Opinion Leaders` Digest 03-23
Date : July 18, 2003
Author :PARK Yang-Kyoon, A CFE Senior Research Fellow, pyk@cfe.org

Participation in Management by Labor Union and Corporate Governance

Recently, Government is likely introduce participation in corporate management by labor union. This means that the Anglo- American "shareholder's capitalism" would be abandoned in favor of European "stakeholder capitalism", to allow the labor union to join in the process of the corporate decision making. But this is a very unfavorable system to the shareholders imposing serious limitations on their rights.

Corporate Governance - European Style and Anglo- American Style

Legal system of each country is fruits of the influence of the political, cultural environment of that country. So is the corporate governance. In European countries where social agreement is regarded as the top value, corporate governance places its emphasis on the agreement of the parties concerned. However, in the UK and the USA, establishment of the principles has priority value over agreement among the parties concerned in the corporate governance.

The author identifies the contrasting differences of the two types of the corporate governance.

First, the objectives that corporate is pursuing are different each other. European style is stakeholder capitalism. This values social agreement over everything else. Social agreement is concluded among the shareholders, creditors, laborers and other interested parties. Instead, in the UK and in the USA, corporate is seeking for the maximization of the shareholders' wealth.

Second, size of the stock market, liquidity and structure of stock ownership are different each other. Europe has less number of corporations listed in the stock market. And the volume and the amount of the stock trading is rather smaller, with lower level of liquidity. The ownership is not much spreaded but rather concentrated. But the USA and the UK have contrary situation. Investors in the USA enjoy wider opportunities to choose corporations they want to invest to.

Third, corporate financing is quite different each other. European corporations are relying on the debts while their counterparts in the USA and the UK depend their finance on the stock markets.

Fourth, the composition of board of directors is also in contrast with each other. In Europe, they have dual structure consisting of management board and supervisory board. In Germany, directors of the supervisory board are elected by the shareholders and the labor union. And directors of the management board are elected by the shareholders. In Netherlands, directors of the supervisory board and the management board are all elected by the supervisory board. On the contrary, in the USA and the UK, board of directors is monolithically responsible for both of management and supervision. Board members are elected and dismissed exclusively by the shareholders.

Fifth, a striking difference is whether labor's participation in corporate management is admitted or not. In Germany, labor union is represented in the supervisory board and in the management board. Laborers are entitled to elect their representatives up to majority of the management board depending on the scales of the corporations. In Netherlands, the representative of the laborers are not elected the board members. However, the corporation has to organize labor council which is participating in the board meetings but without voting. However, in the Anglo-America, labor unions' participation of the corporate management is not allowed as a matter of principle, leaving it to the corporate autonomy.

Sixth, another difference lies on how to protect the shareholders' right. Too much limits are imposed on the shareholder's right. In Netherlands, any corporation with more than 100 workers and over 12 million Euro in total of the capital and reserve ought to frozen and delegate all the rights of the shareholders, except dividends, to the supervisory board, which is designed to exercise all the right for election and dismissal of the board members, major decision making on behalf of the stockholders. However, in the USA and in the UK, stockholders are entitled to full exercise of their rights and the board members are subjected to the claim of the compensation in case of mismanagement as a safety device.

Metamorphosis of Corporate Governance in Europe and Its Lesson

According to above comparison of corporate governance in Europe and in the Anglo-America, in the countries which chose the European Style, it is found, the numbers of the listed corporations are less than in the USA and the UK, volume of stock trading and level of liquidity are rather lower and their financing is dependant more on loans than on the direct financing from the stock market. This means that in the European-mode governance, disposal of the stock would be rather difficult in case of loss on the side of the stockholders. This is a symptom that European governance is more or less lag behind that of the USA and the UK. The latter is more favorable to the stockholders. Investors would have freer hand and wider opportunity to choose their favorite corporations to invest.
In Europe, before and after the integration into the EU, there have been great controversies on the corporate governance. Anglo-American style governance was proposed as an alternative of European governance. Some of German scholars are insisting that German governance should be replaced with the American. Their wrongful governance leads to the bankruptcy of the competitive corporations and to the high rate of unemployment. In Germany, wealth of the stockholders didn't go up correspondingly even when the German stock market boomed and corporations enjoyed good profits. In Netherlands, Anglo-American governance is more and more favorably chosen, keeping pace with increasing investment from the USA and the UK. This is regarded as more appropriate and more suitable for the protection of the interests of all the parties concerned including the stockholders.

The author argues that his comparative review of the two fashions of corporate governance raise questions and cast doubts on whether government proposal favoring the European style is justifiably right. There may exist no universal valid correct answer in the problem of the corporate governance, as each country has different cultural, political, social and economic environments. So is the participation in corporate management by the labor union. Maybe labor participation in corporate management is effective in the case of highly homogeneous corporation, like law firms. A heterogeneous corporation would suffer from the labor union's participation in its management. It is desirable that labor union's participation would be left to the free option by the corporation. ¡á

(July 24, 2003, summarized and re-edited in English by JUNG Churle, a CFE Research Fellow, jungchrl@unitel.co.kr. Some changes were made in wordings with good advices from the author.)