Employee consultation and information in multinational corporations 9781138242050, 1138242055

Table of contents :
Introduction Jacques Vandamme
Part 1: The Diversity of National Environments
1. The Main Systems of Employee Information and Consultation in European Industrial Relations Roger Blanpain 2. The Main Systems for Informing External Parties in Financial and Commercial Legislation Sidney Gray 3. Does Formal Policy or Law as used in Europe, Contribute to Improved Employee Information and Participation? Frank A. Heller
Part 2: The International and European Context
4. Initiatives Undertaken by International Organisations in the Field of Employee Information and Consultation in Multinational Undertakings (I.L.O., O.E.C.D., U.N.) Geoffrey Hamilton 5. Information and Consultation of Employees in Community Law Relating to Changes in the Undertakings and to the Statute of Companies Jacques Vandamme 6. The Proposal for a Directive on Procedures for Informing and Consulting the Employees of Undertakings with Complex Structures, in Particular Transnational Undertakings Francois Vandamme
Part 3: The Economic Context
7. The Economic Implications of Informing and Consulting Employees in Multinational Undertakings Sylvain Plasschaert 8. Autonomy of Decision Making by Subsidiaries Daniel Van Den
Commentaries
1. The Information and Consultation of Employees. The Point of View of the European Trade Union Confederation (E.T.U.C.) Ernst Piehl 2. The Information and Consultation of Employees. The Point of View of the Industries of the European Community (U.N.I.C.E) Bernard Sassen

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ROUTLEDGE LIBRARY EDITIONS: MULTINATIONALS

Volume 7

EMPLOYEE CONSULTATION & INFORMATION IN MULTINATIONAL CORPORATIONS

C\ Taylor & Francis �-

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EMPLOYEE CONSULTATION & INFORMATION IN MULTINATIONAL CORPORATIONS

Edited by JACQUES VANDAMME

First published in 1986 by Croom Helm Ltd This edition first published in 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 1986 Jacques Vandamme All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-138-28116-5 (Set) ISBN: 978-1-315-27111-8 (Set) (ebk) ISBN: 978-1-138-24205-0 (Volume 7) (hbk) Publisher’s Note The publisher has gone to great lengths to ensure the quality of this reprint but points out that some imperfections in the original copies may be apparent. Disclaimer The publisher has made every effort to trace copyright holders and would welcome correspondence from those they have been unable to trace.

Employee

Consultation & Information in

Multinational Corporations

Edited by Jacques Vandamme

CROOM HELM London • Sydney • Dover, New Hampshire

©1986 Jacques Vandamme Croom Helm Ltd, Provident House, Burrell Row, Beckenham, Kent BR3 lAT Croom Helm Australia Pty Ltd, Suite 4, 6th Floor, 64-76 Kippax Street, Surry Hills, NSW2010, Australia British Library Cataloguing in Publication Data

Employee consultation and information in multinational corporations. 1. Management - Employee participation 2. International business enterprises Management I. Vandamme, Jacques 658.3'152 HD5650 ISBN 0-7099-2624-3

Croom Helm, 51 Washington Street, Dover, New Hampshire 03820, USA Library of Congress Cataloging in Publication Data Main entry under title:

Employee consultation and information in multinational corporations.

1. International business enterprises-Europeemployees-addresses, essays, lectures. 2. Collective bargaining-international business enterprises-Europeaddresses, essays, lectures. 3. International business enterprises-employees-legal status, laws, etc.Europe-addresses, essays, lectures. I. Vandamme, J. HD2755.5.E47 1985 331.25 85-21264 ISBN 0-7099-2624-3

Printed and bound in Great Britain by Biddles Ltd, Guildford and King's Lynn

CONTENTS

INTRODUCTION Jacques Vandamme

PART I THE DIVERSITY OF NATIONAL ENVIRONMENTS 1 : The Main Systems of Employee Information and Consultation in European Industrial Relations Roger Blanpain 2: The Main Systems for Informing External Parties in Financial and Commercial Legislation Sidney Gray 3: Does Formal Policy or Law as used in Europe, Contribute to Improved Employee Information and Participation? Frank A. Heller PART II THE INTERNATIONAL AND EUROPEAN CONTEXT 4: Initiatives undertaken by International Organisations in the Field of Employee Information and Consultation in Multinational Undertakings (I.L.O., O.E.C.D., U.N.) Geoffrey Hamilton 5: Information and Consultation of Employees in Community Law relating to Changes in the Undertakings and to the Statute of Companies Jacques Vandamme 6: The Proposal for a Directive on Procedures for Informing and Consulting the Employees of Undertakings with Complex Structures, in particular Transnational Undertakings Francois Vandamme

