‘What do the developments in European policy and those within transnational companies mean for the development of co-determination in our country?’
The Netherlands, the European Union and co-determination
P.F. van der Heijden (1)
1. Co-determination: from the bottom up
According to the 1975 'Green book' of the Commission of the European Community, co-determination is defined as the various ways in which employees can influence policy decisions taken by the company or institution in which the employees work. This 25-year-old definition is still applicable both in the European Union and in the Netherlands. Over the past 25 years noticeable steps have been made towards the realisation of employees’ co-determination, as formulated in this definition. In the Netherlands the Works Councils Act was radically amended in 1979 in favour of the employees, and later many amendments followed. The most recently published study of the operation of works councils in the Netherlands (Looise, Van het Kaar, De volwassen ondernemingsraad [the mature works council]) shows that co-determination has reached maturity in the Netherlands, that works councils have become fully accepted by the management and that in certain areas the works councils exert considerable influence on company policy. It is particularly important to establish that the quality of the decision-making process within companies and institutions has improved, because this process is effected more carefully and with more motivation of employees. In the Netherlands 92 percent of the companies with 100 or more employees have works councils, whereas in smaller companies this percentage has risen to over 80.
Over the last 25 years employees’ co-determination has developed in the European Union, but to a lesser extent than in the Netherlands. The most important achievement is of course the European works council, based on the relevant directive. Since 1994, in approximately 600 of the approximately 1200 Community companies, agreements have been reached between management and employees (Van den Toren, 1999) on the basis of which European works councils or consultation procedures were instigated (approximately 400 of these agreements were voluntary agreements, concluded before September 1996 (Blanpain 1999)). A major difference between the European and the Dutch approach from the legislative point of view is that in the Netherlands we have mandatory provisions, laid down in the Works Councils Act, whereas the European Union uses the contract -model. Through the European Works Councils Directive, which has been implemented in the national legislation of the various countries, the social partners are invited to conclude agreements laying down the Community co-determination, and – as indicated above – this has happened on a large scale. In other European matters involving co-determination, the contract -model also plays a major role. We refer to the developments regarding the European Partnership (S.E.) which as yet have yielded no results, but where the most recent propositions in the area of co-determination take as a starting point the arrangement of co-determination by contract, by analogy with the European Works Councils Directive. The draft directive on information and consultation of employees also has the contract model as its underlying philosophy. The success of this model based on the European Works Councils Directive will certainly have been a consideration in this matter. Below we will consider whether this model has any interesting aspects for the Nether-lands.
2. Co-determination: from the top down Up to now we have discussed what can be termed 'co-determination from the bottom up'. We refer to representative bodies chosen from and by the employees who are given the opportunity, based on information supplied to them, to give advice or approval regarding proposals formulated by the manage-ment. In the nineties attention was also given for the first time to 'co-determination from the top down'. We refer in this context to the increasingly intense debate on corporate governance. The increased interest in the ins and outs of the stock exchange, for shareholding and for management accountability towards shareholders, has resulted in a number of questions as to what this means in the Dutch situation. The 'anti-takeover measures' have come under discussion. These anti-takeover measures make it difficult, if not impossible, for the company attempting the takeover to acquire the target company. The Dutch government has submitted a legislative proposal to parliament to meet to some extent the criticism on these anti-takeover measures. Also in this context the statutory two-tier regulations (see appendix) have come under discussion. These rules state that companies of a certain size are obliged to have a board of supervisory directors with extensive powers (including the possibility