’What (type of) policies and legislation is the European Union developing in the areas of corporate governance and co-determination as a component of corporate governance? What consequences will this have at EU level in the years to come?’
The European Union and Co-determination
D.C. Buijs (1)
The main contribution so far to co-determination made by "Brussels" is the European Works Councils Directive. According to the European Commission, acceptance of this Directive in 1994 was a highlight in the history of the European Union. This may sound somewhat exaggerated, but the fact is that this Directive which now also applies to the United Kingdom, is to be considered a breakthrough. All previous attempts by Brussels to tamper with national autonomy in the area of co-determination had, apart from a few exceptions in specific fields relating to labour law, failed. First, acceptance of the Directive stirred up once again discussion of the European Company, which is to be introduced as a new form of limited liability company. This discussion had stranded on the co-determination of employees in the composition of management boards. Second, the Commission has drawn courage from this Directive to submit a proposal, similar to the system for European works councils, to make some sort of minimum framework obligatory for national works councils.
Despite the fact that the European Company is getting much more political attention and publicity, the proposal secondly referred to will probably have more practical importance in the longer term.
2. Co-determination via the structure of the legal entity or at the level of the business organisation within the company
Traditionally, both at national and EU level there has been a distinction between co-determination on the basis of the structure of legal entities and on the basis of the business organisation of the company. The variant based on the structure of legal entities applies by definition only to companies conducted as a legal entity, such as an N.V. or B.V. With regard to these legal entities, co-determination is incorporated into the structure of the legal entity itself, i.e. via the role of the employees with respect to the appointment of directors in the management board or board of supervisory directors of the legal entity. The most notable example in the Netherlands is the rules applicable to statutory two-tier entities. These require large legal entities to have a board of supervisory directors. The board of supervisory directors appoints (coopts) its own members. Shareholders and employees have specific rights of nomination and objection. Under the rules applicable to statutory two-tier entities, the law grants considerable rights to supervisory directors. In Germany, in the boards of supervisory directors of the largest companies, 50% are representatives elected by the employees. This system appears to grant the employees even more direct co-determination than the Dutch statutory two-tier system does. It must however be borne in mind that the other 50% elected by the shareholders, will eventually be the deciding factor when it comes to decision-making. In this far-reaching form neither of these two systems has been followed by other member states, although some do have a representation of employees in the management of the company. At Community level there is no equivalent of the N.V. or B.V., but for some thirty years debate has been going on regarding the European Company. The major obstacle to this is precisely the issue of co-determination via the structure of this legal entity.
The organisational level variant is not concerned with the legal form under which the company is operating. This variant is linked to the actual organisation carrying out the economic activity. It is irrelevant whether the organisation is conducted by a legal entity or by one or more natural persons, for example as a general partnership. The most prominent example in the Netherlands is the WOR (Wet op de Ondernemingsraden) (Works Councils Act). Works councils are also a well-known phenomenon in Germany and many other member states.
Again, the Netherlands occupies a leading position where the actual competences of the workscouncil and its influence on decision-making are concerned, particularly outside the scope of social policy. At Community level there is the European Works Councils Directive. For large international concerns, this directive lays down the rules concerning obligatory consultation on the establishment of a European works council or a procedure for the purposes of informing and consulting employees. Further, the directive provides a safety net of minimum requirements. In the organisational level variant, co-determination is directed not towards the composition of the management, but to a "dialogue" with this management. Besides, this dialogue is primarily conducted with the management of the actual business organisation concerned.
I will ignore mechanisms that do not belong to the core of co-determination law, such as stock option schemes or share plans for employees and the possibilities that the right of inquiry offers their representatives.
3. Corporate governance
As mentioned earlier on, co-determination via the structure of the legal entity affects the structure of the legal entity via the influence of employees on the composition of the board. What comes to mind is that the current discussion on corporate governance has consequences for this form of co-determination. As it is, corporate governance focuses (in part) on the management of the legal entity. The relation is therefore an obvious one. However, there is a fairly broad consensus that the role of the legislator is limited as far as the stimulation of proper corporate governance is concerned. What it centres on is good behaviour. The legislator can encourage this by removing legal bottlenecks, but is evidently unable to provide mandatory exhaustive regulations in this matter.