13

39

69

95

117

149

PART III THE ECONOMIC CONTEXT 7: The Economic Implications of Informing and Consulting Employees in Multinational Undertakings Sylvain Plasschaert 8: Autonomy of Decision Making by Subsidiaries of Multinational Enterprises Daniel Van Den Bulcke COMMENT ARIES 1 -The Information and Consultation of Employees. The Point of View of the European Trade Union Confederation (E.T.U.C.) Ernst Piehl 2 -The Information and Consultation of Employees. The Point of View of the Industries of the European Community (U.N.I.C.E.) Bernard Sassen

187

219

251

259

INTRODUCTION Jacques VANDAMME

RESITUATING THE DEBATE The study presented by the "GROUP FOR EUROPEAN POLICY STUDIES" at the request of the Institute for Research and Information on Multinationals is intended primarily to place the problem of employee information and consultation in multinational undertakings in the context of an overall approach to the problem. Whilst it may be true that the debate on this question in the European Community is centred around the proposal for a directive(l) submitted by the Commission and known as the VREDELING-RICHARD(2) proposal, the first version of which was submitted in October, 1980, with a new draft being submitted on July 8, 1983, we feel, however, that although this proposal may be considered as constituting the "event" as it were, the problem posed by this proposal is one which has, none the less, a much more general scope. A better appreciation of the overall situation in all its aspects should allow one to better situate discussions on the specific proposal in question. 1 - THE NATIONAL AND INTERNATIONAL ENVIRONMENT It is necessary to take into account the national and international environment which forms the background to the debate. The national environment is characterised primarily by the development of employee information and consultation systems in the national legislations of most European countries. In certain cases these are linked to experimental worker participation in company management; in other cases they have developed outside company management structures. (R. BLANPAIN). 1

Secondly, one may note an extension of the systems for providing information to cover of company accounts and activities, which may be explained both by the need for transparency ir: business activities as well as by the demands of a capital market, which should be truly open. (S.J. GRAY).

Finally, surveys that have been carried out would seem to suggest that binding rules in this field do contribute to strengthening worker participation in the activities of the undertakings (F.A. HELLER) to a greater extent than can be done through voluntary codes of conduct. This is being shown to be true in multinational and national undertakings. But it is also worth analysing the international and European environment. Employee information and consultation has been the subject of different instruments such as codes of conduct and declarations in the International Labour Office, the O.E.C.D. and the U.N. However, the efficacity of such measures has been the subject of controversy. (G. HNULTON). At a European level the Commission has been following a programme intended on the one hand to protect employees in the case of major changes in the company and on the other hand to create a legal status for transnational commercial activities. In both cases employee information and consultation systems have been established (for example, in the case of collective redundancies) or have been proposed (for example the Fifth Directive on the Harmonisation of Company Law) (J. VANDAMME). The VREDELING-RICHARD proposal forms part of this general approach, involving worker participation in the taking of economic and social decisions which are likely to affect their future. This is a result of the increasingly strong transnational nature of economic life and the decisive role played by multinational undertakings. (F . VANDAMME) . Finally, such an analysis of the context of the problem relating to employee information and consultation should lead to an examination of questions on the economic implications of the system and its repercussions on company operations. Whilst it may be true that there is a tendency far too often to legislate without having sufficiently analysed the functioning of the

2

decision-making systems in multinational enterprises (S. PLASSCHAERT), it is, however, necessary to note that in practice important decisions on the closure of undertakings or concerning changes in company structures are, in fact, taken at the level of central management. (D. VAN DEN BULCKE). It is, therefore, logical that employee information and consultation in multinational undertakings should also operate at this level, even if labour relations are generally speaking the responsibility of the management of the subsidiary or the local undertaking(3). 2 - ~..ATTERS OF PRH1ARY AND SECONDARY IMPORTANCE IN THE EUROPEAN DEBATE When considered in its true national European and international context, the debate on the VREDELING-RICHARD proposal within the Community seems to have attached excessive importance to certain really rather minor problems, whilst certain issues remain in the shade. A.

