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C5 Corporate democracy and transparency

A) Goal of the indicator

Legally speaking, we live in a democracy but in fact, citizens’ possibilities for co-participation beyond that of taking part in elections every 4 to 5 years are very limited and practically unknown.

In business, democratic principles come to bear even less. Executives make the decisions; the employees have only very limited rights to employee participation and co-determination. These essentially consist in the right to unionize and elect a works council which represents the interests of the employees vis-à-vis the employer (representative co-determination). 

In reality, the business system likens a monarchy which permits varying forms of exerting influence depending on the executive in charge.

Our ideal is to obtain the highest possible degree of employee co-determination regarding all crucial decisions (at least in the work area) and legitimization of executives through elections by employees.

An essential prerequisite for any form of democracy is comprehensive transparency within the company, which allows employees to make sound decisions for the company in the pursuit of achieving common goals.

Corporate democracy is not necessarily identical to grassroots democracy. A form must be found which allows for effective and efficient performance on the one hand and co-determination on the other, at least at the employee’s own / the team level. There are sufficient examples of this – see Good Practices.

Studies show that in truly democratic companies the employees are more satisfied, committed, innovative and productive than in traditional organizational structures.

B) Prompt questions

  • What percentage of critical data in particular (board minutes, salaries, internal cost accounts, decisions on dismissals, hires) are accessible to all employees inside the company?
  • Which EDP support is provided inside the company concerning the issue of transparency? Who has online access to which information?
  • How is executive personnel legitimized? Who decides on hiring / promotions? To what extent do the new employees participate in making such decisions? How transparent is the decision-making process?
  • What is the procedure for hiring new employees? What extent of co-determination do the teams involved have?
  • How are mutual decisions made? What decision processes are there and what form do decision-making processes take (majority decision, systemic consensus, consent, consensus)?
  • Which decisions are made with employees being heard; which decisions do they participate in making; which decisions are made on the basis of co-determination; which decisions are made exclusively by employees?
  • How are mutual decisions made? What decision processes are there and what form do decision-making processes take (majority decision, systemic consensus, consent, consensus)? [1]
  • What extent of co-determination do employees have in regard to profit distribution?
  • What percentage of the proprietorship is owned by employees? Which legal form of cooperative business (for ex. employee foundation, cooperative) is in place? Under what conditions can any employee become a partner. What efforts are taken to enable employees to become partners?

C) Evaluation table:

Sub-indicator

First steps

(0 - 10 %)

Advanced

(11 - 30 %)

Experienced

(31 - 60 %)

Exemplary

(61 - 100 %)

Degree of transparency

 

Relevance: low

 

Initial measures taken to ensure more transparency

Some critical data*1 are transparent

Key critical data are transparent

All data are transparent; available to all employees

Legitimization of executive personnel

 

Relevance:

moderate

 

Hearing / consultation when new executive personnel is hired

Right of veto for hiring of new executive personnel, in a test phase* 2 to  25%  elected

25-75% of executive personnel elected on a regular basis

76-100% of executive personnel elected on a regular basis

Co-determination concerning fundamental decisions

 

Relevance:

high

Hearing / consultation + justification, concept of democratic co-determination in place

Test phase, - 25% of all decisions are democratic, partially consensual, incl. those regarding profits

 

25-75% of decisions are democratic, 25% of them consensual, incl. those regarding profits

76-100% of decisions are democratic, at least 50% of them are consensual, incl. those regarding profits

Employee co-ownership

 

Relevance:

moderate

 

Overall concept and self-obligation of previous owners; initial measures in this direction

Employees have up to 25% ownership

Employees have 25.1 to 75% ownership

Employees have 76 to 100% ownership

*1: Critical data are board minutes, salaries, internal cost accounts, decisions on dismissals, hires.

*2: Test phase = period during which democratic forms of decision-making are “tested,” i.e. the executive waives the right to exert sole decision-making power for the benefit of mutual decision-making models during this period of time

Further individual measures (democratic co-determination)

  • Team elects / decides  who gets hired as their own manager
  • Anonymous evaluation of executives; all results accessible online (Semco)
  • Large-group meetings at which strategic decisions are discussed and made (tendency in the direction of grassroots democracy).
  • Individual methods for meetings which place great store in cooperation/equality such as World Cafe, Openspace, dynamic facilitation.
  • High degree of self organization at workplace (cf. C1 Workplace quality)
  • Systemic consensus-making[2] or other forms of group decision-making concerning individual issues
  • Preventive conflict consultancy/ conflict resolution involving consensual solutions

D) Special aspects of evaluation

Differentiation from other indicators

In Matrix 4.0. there was still some overlapping between C1 and C5, which has now been minimized.