Moreover, this corporate govern-ance context is too restrictive for a sensible consideration of co-determination in two respects:
- the discussion about corporate governance centres on solutions to the problems that emerge due to the distance that has grown between the providers of capital on the one hand and the management of a company on the other hand. To a considerable extent the management has acquired an autonomous status. The role of the providers of capital as the owners of and fellow players within the company, has been pushed back. The anti-takeover measures widely used in the Netherlands which to a large extent separate the management of the company from the immediate influence of the providers of capital, are among the most striking examples of this. Some legislation emphasises this autonomy even further, for instance in Germany and the Netherlands, with the statutory two-tier system, especially in its most far-reaching form where having appointed themselves, the supervisory directors also appoint the directors.
As for co-determination, the sharpness of this separation is hardly relevant. The management is and remains the logical focus of co-determination. The relationship between the management and the providers of capital, whether or not they keep in close contact, does not detract from the management's responsibility within the context of co-determination.
- the discussion about corporate governance focuses primarily on listed companies. Within a European framework, co-determination is an important issue for far more companies than just those that are listed.
These two aspects are obviously closely related. In principle, the distance between the providers of capital and the management increases as the shares or trust certificates for shares are more widely distributed. A stock exchange listing is the most obvious means of distribution.
4. The EU and co-determination via the structure of the legal entity
Nonetheless: the key concepts of corporate governance are transparency and accountability. These concepts are equally important in the European discussion on co-determination, except that there these concepts are then referred to as information and consultation and the discussion is not confined to listed companies.
Harmonisation of the law of legal entities
Long before the discussion about corporate governance started, co-determination played amajor - albeit mainly obstructing - role in all kinds of projects in the area of the law of legal entities, especially company law.
I will summarise the most important examples as far as the harmonisation directives are concerned. (For a brief specification of the EC initiatives I refer to the attached overview of K. Terwan.)
The proposal for a so-called fifth harmonisation directive concerning the structure of companies similar to the N.V. has been blocked completely because of the alternative regimes for co-determination contained in it. According to the maximalist member states, such as Germany, with a high degree of co-determination via the structure of the legal entity, this is unacceptable because it leaves too much room for - in their view - too limited co-determination. According to the minimalist member states, who are of the opinion that co-determination has nothing to do with the company's structure, this proposal is too far-reaching.
Proposals for a tenth and fourteenth harmonisation directive for cross-border legal mergers between companies and international transfer of the registered office or head office of a company respectively, are met with the same objections, for these could open up possibilities for companies to "escape" from a maximalist to a minimalist regime.
Recent case law
The maximalist member states are not supported by case law from the European Court in Luxemburg. This court recently emphasised the freedom for legal entities to conduct cross-border activities from one state to another. At issue in the Centros case of 9 March 1998 was a company similar to a B.V. which had been incorporated and still had its registered office in England although it conducted no business there at all; the only reason for its having its registered office there was therefore a formal legal one. It was focused completely on activities in Denmark. The Danish Chamber of Commerce refused the Danish establishment to be registered as a "branch office" because in this way the minimum capital requirements applicable in Denmark for companies similar to a B.V. and having their registered office there, would be circumvented.
England has no minimum capital requirements for companies similar to a B.V. The European Court ruled that national concerns of a receiving member state, in this case Denmark, such as the protection of capital for companies similar to a B.V., should not be an obstacle to a registration of the English company in this member state. There is no reason to expect a different outcome should the concerns of the receiving member state relate to co-determination via the structure of the legal entity. The idea behind this case law seems to be that once a company has been validly established in one member state, this company can conduct its business in the other member states without any restrictions based on the law of legal entities whatsoever. This ruling has certainly not been received with much enthousiasm in some maximalist member states such as Germany. For the minimalist member states it is no incentive to give their employees a role in the composition of the management of their company in order to open up additional cross-border possibilities for "their" companies. On the other hand receiving member states can probably put the same demands on an organization that carries out activities in their country as a branch of a company from a foreign member state, as apply to business organisations that are maintained by a person/legal entity of that receiving country itself - for example in the area of co-determination at the organisational level.
The European Company
The project for a European Company has also been stuck for years on the aspect of co-determination. Occasionally, and recently, there has been some movement but false motives play a considerable role here:
European trade and industry supports the project. This support is however somewhat cheap. A European Company might yield a possible new form of company without any obligation whatsoever to use this form, whereas through this vehicle benefits can possibly be derived by facilitating international mergers or international transfers of the registered office or, even more interesting, the international fiscal offsetting of losses. Without exception, these issues all seem quite appealing to me. I do not quite see, however, why these benefits should be granted only to the European Company and not to other legal forms. What's more, such a privileged treatment would appear to be discriminating against other legal forms and in violation of the freedom of establishment in the Community. This encompasses the cross-border freedom of choice between legal forms.
some member states not inclined to obligatory co-determination are prepared to support the European Company project including co-determination on condition that other Community initiatives in the area of harmonisation of co-determination (primarily at the organisational level) (see point 10) are frozen. As said before, a successful European Company project does not impose any obligations on companies, contrary to harmonised co-determination.