to block hostile takeovers). The appointment of the members of the board of supervisory directors takes place by means of controlled co-option. The trade unions, and to a lesser extent several political parties, are pressing for the abandonment of this co-option system in exchange for a system whereby the members of the board of supervisory directors are appointed by the employees and the shareholders, these two groups selecting a third independent group on the board of supervisory directors (also schematically illustrated as 2x+y). This national debate is influenced to a certain extent by the 13th directive of the European Union regarding take-over bids. Negotiations on this directive have been in progress for 20 years. The directive requires the rules for take-over bids to be written into legislation, which up to now has not happened in the Netherlands. The subject is covered in the SER (Socio-Economic Council) Rules of Conduct for Mergers, which however do not have statutory force. An important aspect of the 13th directive is that the scope for the management of the target company to act is severely restricted during the bidding process. A second important aspect, and new for the Netherlands, is that an acquiring shareholder who has obtained control over a listed company, is obliged to make a bid for the remaining shares. There are no provisions for this subject in the Netherlands at the moment. A third important aspect laid down in the directive, and especially important for co-determination, is that article 6 appears to impose a rule on the member states that employee representatives may only be informed of an imminent bid once the bid has been made public. Articles 18 and 20 of the SER Rules of Conduct for Mergers on the other hand start from the idea that the party making a bid and the management of the target company must inform the employee representatives before the bid is made public. The legislative proposal 'preventing anti-takeover measures' referred to above, will have to be adapted to the 13th directive. It must also be noted that once the 13th directive becomes effective (something which has not been determined as yet), the member states will still have four years to implement the directive into their national legislation.
Finally, it is useful to note that both in the Netherlands and in the United Kingdom non-governmental committees have studied issues concerning corporate governance. In England the Cadbury, Greenbury and Hampel committees recorded interesting thoughts on corporate governan-ce, and in the Netherlands the same has been done by the Peters I and II committees. Where underlying values and starting points for company-oriented production in the free market economy are concerned, the Netherlands still adheres to the Rhineland stakehol-der philosophy. This is markedly different from the Anglo-Saxon approach in which the shareholders are traditionally the owners (principal) of the company who appoint and dismiss the management (agents).
Below we further elaborate on the difference between the Dutch and the European approach to co-determination (mandatory provisions versus contract model) and the debate on corporate governance in Europe and the Netherlands, since it would appear that increasing influence from 'Europe' is discernible in the Netherlands.
3. Co-determination on a legal basis or on a contractual basis Contracts European co-determination law is characterised by a contract model. Within a framework set out by European legislation the interested parties, employers and employees, are free to adapt co-determination to their own situation as far as possible. In the European Works Councils Directive the contract mo-del is expressed in two ways. In the first place article 13 of the directive made the 'voluntary agreements' possible, which have been applied, as indicated above, in approximately 400 cases. Until September 1996 Community companies could in this context make agreements on information and consultation procedures within their companies, without the rules laid down in the directive further being applicable. In this way the directive concurred with existing agreements and provided ample opportunity to conclude such agreements before a specific date. It was intended as an incentive. For companies that have not concluded a voluntary agreement, the guideline and national legislation are applicable as of September 1996 on the basis of which these companies are obliged to conclude a co-determination agreement via negotiations. Of course this agreement must meet certain requirements and fit in with the framework outlined by the European directive, but the parties still have a reasonable amount of freedom in working out the details of the agreement. If no agreement is concluded at all, the 'annexe' to the directive becomes effective, consisting of substantive co-determination provisions.