Co-determination/transparency vis-à-vis customers is treated again in D1, vis-a-vis co-enterprises in D2 and D5 and vis-à-vis the social environment in E5.

Company-specific aspects 

The smaller the company, the easier it is to achieve internal transparency and democracy.

Internal democracy involves much more than the co-determination afforded by a works council and most of all, it comprises decision-making in employee teams, at least as far as fundamental and framework decisions are concerned, which is to say fundamental company decisions.

Cooperatives

In most cooperatives, the customers are also members. The proportion of customers to employees in cooperatives can vary greatly. This indicator evaluates what percentage of voting shares the employees have. The evaluation facilitated by this table is made on the basis of this percentage; for ex. if 35% of members are entitled to vote, this would be evaluated as advanced.

Cooperatives are organizational forms which are very Common-Good oriented in terms of ownership structure. The percentage of customers who are entitled to vote is an aspect subject to positive evaluation under D1 Customer co-determination.

Lack of a works council

If no works council exists, one should always be skeptical and ask whether and in what way the establishment of a works council has been actively demanded. If it is not actively demanded or efforts were made in the company to establish one but they were not supported, this can be an initial indication that attempts have been made to prevent this from happening. In the course of its history Semco, for example, has welcomed union activity and actively worked together with its works council, establishing this form of cooperation as an important entrepreneurial principle.

If no works council exists, the first step to take would be to adduce the potential co-determination rights which would exist if there were a works council and to find out the degree to which such rights currently exist and are safeguarded.

In principle, the lack of a works council can be evaluated by a deduction of 10-20%.

If the co-determination rights of the employees fall short of those ensured by respective laws, the aspect “Co-determination regarding decisions” can be evaluated as no higher than “First steps.” Should fundamental rights be denied, one must critically examine whether the establishment of a works council has been prevented or not.

Cf. co-determination rights of works councils in Austria[3]:

Of course regulations for works councils can vary from country to country. In principle, mere adherence to legal standards is evaluated with 0 points.

In the EU, the respective EU rights are to be viewed as the legal standard for all.

Overview for Germany: 

http://www.precht.wiso.uni-erlangen.de/download/ar/uebung/ar2_02_Beteiligungsrechte_BR.pdf

General Wikipedia article on works constitution: http://de.wikipedia.org/wiki/Betriebsverfassung

E) Definition + Background

Employee participation means that co-workers have the power to co-decide and not only be informed or heard, which gives them possibilities for exerting influence. Quality-wise, various forms of democratic co-determination must be differentiated. These can range from majority to consensual decisions.

Unfortunately, the field of economic democracy is hardly known or investigated. Democracy is often equated with grassroots democracy, but this entails having all employees be involved in all decisions, which paralyzes an organization. There are means and ways to involve employees democratically and fulfil the purpose of the business productively at the same time, however. You can find examples of this in “Good Practices.”

We believe that a large measure of employee participation creates a multitude of positive effects[4]:

  • Empowerment and thus also higher motivation of employees
  • More identification with the company and consequently lower degree of employee fluctuation
  • A humane corrective for the shareholder-value approach
  • Changes in entrepreneurial culture in the direction of partnership-based division of labour
  • More creative solutions because everyone’s viewpoint is heard
  • Committed employees and better results.

In connection with the research project ODEM, Wolfgang Georg Weber and his colleagues investigated several democratic organizations and drew the following conclusions:[5]

“The more democratic the organizational structures of a company are,

  • The more willing employees will be to act in an obliging, solidarity-based and socially responsible way;
  • The more pronounced the humanistic value orientation will be regarding the employees’ sense of ethics;
  • The more willing the employees will be to engage in democratic and societal commitment;
  • The stronger the emotional bond of the employees to the company will be.”

Corporate democracy can be realized systemically or in regard to individual decisions. Tannenbaum/ Schmidt[6] developed a management continuum which differentiates various levels from authoritarian to participatory:

Authoritarian managerial style                           Cooperative managerial style

 

Decision-making scope of the superior              Decision-making scope of the group

 

1

2

3

4

5

6

7

The superior makes the decision and imposes it

The superior makes the decision but he reasons with his subordinates before imposing it

The superior makes the decision but he allows questions to be raised concerning it in an effort to achieve employee acceptance

The superior informs his subordinates of the intended decision; the subordinates are given the opportunity to express their opinion before the decision is finalized.

