting cycles. Rather, they have in many important ways outperformed their United States counterparts. The arguments against employee representation were already in trouble on their own theoretical terms. The presence of a significant, well-functioning counterexample to shareholder primacy should be further cause to question.
Does this mean that German-style codetermination is without faults? Of course not.196 The system has been criticized for its large, two-tiered board structures.197 It makes use of an (arguably) unnecessarily baroque version of an electoral college to elect employee representatives.198 And the recent success of the German system also doesn’t mean that it would directly translate to corporations in the United States. Perhaps supervisory codetermination can only flourish in conjunction with the strong union presence and works councils found in Germany. (Or perhaps it’s the other way around.)
Nevertheless, German codetermination is working well enough that it helps confirm many of the arguments made in favor of a shared approach to corporate governance.
Hayden, Grant M. and Bodie, Matthew T., Codetermination in Theory and Practice. Florida Law Review, Vol. 73, No. 2, 2021, Saint Louis U. Legal Studies Research Paper 2020-18, SMU Dedman School of Law Legal Studies Research Paper No. 481,