Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Britain's leader-in-waiting Theresa May wants to ape Germany by appointing workers to corporate boardrooms. She might balk at going quite as far as big German companies, where staff take half the seats on supervisory boards and have a say over investment and firing executives. But there's plenty to commend a reappraisal of Britain's cozy and ineffective system of non-executive directorships. The German "co-determination" model has merits -- for investors and workers. Here are four positives:

1. Shareholder returns

Employees worry about more than the stock price, so you might expect their boardroom presence to mean poor shareholder returns. In fact, Germany's Dax and mid-cap M-Dax index have outperformed their U.K. equivalents over the past decade.

Staff Returns
Germany's index of mid-sized companies has performed better than its British equivalent
Source: Bloomberg

Correlation isn't causality. We don't know how German stocks would have performed had workers not had a voice. But it's not preposterous to think having a say helps motivate workers, which benefits shareholders and employees alike.

2. Productivity 

Okay, so Germans work fewer hours than any other OECD nationals. Yet, that has upsides. Despite some high-profile exceptions -- such as airline Lufthansa --  German employees don't strike that much. Their labor productivity per hour is better than the Brits. When they're not leaving the office early and enjoying long holidays, German workers get things done. 

Prussian Productivity
Germans don't work long hours but still get the job done
Source: Office for National Statistics
UK= 100. This means U.K. productivity was 36 percentage points lower than Germany in 2014.

3. Looking at the long term

Many U.S. companies seem to be prioritizing share buybacks over corporate investment. That may be unhealthy because today's investments are tomorrow's profits. Buybacks are far less common in Germany, where workers tend to think building plants or developing products is a better use of cash. R&D spending is higher in Germany than the U.K. 

Forward Looking
Germany spends more on R&D than the U.K.
Source: Eurostat

 4. Employment

Of course, workers on boards might discourage executives from cutting jobs, even when that's needed. Take Volkswagen, where employee reps have protected German jobs and productivity has suffered. Still, VW's board is an oddity.  Strong ties between management and workers can help in tough times. When demand for German exports slumped in 2009, labor board representatives swiftly backed working hour reductions, meaning job cuts were avoided. Exports recovered and German companies were able to reap the benefit. 

Worker Retention
German companies avoided large scale job cuts in 2009 and reaped the benefit when demand improved
Source: Eurostat

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That's because the State of Lower Saxony, where VW has its headquarters, also holds supervisory board seats. Both the state and labour representatives have a vested interest in protecting jobs. Between them they control a majority of the supervisory board seats. 

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net