The group draws up proposals. The superior selects the solution he favours most from the sum of those formulated and accepted by the group.

The group makes the decision after the superior has presented the problem and the group’s decision-making scope has been defined.

The group makes the decision. The superior acts as an internal and external coordinator in this process.

“authoritarian”

“patriarchal”

“informatory”

“consultatory”

“cooperative”

“delegatory”

“democratic”

In this overview, the decision-making authority lies with the executive. He/she decides which form of participation will be permitted/allowed for employees.

Wolfgang G. Weber and the international research network OPEN[7] cite the following levels of employee participation, which provide a good rough orientation:[8]

  1. No participation
  2. Information
  3. Consultation
  4. Participation
  5. Co-determination, co-decision
  6. Self-determination

Areas of co-determination

  1. Operational decisions (daily business, individual cases within guidelines)
  2. Tactical decisions (for ex.. hires/dismissals)
  3. Strategic decisions (for ex. budgets, serious re-structuring measures)
  4.  

Lewin, Lippit and White investigated three management styles adopted for young pupils: “authoritarian,” “laissez-faire” and “democratic.” The results show that performance in the groups with authoritarian and democratic management styles was about equal, whereas the performance of the laissez-fair group was poorer.

Different behaviour patterns were observed in the two groups, however:[9]

Group with authoritarian management style

Group with democratic management style

  • High degree of tension, manifestation of animosity
  • Submissive, obedient group behaviour
  • High work intensity
  • Interruption of work when leader absent
  • Relaxed, friendly working atmosphere
  • High degree of cohesion, low degree of withdrawal
  • Greater interest in task
  • More original work results
  • Continuation of task when leader absent

 

Marshall Rosenberg, the founder of non-violent communication, likes to pose the two following questions:

1) What do I want my counterpart to do?

2) What is my motivation for wanting my counterpart to do this?

An authoritarian management style is usually based on fear, punishment and control and it motivates people extrinsically; a democratic management style is based on cooperation, inclusion and community and it motivates people intrinsically.

F) Means for facilitating implementation

Sociocracy is a model which defines a clear-cut, multi-step process extending from a first interview to installation of a pilot circle and finally, complete transformation of the organization in question.

Otherwise it is necessary to initiate a comprehensive process of clarification as to which democratic elements should be introduced where and in what way. It is best if such a process is organized democratically from the very start.

It is important for proprietors/top management to completely embrace the process when it is introduced and to support/accompany it over a period of five to ten years.

To begin with, a steering committee is formed which consists of external consultants/experts, members of the board as well as other key members of the organization who accompany the process of implementation. They address the following questions:

  • Which form of democratic co-determination suits us best?
  • How can we shape the process ourselves democratically?
  • What could serve as a prototype; in which parts of the enterprise could we experiment, evaluating the results to see if we were successful?
  • What value does success of democratic co-determination have for us – above and beyond win-loss calculations? How can we measure it?
  • How can the first steps be communicated?
  • What kind of support do we need and from whom within the company?

In principle one can either take one radical step (like at Semco) or – perhaps more advisable – approach things gradually by engaging individual circles/partial areas of the company (as envisioned by the sociocracy model).

G) Good practices

As examples of Best Practices, one successful democratic model has been cited as well as two companies which have implemented democratic co-determination each in their own special way. What all have in common is comprehensive internal transparency, for this constitutes the prerequisite for real democratic co-determination. At Endenburg Elektrotechniek, the pioneer company which has implemented the sociocracy model, as at Semco, one component of transparency are employee trainings which teach employees how to study and interpret company figures.[10]  

Wagner & Co Solartechnik is a solar pioneer in Germany which we have listed under the category “Good practices”; it looks back on a democratic history spanning over thirty years.

Sociocracy[1]

Sociocracy is an organizational model designed to engage employees in all fundamental and framework consensus-based, decision-making processes on par with executives. Finding a consensus means that no one in the respective team (also referred to as circle) has any serious objection to the proposal at hand regarding the mutual goal.

Fundamental and framework decisions are for ex. those concerning budgets, hires, dismissals, strategy, division of tasks etc. Such decisions are no longer made by executives alone but rather mutually in the respective team on the basis of equality. Everyone is permitted to say “no” and justify his/her response so that another, viable solution can be found which everyone is willing to implement.

Executives are elected after open consultation and can be dismissed again too. There are elected delegates for every higher level of the hierarchy; thus any conceivable board has three chairpersons and three elected delegates. Decisions are made on a consensus basis.