Vilvoorde The controversial Renault Vilvoorde case illustrated that the directive’s impact on voluntary agreements is quite substantial. The circumstances of the case are well-known. The executive committee of Renault in Paris decided in 1997 that the Renault factory in Vilvoorde near Brussels had to be closed. This meant the dismissal of over 3000 employees working at the factory. The decision was taken and announced without prior notification and consultation of the 'Comité de Groupe Européen' (European works council). This 'Comité de Groupe Européen' had been created on the basis of a voluntary agreement within Renault at a European level. This decision by Renault has resulted in numerous proceedings. First, civil proceedings in two courts in Belgium. Second, criminal proceedings in Belgium, and thirdly, civil proceedings in France. Renault lost all these cases. However, the factory in Vilvoorde is no longer open. In addition to the European Works Councils Directive, the Collective Redundancy Notification Directive played a prominent role in the civil proceedings in Belgium. An interesting aspect for the issue at hand, the contract, is that the French courts, both the court of first instance in Nanterre and the appeal court in Versailles, followed the demand of Renault’s European works council to interpret the voluntary agreement existing at Renault in accordance with the directive. This has far-reaching consequences. Renault’s 'voluntary agreement' does not contain an obligation for Renault to submit in advance a decision such as was taken in the Vilvoorde case to the European works council. Nevertheless, the appeal court in Versailles reached the conclusion that Renault’s conduct was not permissible, Renault should have notified and consulted in advance the 'Comité de Groupe Européen' concerning the closure of the Vilvoorde factory. For the way in which Renault had complied with the European Works Councils Directive through an agreement must also be judged on whether the directive has achieved an 'effet utile'. The right to information and consultation as laid down in the Renault agreement is interpreted in the light of the directive, which in the eyes of the appeal court requires prior information and consultation. It is likely that, if Renault’s principal seat had not been in France but in the Netherlands, the Dutch Enterprise Section of the Amsterdam Court of Appeal would have reached a similar judgement. The management of Dutch companies have long been used to the fact that providing information and providing possibilities to have a say are pointless once a decision has been reached. Nevertheless, the judgement of the Versatile appeal court is of major importance for the interpretation of 'voluntary agreements' in the area of European co-determination. The judgement was important in another way as well: closing the Vilvoorde factory means closing a factory in one member state and not in two. But because production was also removed from Belgium to another country, the appeal court judged the decision to have a Community scope. Therefore we find the European contract -model to be fairly strongly linked to the wording of the European legislation. The formation of the contract within the legal regulations guarantees co-determination on a Euro-pean level.
Legislation and/or contract In the Netherlands co-determination does not centre on the contract, but on legislation. However, in recent years the contract model has gained in popularity. An example is the new Working Hours Act (1996) which provides the social partners with a certain freedom within the framework of the act to conclude contractual arrangements for working hours that deviate from the standard model laid down in the act. Since 1998 the Works Councils Act also sees the contract as the instrument for co-determination, since section 32 provides the company agreement (a contract between the works council and the management) with a legal basis. In the literature on co-determination it has been proposed to introduce the next stage in co-determination via the co-determination contract (Wissema c.s. 1995). The underlying idea is that in modern employment relations and operational management the command structure and the hierarchic relational structure are outmoded. The issue is to promote interactive co-determination and to this end the co-determination -contract can play an important role. At the start of each term of a works council, a co-determination -contract is concluded between the management and the works council in which are laid down the issues, the strategy, the structure, and the culture for the coming period. The proposal distances itself from the present Works Councils Act, via a co-determination -contract it is possible to deviate from this act. Each company designs its own Works Councils Act, as it were.
The contract model has the important advantage that co-determination can be adapted to the company or institution’s specific situation. This is the reason that the contract model works at the European level. For the Netherlands the following considerations are also relevant for the contract model.
Reasoning from the possibility of further flexibility of co-determination and from the often expressed desire to adapt the right of co-determination to the specific company, in our view a different variant than the variant proposed by Wissema c.s. would be preferable. We refer to a variant that could be developed in response to the example given by the Directive on the European works council. We will elaborate on this below.
Adaptive co-determination As described above, the Directive on the European works council uses a system that to a large extent can be traced back to the contract as co-determination instrument. The directive instructs parties which are further described, to conclude a contract within a certain period of time. The contract must meet certain basic standards as to content. If parties fail to conclude such a contract, the directive’s 'annexe' automatically becomes effective, in which the European legislature provides the content of the contract.