Matters under discussion Discussions on the VREDELING-RICHARD proposal have concerned principally: 1) the extent of the economic and financial information to be given to employees' representatives and the risk of certain points of information being divulged; 2) . the fact that consultation of employees could introduce an additional factor of rigidity at a time when it is even more necessary for there to be a high degree of flexibility in company adjustments; 3) the right of employees in a subsidiary company to call on the. central management to obtain explanations on reorganisation plans which could affect their futures. The proposal does not, in fact, at least in its present draft, provide any really revolutionary approaches to any of these points. The extent to which financial and economic information is provided to employees of undertakings is very wide in many countries and is subject to uncontested legislative provisions. One could mention particularly the Federal Republic of Germany, Belgium, the Netherlands and France. The difficulty, however, lies in the application of these provisions. It is known that 3

in certain countries the laws are not applied in 30-40 per cent of cases. Sometimes this is due to ill-will on the part of management but sometimes, too, it is due to a lack of interest on the part of employees. economic Furthermore, a great deal of information that should be communicated according to the proposal is already covered by other Community instruments which have been approved without major disagreement: these are the Directives on stock market placings and on consolidated accounts. The Council Directive of Harch 17, 1980, relating to the information to be provided in the listing particulars to be published to the admission of securities to official stock exchange listing, lays down that far-ranging information should be provided on the assets and liabilities, financial position, profits and losses and prospects of the issues. Thus the company in question is obliged to supply data on its research and development policy, on any suspensions of activities having an influence on its financial situation, on its investment policy with the exception "of securities issued in connection with a take-over off~r". Is this really very far from the VREDELING-RICHARD proposals which lay down that information should be provided on the likely trend of performance, production, sales, employment and investments? And what can one say furthermore about the provisions of the 7th Council Directive of June 13, 1983 on the consolidated accounts of commercial undertakings? This is dealt with in Chapter 2 of Part I and lays down that such accounts should provide "a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included therein taken as a whole" (Article 16) and makes mandatory the publication of a consolidated annual report, indicating: a) any important events that have occurred since the end of the financial year; b) the likely future development of those undertakings taken as a whole; c) the activities of those undertakings taken as a whole in the field of research and development; d) the number and nominal value and, in the absence of a nominal value, the accounting par value of all of the parent undertakings' shares 4

held by that undertaking itself, by subsidiary undertakings of that undertaking or by a person acting in his mvn name but on behalf of those undertakings. Isn 1 t what would be useful for shareholders and third parties not also useful for company employees? Obligatory consultation of employees is already enshrined in Community law in the case of collective redundancies, of transfer of an undertaking or part thereof, as well as is the case of company mergers. (See Part II, Chapter 2). The cases of obligatory consultation of employees in the new Commission proposal (see Part II, Chapter 6) relate to the closure or transfer of the whole or major parts of an establishment or of substantial restrictions on company activities; these virtually always cause collective redundancies and, therefore, the application of legislation already applying to all undertakings. Among the other situations which may have serious consequences on workers' interests, the Commission also mentions organisational modifications, changes in working methods or manufacturing processes, the introduction of long-term co-operation with other undertakings or the cessation of such co-operation and measures affecting the health and safety of employees. This is very far from being the upheaval claimed. Furthermore, in all these cases consultation should take place within a period of thirty days subsequent to the announcement of the event in question with a view to reaching an agreement on the measures to be taken with respect to employees. Such a provision is a long way behind the already existing situation in several major Community countries, particularly with respect to the powers of public authorities to. forbid or delay the introduction of the proposed measures, often well beyond the thirty day period, when the accompanying social plan is considered to be insufficient. Finally, as far as the question of the right of appeal to the parent company, when the information given by the subsidiary is considered insufficient by employees (by-pass), the new proposal has considerably attenuated the scope of the previous proposal since it no longer provides for a right to contact the management of the parent company in writing, with States deciding themselves 5

on the type of sanctions to be applied in the case of infringement of this obligation. B.

Neglected elements On the other hand, however, the controversy has but slight bearing on two essential points; the first being that of deciding whether European integration also has a social dimension, the second that of knowing whether one may envisage a new type of holding company in European countries, as a major element of a strengthening of the competitive capacity of our economy. 1. The social dimension of European integration This question is a very controversial one and has been so since the birth of the Community in 1958. In this respect, the fact is that Article 117 of the E.E.C. Treaty states that the social harmonisation achieved as the Community progresses will undoubtedly result in an opening of borders and in the establishment of a common market. There is no need, therefore, to provide for binding instruments in order to attain this goal. However, since 1970-71, the outlook has changed in that in addition to the notion of a planned economic and monetary union, one now has the idea of a social union, which would imply positive measures. This objective has been translated in a Social Action Programme adopted by the Council in 1974, which provides for a better employment policy through reforms of the Social Fund, protection of workers in the case of industrial changes, equal treatment of men and women under labour law and with respect to social security and improving the status of migrant workers. A great deal of this programme has now been implemented but the whole integration process in the Community has not made any progress, despite the decisions taken by governments in 1972 and 1974 to "transform before 1980 all the relations into a European Union". One is unfortunately all too aware what became of the plan for European Union put forward by L. TINDEMANS, the Belgian Prime Minister in 1976. Since then the Community has been faced with a directional crisis: several different concepts are in conflict. If Community Europe is to become a slightly improved free trade area, it is logical that fields such as European social law and labour regulations should remain a matter of national responsibility. If, on the other hand, the Community is to develop as a coherent economic 6