5. The EU and co-determination at the organisational level
In late 1995 the Commission, strengthened by the somewhat unexpected success of the European Works Councils Directive, once more reviewed the state of affairs. The preliminary conclusion of the review was that the only way to get on with the bogged down projects relating to company law would be to unlink these from any co-determination elements relating to the structure of the legal entity. In return there would have to be a harmonisation of national co-determination regimes, especially regarding the organisational level. The set-up of the European Works Councils Directive would provide a useful example in this context.
By the end of 1998 the Commission had indeed made a proposal for a directive introducing a general framework for the information and consultation of employees within the European Union. The directive is applicable to companies with more than 50 employees and makes use of the minimum model, providing the social partners with much freedom - which also forms the core of the European Works Councils Directive.
The objections to the proposal are mainly based on its allegedly being contrary to the principle of subsidiarity. This would exclude Community involvement.
As stated above, the proposal has driven several member states not inclined to statutory co-determination, to support - reluctantly - the project for a European Company, provided that the new proposal is blocked.
The Commission's approach would seem attractive, certainly for the Netherlands:
- harmonisation of co-determination via the structure of the legal entity is doomed to fail. The Netherlands have no interest in this anyway, unless it's aim is to prevent the use of for example English companies in order to escape such co-determination. For this purpose English companies would also have to be subjected to the harmonised influence of the employees on the composition of the company's management. However, I do not see this happening.
- co-determination at the organisational level pursuant to the Commission's proposal is in accordance with the socio-economic reality of the organisation. All business organisations within one member state and sharing the same socio-economic climate, are subjected to the same legal co-determination regime. On the other hand, co-determination regarding the structure of the legal entity for a company depends entirely on the more or less incidental country of establishment of the legal entity that runs the organisation.
- in this approach nothing prevents member states from introducing, maintaining, extending or even abolishing co-determination via the structure of the legal entity without any direction whatsoever from the EC. Provided that there is guaranteed freedom to set up a cross-border registered establishment in whatever form, the international competition between natio-nal company laws (within the framework harmonised within the EU) can function properly.
- in this context it should however be possible for companies in the course of their development to transfer their registered or head office and to merge internationally. Resistance to this is based on the extra-territorial aspirations of national co-determination hobbyists who no longer fit in the Europe of this millennium.
- the Commission's approach is a natural extension of the system of the European works council which is now accepted and has been implemented.
Harmonisation of national co-determination law through a minimum directive following the example of the European works councils will probably be achieved despite resistance. This resistance would be stronger if by then a statute for a European Company with one co-determination regime or another has come about. The creation of this so-called community vehicle with a co-determination arrangement, but without any obligation actually to use this vehicle, will strengthen the member states' demand to organise their own co-determination law regarding the subjects not covered - invoking in this context the principle of subsidiarity.
6. Co-determination regarding the structure of the legal entity no longer in favour
Finally three other developments must be mentioned.
- The rapidly increasing entanglement of the capital markets, the internationalisation of securities transactions, partially under the influence of EU directives, and the co-operation between stock exchanges will intrinsically result in a de facto international harmonisation of the constitution of companies. Companies that are less attractive to investors because of their legal structure, will find themselves out of favour. The companies in question cannot afford this to continue. This trend towards harmonisation driven by the market will ultimately not remain restricted to listed companies. Because this is a development that transcends EU borders and has an important American component, it is not to be expected that the ideas of a limited number of EU member states on employees' influence on the composition of the management of companies which by chance have their registered office in the EU, will be a decisive factor.
- A second development is the increasing resistance within the EU to, for example, anti-takeover measures that reinforce the management's position. There is political agreement on a 13th directive. This directive will to a large extent make impossible the Dutch system of issuing preference anti-takeover shares as a protection against a takeover which is seen as undesirable by the management. The statutory two-tier system also functions, unintentionally, as an anti-takeover measure and is therefore unpopular with the ever more influential proponents of a free market for corporate control.
- Thirdly, the corporate governance debate also increases the pressure on the statutory two-tier system. After all, this reinforces the entrenched and autonomous position adopted by the management, whereas proper corporate governance emphasises "checks and balances" in the form of transparency and accountability.