If we take as our point of departure adaptive co-determination, i.e. co-determination that – similar to the adaptation the eye performs – can adapt to the circumstances of the company, then such a system could be useful. The national legislator could then via the Works Councils Act instruct the management of companies to conclude a contract arranging co-determination per company with a group of people representing the employees or the existing works council. The legislator must then also determine that such a contract will also include advisory powers as to organi-sational and economic decisions, linked to a right of appeal to the Enterprise Section, and a right of approval concerning decisions with social implications. The legislator could also provide a description of such types of decisions, but restrain from giving an exhaustive account of such decisions, because this is precisely something best left to the contracting parties. Possibly at the company level provisions providing convenient headings for classification would be sufficient, although a more detailed list of subjects – comparable to the list in the present Works Councils Act – could be considered as well. If the employer and the group negotiating on behalf of the employees or the works council do not reach an agreement, the legislator can determine that the currently existing Works Councils Act will become effective ipso jure .
Of course such a system also raises questions. A first question, comparable to those surrounding the European works council, is why a body representing the employees/works council should conclude a contract with the management that guarantees less co-determination than the Works Councils Act that becomes effective anyway if no contract is concluded. There is no clear answer to this question.
The big stick
Depending on the corporate culture, and on the wishes of the employees regarding co-determination, it is possible to choose via a contract a model whereby, compared to the Works Councils Act, the employees are given more co-determination on some points and less co-determination on others. This can be a subject for negotiation. If one finds oneself confronted with a corporate culture in which such negotiations are regarded as futile from the start, one can immediately fall back on the Works Councils Act. The attractive feature of this variant is therefore that the management and the employees are able to design a co-determination arrangement that is entirely adapted to their company, which arrangement is of course binding. Of course the big stick remains necessary, because without the supervising eye of the legislator in the background employers could choose a form of co-determination that is very far removed from the present level of co-determination as laid down in the Works Councils Act. Without the above support from the legislator, the employees entrusted with the negotiations on a co-determination -contract for their company would find themselves in a very weak negotiating position. This is the weak spot in the proposal of Wissema c.s. If the proposal suggested above is opted for, the employees are ultimately guaranteed a system of co-determination providing a reasonable level of co-determination.
The legislator must ensure that co-determination for employees is guaranteed at least at the present level. He must also provide flexible instruments enabling entrepreneurs and employees to organise co-determination in other ways at the organisational level, adapted to their specific organisational requirements. At the basis of such arrangements lie visible and applicable principles of sound business practice, such as the principle of due care, the motivation principle and the principle of trust which are anchored in the regulation that entrepreneur and works council must act in accordance with the rules of reasonableness and fairness (section 2:8 and 2:15 Civil Code, section 3:12 Civil Code and section 6:2 Civil Code).
4. Corporate governance and co-determination Not only in the Netherlands but also in the other member states of the European Union there is a debate on corporate governance, transparency of the company's management, the accountability of the management and the board of supervisory directors and, in relation to this, the position of shareholders and employees. The take-over battle between British Vodafone and the German Mannesmann Group for example, shows among many other things a collision between the Anglo-Saxon shareholders approach and the Rhineland stakeholder philosophy. The earlier mentioned 13th EU directive on take-over bids is especially shareholder-oriented (Timmerman 1999). The management of the target company may only take countermeasures against hostile bids if the shareholders have given their explicit consent to do so after the bids have been made known. The directive does not allow for any form of co-determination prior to the hostile take-over bid. As to the implementation of the directive the member states are free to maintain existing co-determination regulations and it is expected that the Netherlands will support this position. Nonetheless, the 13th directive can be considered a signal that the shareholder approach has gained momentum on the continent.
