Capital’s Weak, So Labor Gets a Share

WORKERS BID TO OWN THEIR FUTURE
By Chris Bryan, May 28, 2009

Demanding a capital stake in a troubled company may seem like an odd thing to do at the height of the worst recession since the second world war, but for German workers it is fast becoming a powerful rallying cry. The idea of Mitarbeiterbeteiligung – employee participation in either the capital or the profits of their company – is catching on among trade unions and politicians. The move shows that amid the ravages of a brutal downturn, labor representatives, who have traditionally prioritized wage negotiations, are prepared to explore unfamiliar territory.

“Companies are saying to workers: ‘You must put up with this or that.’ Well, we’re saying, ‘OK, maybe we’ll go along with that, but only if we get something in return’ – from employment guarantees right up to a stake in the company,” says Berthold Huber, head of IG Metall, Germany’s biggest trade union.

Compared with other European countries, German employees have until now shown little enthusiasm for taking a stake in companies. A report published this year by the European Federation of Employee Share Ownership found only 1.7 per cent of the equity of large German companies was held by their workers, compared with a European average of 2.6 per cent and 4.5 per cent in France.

Yet the economic downturn is increasing the popularity of the idea in Germany. Businesses suffering from falling demand and a shortage of liquidity have been under pressure to cut their personnel costs. In this context, employees have little choice but to agree to concessions. However, they are starting to demand assurances that they will be rewarded after the crisis is over and the company returns to profitability.

Politicians also see the advantages of these arrangements and legislation was passed earlier this year to promote employee co-ownership. “Since the crisis began, the idea of giving workers a [capital] stake has become more attractive,” Olaf Scholz, labor minister said in Westdeutsche Allgemeine Zeitung. “Until now, workers have held too few of the shares in their companies.”

Leading the way is the cars sector whose weakened condition is forcing management and workers to embrace new ideas.

Daimler last month set up a working group to examine whether an employee profit bonus should be converted into a capital stake in the company to help reduce costs.

The talks follow the announcement of a €2bn (£1.8bn) cost savings programme that will cut the hours and pay of 60,000 workers by 8.75 per cent this year in exchange for job guarantees.

“We are the only shareholders who have a long-term interest in the company, in contrast to those [shareholders] who only want to make a quick profit,” Erich Klemm, head of Daimler’s works council, told a trade union conference.

Opel’s works council has mooted a similar plan in the battle to help rescue the troubled European arm of General Motors. In its bid for Opel, Magna, the Canadian auto parts maker appeared to take this message to heart – promising workers 10 per cent of the new company.

Meanwhile, workers may be given a stake in Schaeffler, the indebted car parts and industrial conglomerate, as part of an unprecedented deal with labor representatives to preserve jobs and cut €250m in costs.

Small and medium-sized companies are also beginning to recognise the benefits of the scheme, says Heinrich Beyer, director of the Arbeitsgemeinschaft Partnerschaft in der Wirtschaft (AGP), a sort of lobby group for companies with employee ownership arrangements.

“Workers have nothing to lose. With a profit share or capital stake they at least have a stake in the future,” he says. That’s the way many companies are thinking at the moment – and the unions too.”

However, IG Metall, which has 2.3m members in the German engineering sector, also retains considerable skepticism about the ability of employee ownership to help companies and their workers. “Opel will not be saved by just giving workers a stake – [the rescue package] will be of a far greater dimension”, Jörg Köther, a union spokesman, warns. “Employees who take a stake in their company . . . not only have to worry about [losing] their job but also bear an additional financial risk.”

Critics say trade unions have been unwilling to see their power diluted by employees becoming protocapitalists – German workers already influence big corporate decisions through their representation on supervisory boards.

Little surprise, then, that a study by the Institute for Employment Research (IAB) found that in 2005 only about 10 per cent of German companies had profit-sharing schemes, while a paltry 2 per cent enabled workers to put capital into the business.

These figures, taken at a time when the economy was stronger, corporate profits were soaring but wages stagnating – revealed a bleak picture of a German workforce that was failing to enjoy the fruits of its labor.

When Chancellor Angela Merkel’s coalition government came to power in 2005, ministers promised to do something about this. The government finally agreed a batch of new employee incentives last year (see box).

Goldbeck, a mid-sized inter-national commercial construction group based in Bielefeld, western Germany, is a model for how these incentives could work.

The family-owned business allows workers to purchase a “silent” capital stake up to the value of €1,055 each year.

The annual interest pay-out on this capital varies according to the profitability of the company but has averaged 12 per cent since the scheme was founded 25 years ago.

Although workers are not purchasing a say in how the company is run, they are motivated to work harder and there is better communication between staff and management, explains Thomas Domeyer, a Goldbeck financial officer.

“Employees have the feeling that they are partners in the firm and that at least a small piece of the company belongs to them,” he says. “As long as the company has good results, it’s very lucrative for them.”

However, Mr Domeyer acknowledges that the investment is not risk-free: “If the company became insolvent the money would be gone.

New German legislation designed to encourage employee co-ownership came into force on April 1. The tax-free limit on employee stake purchases was raised from €135 (£118) to €360 and a program of state top-up contributions was expanded.

An alternative model, backed by the Social Democratic party, gives employees the option of buying a stake in a so-called “Germany-fund”. The risk to workers is thereby reduced because the fund manages shares in several companies.

Companies hoping to take advantage of the improved tax breaks must also tread carefully because the legislation prohibits the simple substitution of a pay increase with a capital stake. Any capital participation must be in addition to agreed pay deals. However, Olaf Scholz, labor minister, said this week that exceptions to this rule might be necessary because of the economic crisis.