Sociocracy was developed in the Netherlands in the late 1960’s. It is widespread there and in parts of the USA, in particular in NPOs and SMEs. In the Netherlands, companies with 100% sociocratic organization require no works council.

Depending on how far along implementation of the sociocracy has gone, the levels can be evaluated as follows:

Category

First Steps

(0-10%)

Advanced
(11-30%)

Experienced
(31-60%)

Exemplary
(61-100%)

Sociocracy

Sociocracy with pilot circle

Up to 100% circle structure[11]

Sociocracy with complete circle structure for the past 2-3 years

Sociocracy is legally anchored, institutionalized

 

Over the past years, the holacracy approach has evolved out of the sociocracy model; the two are similar in many respects. This approach goes in the direction of democratic co-determination but it does not have the same quality as that produced by a sociocracy. In a sociocracy the members of the circle decide on their own accord whether any serious objections exist or not. In a holacracy the moderator or the group may decide which objections are valid or not.

One would ultimately have to examine individual cases to determine whether holacratic companies fit into the above categorization or not and how they should be evaluated. [12]

Related resources on sociocracy


Semco[13]

Semco is a Brazilian multi-industry company with a unique entrepreneurial culture. In 2003 it had about 3,000 employees, most of whom worked together in small units. There are no guidelines, only an illustrated survival manual, lots of self-organization and a high degree of employee co-determination. The employees are permitted to select their own managers, determine their own working hours and their wages, participate in all meetings and engage in all decision-making processes. The key counterbalances are transparency and result-orientation at the team level. Wages and salaries must be justified vis-a-vis the co-workers and self-generated. There is a high degree of transparency regarding figures, facts and decisions, and a highly innovative working atmosphere prevails.

Manager performance is evaluated by each team semi-annually. Those whose approval rate is below 70% must improve considerably within one year. Managers usually achieve approval ratings of 80-85%.[14] 

Semco has very good business results. Annual growth rates lie between 25% and 40%; from 1993 to 2004 profits rose from 35 to 160 million US-dollars.

At Semco all decisions are made democratically. Everyone may instigate a decision-making process. All one has to do is send an email to one’s co-workers, arrange a meeting place and get started. If people show up, the topic proves to be of interest and the group works as long as they have the energy to do so and the decision-making process progresses. The group may meet as often as it likes. In the end, those in attendance vote on the basis of a simple majority (one vote per person). Even Ricardo Semler, the principal owner of the company, has only one vote; he has been outvoted several times in the past. Formally speaking he has a veto right but according to him, he has never made use of it so far because he thinks this would jeopardize the entire system. Then the employees might say: “We are allowed to vote the way we want to but in the end the boss decides what he wants anyway.”

The special feature of this form of co-determination is that it is very easy and flexible. Anyone who takes an interest in a topic can have a say. Whoever chooses not to get involved, accedes. This way decisions can be made quite quickly which are carried by those involved/interested in the issue at hand.

At Semco the highest body has a total of eight positions. One of them is reserved for Ricardo Semler, three others are permanently occupied by members of the subsidiaries’ executive boards, two are rotating positions for high-ranking managers at the tier underneath the executive board level and two can be occupied by any employee according to the “first-come-first-serve principle.” These one-time members have the same voting right which the permanent members of the body do. The minutes of the meetings are accessible to everyone, but they must be read in the executive board office, rather than on the Intranet.[15]

 

Related resources on Semco


Wagner Solar
 

Wagner & Co Solartechnik is a pioneer in the area of solar technology which evolved from an environmental initiative and was founded on the market well over 30 years ago.

Wagner & Co consists of two companies:

  • Solartechnik GmbH, which organizes the distribution, development and production of solar thermal systems, solar electricity and pellet heating systems (effective wood-burning)
  • Immobilien GmbH, which owns the company property and buildings.

In addition, there are subsidiaries in Spain, France, Italy, Great Britain and the USA.

Since its foundation, Wagner & Co has been an employee-owned company, i.e.

  • The company belongs to the employees; there are no external partners.
  • The company is democratically organized, i.e. the managers are elected democratically and decisions are made in teams as de-centrally as possible.

 

At present, the company has 400 employees and 100 partners. After working for the company for two years, employees may submit an application to the admission commission, which is made up of nine elected partners and the personnel representative.

The shares, like profit participation, grow with the duration of employment in the company.

Thus, there is a close networking of employment, ownership and profit participation.