The Dutch statutory two-tier rules are also under discussion from the perspective of anti-take-over measures; for it is the board of supervisory directors who in such companies can thwart take-over bids. In the performance of its duties, the board of supervisory directors is responsible for considering the interest of the company and its related business which encompasses considerably more than the interest of shareholders only. Shareholders, especially institutional shareholders such as large pension funds, claim they are rated inferior to employees who - when compared to the general meeting of shareholders - are able to exert greater influence on business policy matters through works councils. Whether this stand can be empirically substantiated however remains doubtful, for the Dutch statutory two-tier system assumes that neither employees, nor shareholders have the power of decision when it comes to important strategic decisions which are the prerogative of the boards of supervisory directors. With regard to these boards of statutory directors, the considerable importance attached to the market value of a company over the past ten, fifteen years, and to price/earnings ratios of a company's shares and analysts’ reports on a company's performance with a view to the share price, have certainly not gone unnoticed.
Erosion of the statutory two-tier system
The discussion on corporate governance centres on transparency, accountability and power. The fact that for decades discussions have taken place in Europe on the establishment of a European Partnership - without any results so far - indicates how sensitive and nationally and culturally determined this matter is in Europe. Meanwhile, the internationalisation of large companies is progressing at a rapid rate which also has consequences for, for example, the number of companies in the Netherlands falling under the obligatory statutory two-tier system. A study instigated by the corporate governance Peters II committee (1998), for example, shows that of the 26 companies listed at the AEX only seven fell under the statutory two-tier system. Nine of these companies apply the two-tier system voluntarily. (Semi-) Dutch companies operating world-wide such as Akzo-Nobel, Heineken, Royal Dutch Shell, Philips and Unilever, do not fall under the Dutch statutory two-tier system and do not apply it voluntarily. We can conclude that only a minority of AEX-listed companies fall under the Dutch statutory two-tier system. Of the 21 MIDCAP funds, 14 fall under the statutory two-tier system which is a considerably higher proportion than the AEX-listed funds. Of the approximately 160 companies listed in Amsterdam, 60 fall either statutory or voluntarily under the two-tier system.
An important reason why globally active companies with a principle seat in the Netherlands do not, or no longer, fall under the statutory two-tier system is because the number of employees working outside the Netherlands far exceeds the number of employees in the Netherlands. Due to a further increase of globally active companies through acquisitions abroad, the importance of the statutory two-tier system will further decrease. The dismantled two-tier system often remains applicable to the Dutch sub-holding of such companies, just as with Dutch subsidiaries of companies of which the parent company is established abroad. If globalisation continues, the two-tier system will be thus dismantled. Heated debates are expected on this issue in the Netherlands in the coming years. The request for advice by the SER (Socio-Economic Council) made by the government in February 2000, indicates that the discussion is still in full swing, or, perhaps, has only just begun in earnest. An assessment study of the existing statutory two-tier system from the perspective of co-determination has as yet not shown that this system has any flaws that need to be repaired. However, the current discussion is held in a totally different social climate compared to the Verdam committee in the sixties of the last century on whose report the statutory two-tier regime is based.
Co-determination of the Dutch works council is closely related to the management's determination. If the powers of decision of the management and/or the board of statutory directors is moved to the general meeting of shareholders we need to carefully consider whether this would imply a decrease of co-determination of the works council; the consequences of this must be assessed from the perspective of parity.
5. Conclusion The existence of co-determination is justified on the basis of the democratic requirement that employees must be able to exert influence on the policy of the company in which they - in a hierarchic relationship on the basis of their employment contract - earn their income and to which they give their best efforts. It encourages the involvement of employees in their company and creates a common basis for the management to realise the actual execution of decisions made. Proper co-determination provides a positive contribution to the competitive position of companies. Companies operate in an increasingly complex, often global world. Successful entrepreneurship remains to a very high degree the work of man. Employees, shareholders, clients, suppliers, society are all very important to the company.
But without employees, without the involvement that is expressed, among other things, through co-determination, successful entrepreneurship is hardly conceivable. Co-determination by employees is under increasing pressure from the desired shareholder control. Finding a new balance in a changing society will prove to be the major challenge of the years to come.
