Under the German system of codetermination firms may be required by law to appoint employees to the supervisory board of the firm. Codetermination laws apply to all German private corporations(GmbHs) with more than 500 employees, and to all stock corporations(AGs).

Codetermination affects the composition of the membership of the supervisory board. The position and role of the board of directors in firm management is particularly significant because the board of directors represents the top of the firm’s decision hierarchy.

The German codetermination system legally requires firms to allocate supervisory board seats to employees depending on the number of employees in the firm. Codetermination creates bargaining power for employees by effectively transferring some of the suppliers of capitals’ control rights to them in the form of seats on the supervisory board. The votes attached to shares are less valuable when employees are entitled to supervisory board seats by law.

But we find that with employees on the supervisory board, firm resources are directed differently, decreasing the return on assets and the market-to-book ratio. Also, the return on equity decreases. Employees influence decisions such that the firm’s systematic risk increases because of employees resisting restructuring efforts by shareholders. Codetermination appears to be a binding constraint on shareholders. Such codetermination in the organizational form seem to be prohibitively costly for many large German stock corporations.

For this reason, the stock market has played a much smaller role in the savings-investment process in Germany than in the United States and the United Kingdom.

Generally, the policy of appealing to labor and management alike will only succeed in calming the market and preventing the outflow of capital at a time of uncertainty like now, providing grounds for expanded foreign investment, according to analysts.

But, with the launch of the Roh Moo-hyun administration, korean labor unions are pinning their hopes on the government as Roh’s victory in the presidential election last year was largely due to his pro-labor propensity.

This may encourage other labor unions to resort to collective action in winning concessions from the government.

Another feature of the recent labor activism is not necessarily related to labor rights such as wage hikes. The trade organizations want to influence policymakers and lawmakers to revise policies and laws. For example, the trade unions want to adopt the system of participation in management like Germany. The trade unions are also moving to pressure the National Assembly into legislating a bill to promote the status of participation in management. If these labor demands are met, Korea would make a giant step back to labor rigidity.

Therefore, it is clear that Korea have no choice but to reduce workers and investment, and relocate plants offshore when the principle of law and order is not upheld and unionized workers meddle in intrinsic managerial rights.

As was seen before, Employees influence decisions such that the firm’s systematic risk increases because of employees resisting restructuring efforts by shareholders. Codetermination appears to be a binding constraint on shareholders. Such codetermination in the organizational form seem to be prohibitively costly for many large German stock corporations.

For this reason, it would be premature to legislate the codetermination in Korea like Germany.