Editor Cornelia Girndt asked the questions.

Herr Raabe, you wanted to find out how the 1976 law on employee board-level representation is working in practice and to investigate its failings. What have you found?
I started the interviews with members of management and supervisory boards in a very critical frame of mind, because my starting point was that there really were serious problems and that they were primarily caused by the employee representatives in those bodies. Today, five years later, I have to say that, yes, there are serious shortcomings in the supervisory boards of some of the DAX-30 companies [the largest German quoted companies] but in none of these cases can I identify the employee representatives as being principally to blame. In fact it is rather the opposite.

Which shortcomings were identified by the business people you interviewed?
In many supervisory boards the main problem is the lack of a culture of trust. Several of my interviewees reported massive problems with confidentiality - with people talking to the press. Supervisory board members who don't feel that they are well informed will often contact the press to raise issues of concern before the supervisory board meeting. It is then on the agenda without the individual having to have personally revealed themselves. The frequently expressed supposition, that it is primarily the employee representatives who are the source for these leaks and who break the confidentiality requirements, could not be confirmed by the people I spoke to.

How do you explain the fear on the shareholder side of raising things directly in meetings?
Some of the shareholder representatives told me that they had been asked to resign by the chief executive because they had asked critical questions in the supervisory board on several occasions. Because of this, people use indirect approaches. It may happen that a representative of the shareholders rings up an employee representative on the supervisory board the day before the meeting and asks if he or she can raise a particular topic. The reason is so that they don't make themselves unpopular with their own side.

Critics of employee representation at board level argue that the presence of employees blocks discussion, because those representing the shareholders hold back from criticising the management when "straightforward" employees are in the meeting.
There certainly are managements who are enormously disturbed by criticism, when employee representatives are present. But that is essentially a cultural problem. These managements don't want to be criticised by anybody. They don't want criticism from the shareholders' side, not even in the pre-meetings when they are on their own. Incidentally it is a myth that these pre-meetings with shareholders' representatives are where the real tough strategic debates take place - the ones that are supposedly not possible in the full meetings. The one exception is in moments of crisis. But criticism is not about damaging management - it's about monitoring it and making it more successful.

Are divisions among the shareholders important - perhaps with financial investors taking a different view?
In many of these supervisory bodies what is at issue is power, not factual questions. That's the case when the balance of forces between the management board and the shareholders is not clear or when there are disagreements between different factions on the shareholder side. For some time the sharp dividing line between shareholder representatives on one side and employee representatives on the other has ceased to exist. Sometimes there are several groupings on the employee side of the table - there are four at Lufthansa. This makes the chair of the supervisory board that much more important. He or she decides who can be given what information. The chair is crucial in determining whether or not a culture of mistrust develops.

There are intrigues and power struggles everywhere. Why is a culture of trust so important for the successful functioning of a supervisory board and particularly for employee participation?
Employee participation is also in the best interests of those who own the business. For shareholders in particular it is enormously useful when they hear opinions that do not reflect the perspective of the chair of the supervisory board and the management board. I was frequently told of cases where it had been possible to keep German plants competitive through cooperative cost management

And where then is the problem?
These issues are so sensitive that the employee representatives often do not communicate them to their own voters. The shareholder representatives similarly do not do so because it might appear that they were doing behind the scenes deals with the representatives of the employees. In fact it is exactly this cooperation that is to the benefit of the business and that is why trust and real cooperation is so important for the functioning of the supervisory board.

You also interviewed a few foreign representatives from management consultancies and funds. What has been their experience of supervisory boards with equal numbers of employee and shareholder representatives?
Intellectually, those from the Anglo-Saxon tradition find employee participation difficult to comprehend, but they are pragmatic. For them it is what comes out that is decisive. In classical industrial companies, the foreigners that I spoke to were very much impressed by the expert knowledge and strategic far-sightedness of the employee representatives and they felt this to be a major plus factor. However, one problem is that when the foreign shareholder representatives cannot speak German, they are often excluded from informal communications.

In your dissertation you pursue the supposed failings of employee participation at board level. One accusation is that the employee representatives are not independent of the company.
I think the debate about independence, as it has been presented by the EU, is misconceived. Without the shareholder and employee representatives in the supervisory board, the only people watching over the company would be lawyers and auditors acting as trustees. Cooperation works best where long-term shareholders or family representatives know what they stand for - the long-term success of the business. It becomes more difficult when people are brought into supervisory bodies as supposedly neutral advisers and worry about their position if they pose questions that are too outspoken. In my view the most important criterion for independence is whether one is independent from the body being monitored - the management board. Those who are least dependent are the external trade unionists - indeed that was one of the important reasons for giving them monitoring functions in the 1976 legislation.

How do the shareholder representatives see the external trade unionists?
There is a big difference between industrial sectors. Large parts of the banking and finance industry criticise the role of external trade unionists because union density there is very low and they only represent part of the workforce. In manufacturing it's very different and the external trade unionists are perceived much more positively. Their role is particularly positively seen when they are able to find a common position uniting the opposing interests of different company locations.

A further reservation felt about the employee representatives on the supervisory board is that because they help to choose and monitor the members of the management board, they get favours in return.
Sometimes unethical offers are made - on both sides. It is up to the chair of the supervisory board to establish clear standards. However, I wasn't able to find any proof that the system of employee participation led to management boards being in a state of dependence on the goodwill of employee representatives.

In events organised by the Berlin Network for Corporate Governance it is argued that employee participation in supervisory boards is not compatible with good company management. Your mentors won't be pleased that you were not able to prove this.
No one is interested in simply having their positions confirmed. We are interested in objective information not any sort of ideology. The basic approach was to try to get inside the black box. What really happens in a supervisory board? I was completely open-minded when I went into the interviews, and if what had come out had been that employee participation was a problem and needed to be abolished then I would equally have said that. But what I now say is that, employee participation is not responsible for the shortcomings that sometimes exist. Within the same legislative framework, there are supervisory boards with employee representatives that operate outstandingly but there also some disastrous examples.

Your thesis is that there is no fundamental difference between the system where the employees have one-third of seats and one where they have half the seats, as in the case in larger companies under the 1976 legislation. But neither the unions nor the employers' associations share that view.
Let's not kid ourselves. The fact that the chair, representing the shareholders, has the right to a second vote means that the shareholders' can push through every decision. Certainly the symbolism of having an equal number of members on the supervisory board is important - it gives the employee side equal status. But the quality of employee participation is decided in cases where a solution that is acceptable for all sides can be found for measures which are not in the interests of the employees. That only works when there is a relationship of trust between all those involved in the decision - the management board, shareholders and employee representatives. Expressed another way, if I always have one vote less than the other side, then it is only through the quality of my arguments and my work on the board that I can get my voice heard.

(Translated by Lionel Fulton from magazine Mitbestimmung 4/2010, Photo: Rolf Schulten)

More information

Nico Raabe: Die Mitbestimmung im Aufsichtsrat (Employee participation in the supervisory board), 2010,Erich-Schmidt-Verlag Berlin, 400 pages, 49.95 Euro, May 2010

Interview with Dietmar Hexel (for download)

Information about Nico Raabe´s supervisory board-study (for download)