Amsterdam
February 2000
Bibliography
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- Peters Committee-II, Monitoring Corporate Governance in the Netherlands, Amsterdam, 1998
- F. Dorssemond and A.Ph.C.M. Jaspers, De affaire-Renault, een les voor later of een storm in de Europese vijver? [The Renault case, a lesson for later or a storm in the European pond?], Sociaal Recht June 1999, p. 152 ff.
- R.H. van het Kaar and J.C. Looise, De volwassen ondernemingsraad [The mature works council], Deventer, 1999
- R.H. van het Kaar, Rechtsorde van de arbeid en corporate governance [System of law on labour and corporate governance], in: Een nieuwe rechtsorde van de arbeid, Hugo Sinzheimer Institute, 1999
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- M. van der Meer and J.P. van den Toren (red.), Wat bindt de onderneming?[What binds the company], De Burcht, Amsterdam, 1999
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- J.G. Wissema, M.G. Bouts, B. Rutgers, Contouren van een medezeggenschap op maat [Contours of tailored co-determination], The Hague, 1995
Appendix
Statutory two-tier system
Since 1971 the Netherlands has had a so-called statutory two-tier system. This refers to the mode of management of large private limited liability companies (BV) and public limited liability companies (NV) as well as since 1988, large co-operative associations and mutual insurance associations.. In this paper we will concentrate on large N.V.s and B.V.s. Either the comprehensive or limited two-tier system applies to these companies. The term two-tier system can be explained by the fact that a specific structure is obligatory for these companies; i.e. a management structure consisting of a board of supervisory directors, a management board (directors), a general meeting of shareholders and a works council. Capital, labour, management and supervision are represented in this structure.
A company is a large company in the sense of a two-tier system if three conditions have been met:
- the issued capital together with the reserves according to the balance sheet and explanatory notes is at least NLG 25 million;
- the company has instituted a works council in accordance with its statutory obligations;
- the company and its dependent companies employ a minimum of 100 employees in the Netherlands;
If the company meets these criteria, it is obliged to report this in the Commercial Register. If the company has been registered in the Commercial Register for three consecutive years, the statutory two-tier rules apply.
In outline, the statutory two-tier rules are as follows.
Companies falling under the statutory two-tier regime have a board of supervisory directors. The appointment of this board of supervisory directors is effected via a system of regulated co-option. This means that the board of supervisory directors appoints its members. The general meeting of shareholders and the works council have a right of recommendation and a right of objection with respect to the appointment and re-appointment of members of the board of supervisory directors. The management board has the right of recommendation, but no right of objection. If the general meeting of shareholders or the works council objects to the proposed appointment of a member of the board of supervisory directors, the latter must in the event it wishes to proceed with the appointment, refer to the Enterprise Section of the Court of Appeal in Amsterdam with a request to declare unfounded the objections raised. Subject to the law (Civil Code), the objections can be aimed against the person of the supervisory director to be appointed (unsuitable), against the procedure followed with respect to the appointment, or the composition of the entire board of supervisory directors which needs to meet the requirement that financial, economic and social expertise are all represented.
The board of supervisory directors has broad powers. All major strategic and organisational decisions taken within the statutory two-tier company must have the consent of the board of supervisory directors. This board is also charged with the adoption of the annual accounts and the annual report of the company. In addition, the board of supervisory directors is charged with the appointment and dismissal of directors (members of the management board, directors).
The Dutch law makes a distinction between companies with a comprehensive and those with a limited two-tier regime. Earlier on we have given an outline of the comprehensive scheme. The limited statutory two-tier system implies that the provisions regarding the appointment and dismissal of directors and regarding the adoption of the annual accounts do not apply. The provisions regarding the appointment of supervisory directors and the consent of the board of supervisory directors for major management decisions however, do apply. The limited scheme is intended for Dutch statutory two-tier companies that are part of an international group. In order not to disrupt the group's unity, the right to appoint directors and the right to adopt the annual accounts are left to the general meeting of shareholders (the parent company).
- Professor-director Hugo Sinzheimer Institute, University of Amsterdam