Employee representation on the board

Employee representation is a specific requirement for German boards, but global boards can learn from Germany. More and more boards have an employee representative, mostly a director, who brings employees’ perspectives back to the board.

In this podcast, Dr Sabine Dembkowski, founder and managing partner of Better Boards, discusses employee representation on the board with Gabriele Bornemann, who wants to set new standards for qualification supervisory boards with her company Management Alliance. Before that, Gabriele worked in industry and finance for over 25 years. She was responsible for investor relations, M&A, risk management, and strategy.

“We do not ALL like this option to have equal representation”

Gabriele outlines the concept of labour representation at the board level in Germany – a unique approach shaped by the country’s two-tier corporate governance system. Unlike the Anglo-Saxon one-tier system, where the board has direct engagement with employees, German supervisory boards are legally required to remain independent and cannot interact directly with employees. However, employee representation can still play a crucial role in management decisions, particularly in larger organisations, as the level of employee participation depends on company size. She explains that companies with 500 to 1,999 employees must allocate 1/3 of their supervisory board seats to employee representatives, and larger companies (2,000+ employees) must implement equal representation, with shareholder and employee representatives holding an equal number of seats. To break deadlocks, the Chairman of the Supervisory Board holds a casting vote.

As of 2023, 664 German companies followed parity codetermination, 412 of them unlisted companies. However, there is a growing trend of businesses seeking to circumvent co-determination by converting to European company (SE) status before crossing the 500-employee threshold, a move that effectively eliminates the German legal requirement for labour representation.

“Profitability of the company as a whole is at stake”

Gabriele accepts that labour representation on the board is not without its challenges. A key example is Volkswagen, where employee representatives hold significant influence over management decisions, and their primary concern is job security and maintaining production sites in Germany – but business realities demand a shift toward new markets. If changes in sales and procurement make Germany less viable as a production hub, the company must adapt, even if it means relocating operations. With strong employee representation, these strategic shifts can become contentious, with decisions to prioritise national job security over global competitiveness.

She explains that co-determination reaches its limits when employee representation remains focused solely on national interests. In an increasingly globalised economy, international business considerations must take precedence. Yet, the current structure does not attract an international perspective from employee representatives, which can impact strategy and long-term profitability.

That said, Gabriele knows labour representation has clear advantages when approached effectively. Employees bring valuable insight into operational realities, workplace culture, and long-term workforce stability. Co-determination could evolve into a more balanced and globally competitive model if employee interests were considered from a broader, international perspective.

“Codetermination also has also a very positive impact on the structure of a company”

Gabriele explains that the origins of codetermination in Germany are deeply rooted in history. Emerging after World War II, it was designed to safeguard labour rights in an evolving and increasingly competitive market. While it has its challenges, she knows that the system also brings clear advantages, especially in ensuring greater oversight within corporate governance structures.

She gives the example of the Wirecard scandal, Germany’s largest corporate fraud case in recent history. Wirecard’s supervisory board was not co-determined, meaning no employee representatives were at the board level. This raises the question: Could the fraud have been uncovered earlier if direct employee feedback had been available?

Germany’s two-tier governance system means supervisory board members are legally prohibited from direct contact with employees. Their only communication channel is through the management board, which, in the Wirecard case, was actively concealing fraudulent activities. While site visits and employee guest invitations to board meetings were permitted, management always facilitated these interactions, creating the risk of filtered or controlled information.

Gabriele explains that the fallout from Wirecard led to regulatory changes, softening the previous strict ban on direct contact. Now, the audit committee chairperson is allowed to communicate directly with employees responsible for risk management, auditing, and other control functions without prior approval from the management board. While she believes this is a step forward, she also feels that co-determination can serve as a vital mechanism for greater transparency and accountability, preventing governance blind spots that might otherwise go unnoticed.

“It’s very important that we have a strong chairman of the supervisory board”

Gabriele believes that co-determination presents both opportunities and challenges. The key to making it work lies in how the different parties collaborate, the composition of the supervisory board, and the role of the chairman. She advises that a strong chairperson is essential to balance perspectives and ensure discussions remain productive rather than divisive.

Even small changes can improve communication between shareholders and employee representatives. One simple yet effective measure she advocates is to arrange seating alphabetically rather than placing representatives on opposing sides of the table. Similarly, informal dinners the evening before board meetings can foster collaboration and shared purpose, encouraging all members to make the best decisions for the company rather than acting as opposing factions.

However, Gabriele cautions that one persistent challenge remains—determining how early employee representatives should be involved in major decisions. This becomes particularly complex when decisions impact international operations, such as Volkswagen’s decision to close German facilities and expand production in other regions.

Ultimately, Gabriele feels that co-determination’s biggest weakness is its lack of international adaptability in an increasingly global business environment. The system’s success depends largely on the strength and leadership of the supervisory board chairperson, whose ability to navigate this challenge can define board effectiveness as a whole.

The three top takeaways for effective boards from our conversation are:

• Co-determination in Germany makes sense because supervisory boards have no direct access to employees, and it is important to integrate the employee perspective into their work
• The weakness of codetermination is the lack of internationality in international business models
• A very strong supervisory board chair is important to consider the common strengths of both shareholder and employee representatives.

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