TCS Daily

Stakeholder Blues

By Annette Godart-van der Kroon - September 4, 2003 12:00 AM

How has the economic situation in Germany deteriorated so badly? The most obvious answer is that there is no flexibility, nor a free labor market.


Germany is in fact a "stakeholder society," and this concept has turned out to be disastrous. Germany has historically been a state in which the rulers were patronizing and the subjects had to obey the king. A stakeholder society is one in which contracts are set for a long term, in which there are block-share holdings and "co-determination."


Who are the stakeholders? Well, they are all the groups that experience the consequences of business activity or that influence the concern itself. They include workers, shareholders, consumers, dealers, the government, local communities, ecologists, etc. In any big undertaking, each of these groups provides its contribution, has expectations and/or rights or claims to the concern. Moreover, the stock market is not strongly developed.  A shareholder society, on the other hand, is not bound by long-term commitments. It has a competitive labor market, a strong stock market, a fast re-allocation of financial or human capital and short-term flexibility. It's characterized by market-orientation and labor mobility.


The first co-determination law was enacted in 1951 (Montan Mittbestimmungsgesetz). Later came Betriebsverfassungsgesetz (1952) and the Mittbestimmungsgesetz (1976). Co-determination is founded on the principle that decisions with a distributive character, especially about wages, should be taken far away from the entrepreneur.


If focuses more on the efficient organization of production in the enterprise than on the question of distribution. It is more concerned with the supervision (or control) of management.  The concept of co-determination seems now to be generally accepted, but the following objections to it could be made:


  • "If decisions are made by the vote of workers in the factory, this will lead to under-investment in projects, whose returns will come much later when many of the presently voting workers won't profit enough from them to outweigh withholding money from current distribution."
  • "Current workers, and therefore the factory, will have a strong incentive to choose to maximize average profit (profits per worker) rather than total profits."
  • "The important thing is that there is a means of realizing the worker-control scheme that can be brought about by the voluntary actions of people in a free society."

In 1979 there was a complaint by entrepreneurs before the Bundesverfassungsgericht that the co-determination act would be disastrous. The court rejected it with no explanation other than "because it corresponded with the opinion of the government"!


Of course, the same government had enacted this law.  For an efficient economy one needs property, contracts and responsibility, but property is harmed by these (co-determination) acts.


There is also a danger that workers will become instruments of the government. Entrepreneurs, however, have to focus on market indicators, not government signals.

Opponents of co-determination have already argued that participatory management is essentially a zero-sum game, since the different goals of employers and employees lead to unnecessary bargaining. Supporters argue that the property rights school ignores the intangible psychic benefits that accrue in a co-determined system to owners, managers and workers.


Co-determination is now so much a part of the German consensus that the Germans want to introduce it into European corporate law. Only recently the European Union accepted a law for enterprises of more than 50 employees, demanding consensus and deliberation. This is in the framework of "approximation" (along with "harmonization" and "co-ordination").


All European leaders have to do is to see what a disaster these policies have been in Germany.


Annette Godart-van der Kroon is president of the Ludwig von Mises Institute-Europe.


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