 

EMPLOYEES   

PARTNERS

 

ELECT

SUPERVISORY BOARD

CONFIRM ELECTION

PROPOSES

 

DEPARTMENTS WITH DEPARTMENT HEADS

MANAGEMENT

EMPLOYEE REPRESENTATION

 

(Diagram from: Wagner & Co – Eine kleine Unternehmensgeschichte, pg. 3.)

The highest decision-making body is the general assembly, which meets at least twice a year and makes fundamental and directional decisions. These include decisions concerning the company agreement such as use of profits, far-reaching financial decisions and changes in structures. Votes are cast on a per-capita basis and independent of capital shares.

Every two years the partners and employees elect a new twelve-member supervisory board, 2/3 of whom are partners, 1/3 of whom are employees. The supervisory board nominates and oversees the seven-person management body. Its individual members are nominated by the supervisory board and approved through a single majority of the partners. Management conducts the business of Wagner & Co and develops strategies. Three members of management represent the management body externally.

In addition to the management body and the supervisory board, there are employee representatives who attend to the concerns of the employees and are consulted regarding personnel matters. These employee representatives are elected at an annual employee meeting by all permanent employees who do not act in any capacity on the supervisory board or in the management body.

Below the managerial level there are 22 departments assigned to the various managing directors. The department heads are elected by the employees who work in that department. The departmental and team level maintain a culture of democratic decision-making. This is not precisely defined, however, and the department heads do have the option of making decisions autocratically. The question is whether such persons would be re-elected by the employees.

The partners decide on distribution of profits once annually. According to a fixed regulation, employees receive an additional monthly salary or several, as the case may be, depending on the return on sales. Profits are distributed in such a way that all partners who have belonged to the company for ten years or more receive a “full share,” while those who have been with the company for a shorter period of time receive a proportionally smaller amount; for ex. those who have been partners for four years receive 4/10 of a full share.

Related resources on Wagner Solar[16]

H) Bibliography

Editor: Christian Rüther chrisruether@gmail.com,  experts: Wolfgang Weber, Bernhard Mark-Ungericht 

[1] Consensus = there is no serious objection to the proposal in regard to the common goal

[2] Cf. http://www.sk-prinzip.eu/ and http://www.konsensieren.eu/

[3] http://netzwerke.oegb.at/fladnitz/data/upload/ppt_Mitbestimmungsrechte_Betriebsrats.pdf

[4] Cf. Wegge, Jürgen [u.a.]: Work Motivation, 2010, pp.162ff.

[5] Weber, Wolfgang G. [u.a.]: Handeln, 2007, pg.34/5

[6] R. Tannenbaum, W.H. Schmidt (1958): How to choose a leadership pattern. In: "Harvard Business Review". 36/1958, pp. 95-102

[7] Organizational Participation in Europe Network (OPEN)

[8] Cf. Weber, Wolfgang: Demokratie, 1994, pg. 272; Wegge, Jürgen: Motivation, 2010, pg. 159.

[9] Cf. Manfred Becker: Personalentwicklung, pg. 226, Table adopted verbatim.

[10] Cf. Semler, Ricardo: Maverick, 1993, chap. 17, pp.128-129.

[11] The circle structure superposes the linear structure. At the circle level, all employees have an equal status when it comes to making decisions. Here is where the foundational and framework decisions are made. In addition a linear structure still exists, which is used for conducting daily business and making operational decisions. Under certain conditions, superiors can make decisions at this level without engaging in any consultation.

[12] Cf. the differences between sociocracy and holacracy http://soziokratie.org/wp-content/uploads/2012/11/Vergleich-Soziokratie-Holakratie1.1.pdf - cf. also:http://holacracy.org/resources/video-introduction-to-holacracy 22.00 ff - "most of the decisions are made autocratically”

[13] The sources for Semco refer to the two books by Ricardo Semler, the latter of which appeared in 2003. One can strongly assume that Semco has encountered difficulties in the recent times of crisis. For lack of sources, it is currently hard to say whether and in what measure the company was able to lessen the impact of these difficulties through democratic cooperation or whether these elements were phased down during the crisis.

[14] Cf. Semler, Ricardo: Maverick, 1992, chap.22, pp.160-63 and Semler, Ricardo: 7day, 2003, pp. 212/3.

[15] Cf. Semler, Ricardo: 7day, 2003, pg.223.

[16] DVD of older date on Wagner Solar entitled: Organisationale Demokratie im Unternehmen. Wie Mitbestimmung zu wirtschaftlichen Erfolg beitragen kann (Bm:bwk) can be ordered from Wolfgang Weber directly and free of charge at: wolfgang.weber@uibk.ac.at 



[1] Also known as Dynamic Governance