The statutory two-tier system and other forms of far-reaching co-determination by influencing the composition of the company's management, are increasingly under attack internationally.
The future is to harmonisation of co-determination at the organisational level after the example of the Dutch Works Councils Act.
Brief overview of relevant (proposals for) EU legislation
‘The structure of the company limited by shares and the competences and obligations of its organs’ (5th Directive)
Aim: harmonisation of the internal organisation of the company limited by shares within the European Union.
History and state of affairs: The proposal for the directive was submitted in 1972 followed by an extensive debate in the European Council in the seventies and eighties. Since the early nineties the debate has ceased, the subject is no longer identified as an ‘EU legislation spearhead’. The main problem and cause for the stagnation of the debate is reaching consensus on permissible models of control and, especially, on the permissible forms of co-determination in decision-making (such as our statutory two-tier system).
‘Cross-border mergers’ (10th Directive)
Aim: enabling cross-border mergers between national forms of companies limited by shares.
History and state of affairs: The original proposal was submitted in 1985, from the start there was a strong coherence with policy development on the European Company (SE). When the SE is finally introduced, an international merger must be possible at least for this purpose and this will make political agreement on the 10th Directive far easier. Around 1990 the debate on the 10th Directive was stopped, it was decided to concentrate on the development of the SE.
‘Regulating takeover bids’ (13th Directive)
Aim: facilitating cross-border take-overs, if necessary against the wish of the management of the company to be taken over and protection of the minority shareholders against a controlling majority.
History and state of affairs: The present proposal was submitted in 1996; in the summer of 1999 there was actual agreement on the content, yet early 2000 there was still no joint position of the Council/Commission, pending a solution of the Gibraltar issue (controversy Spain-United Kingdom which recently led to a political embargo of the Spaniards on several EU dossiers).
‘Transfer of registered office’ (14th Directive)
Aim: facilitating the transfer of the registered office of companies within the EU.
History and state of affairs: In 1997 an initial draft proposal of the European Commission was discussed. However, a proposal has not been submitted to the Council because of the expected opposition comparable to the opposition to the proposal for a 10th Directive.
‘(Role of the employees in the) European Company’ (Regulation and Directive)
Aim: creating - by means of a regulation - a new, European form of company enabling entrepreneurs to conduct activities throughout the EU within one company regime; important subsidiary aim is to guarantee adequate co-determination of the employees in such a European Company (by means of a directive).
History and state of affairs: The first attempts to create a ‘European Company’ date from the late sixties. Since that time the proposals have given the member states an increasing amount of freedom to organise certain aspects of the SE nationally. Since the mid-nineties the debate has concentrated on the organisation of co-determination. In 1997 the Davignon committee proposed to organise co-determination by means of a system strongly resembling the European Works Councils Directive: priority for self-regulation by the social partners at the company level with an obligatory statutory ‘safety net’ when no agreement is reached between the employer and the employees.
The directive proposal was discussed in the Social Council in 1997 and 1998 and national accents were added. This almost resulted in an agreement in December 1998, when the Spanish embargo prevented the proposal's adoption. At the moment the final stage of the debate on the regulation is awaiting an agreement on the directive on co-determination.
‘European works councils’ (Directive)
Aim: organising employees' co-determination at a European level in groups that are active in several EU member states and that have a certain minimum number of employees in several of these member states.
History and state of affairs: This directive also goes back several decades. A political agreement was reached in 1994, with a system characterised by priority for self-regulation by the social partners at company level, with an obligatory statutory ’safety net’ when no agreement is reached between the employer and the employees.
The directive has by now been incorporated into the national legislation of almost all the member states; in the Netherlands the relevant act became effective in 1997.
At the moment the European Commission is evaluating the implementation of the directive; major substantive alterations as a result of the evaluation are not anticipated.
‘Minimum standards for national regimes on information and consultation’ (Directive)
Aim: By formulating obligatory minimum standards creating a “bottom” threshold in national legislation of the EU member states with respect to information and consultation of employees within companies; minimum level harmonisation.
History and state of affairs: Late in 1998 the European Commission sent a proposal for a directive to the Council. A politically very sensitive dossier, for which reason the German and Finnish chairmanship decided not to submit the proposal to the Social Council in 1999. The present Portuguese chairmanship has announced that it will possibly do something with the proposal.
1. Former Unilever N.V. company lawyer and former advocate