and social whole, then it is right and proper to envisage a "statute" for European companies, subject to rules of competition in respect of restrictive practices and amalgamations and in this way properly cover transnational economic activities. There is, in any case, a certain contradiction in asking for a development of the European Community in terms of a strengthening of the internal market and an economic and monetary union, without accepting that this same Community should have a social dimension. Since the WERNER Report in 1970, it has been accepted that one cannot have one without the other which comes down to saying that social co-ordination at all levels is more indispensable than ever now if one is to find a solution to the crisis we are confronted with today. b) A new type of undertaking There is a second point that has been neglected in the debate: that of the type of undertaking which we wish to see in tomorrow's post-industrial society in Europe. In the course of discussions on the Vredeling-Richard proposal, we have often had the impression that we were back in the past of a quarter of a century ago, at the time of the great debate on power-sharing in economic life and on the distribution of the benefits of growth. However, the situation we are in today is substantially different from that which prevailed then, particularly as a result of the crisis which has been basically a crisis of structural change in our societies. This means that we need to seek to establish a new type of undertaking and try to define new industrial strategies. The key points are those of the survival of European undertakings in a situation of increased world competitiveness and of the development of new forms of business activities in a European context in which reduced growth does not contribute, contrary to the situation one sees in the U.S.A. and in Japan, to the creation of many new jobs(4). In order for this objective to be attained, there is a need to adopt a solution according to which management and employees get together to define development or redeployment strategies in a context of social dialogue and co-ordination. As Mr. RICHARD, then Member of the Commission responsible for social policy, stated at a recent TEPSA colloquium, "in the situation of today the 7

prime objective of social policy should be neither protection nor redistribution but the cohesion of society. It is too simplistic to maintain that the realisation of social objectives is entirely dependent on economic performance. A good economic policy may be a major requisite for an efficient and adequate social policy but a good social policy can be a powerful support for a good economic policy"(5). It is, of course, easy to understand the concern felt by workers and their representatives in the face of the company closures and rationalisations that are under way at present and obviously prior information on the measures envisaged would have a certain psychological advantage in obliging the interested parties at least to discuss the issues at stake and seek solutions to those problems. But wouldn't it be better to put great stress on the need to organise co-ordination on the safeguarding or promotion of employment, for example, in the context of collective bargaining agreements at European level in such a way as to ensure that specific action does not relate to the consequences of redeployment but rather to the causes and the means which would allow one to attenuate the effects of such changes in the long term and permit to introduce transitional measures? Following such an approach we would subscribe to the opinion expressed by one of our colleagues who is an expert in company management: "The way in which we would like to see U!)dertakings develop is through increased efforts to bring about a new type of co-ordination; relating both to objectives and strategies and not just, as has been the case in the past, to the means in which this is done or to benefit-sharing. This supposes firstly that undertakings do indeed have strategies and plans for the future. It also implies that they should accept the need to submit these to their social partners and to those in positions of political responsibility. Workers will not accept the sacrifices implied by the redeployment of our economies unless they are involved in the drawing-up of the goals to be attained and the strategies that have to be implemented"(6). This type of fundamental problem has not yet received sufficient attention in Europe. One can but hope that in calmer circumstances it will be possible to renew the dialogue on and 8

the co-ordination of measures other than those which affect workers' positions. The year following that in which the European Parliament was re-elected could be one in which social and economic dialogue in the European Community is given a new impulse.

REFERENCES (1)

(2) (3)

(4) (5) ( 6)

10

A Directive "is a more flexible legal instrument than a regulation" . Once a Directive has been adopted by the Council, Member States are obliged to ensure that the aim is attained but free to decide on the ways and means in which this is done. From the names of the Commissioners responsible for social affairs in 1980 and 1983 respectively; H. VREDELING and I. RICHARD. We would point out that according to competition law, .when one has to assess the market position of an undertaking one takes into consideration the performance of the parent company and its subsidiaries, which are considered to constitute a single unit. Report by M. ALBERT and J. BALL, presented to the European Parliament on July 7, 1983, under the title of "Towards European Economic Recovery in the 80's". Colloquium of the Trans-European Policy ~tudies Association in Paris, October 6-8, 1983, on the theme of "A Social Dimension to European Policy". Philippe DE WOOT, Director of the "Centre de Perfectionnement des Entreprises" at Louvain University. Extract from a note for the "Institut de l'Entreprise de Belgique" published in "L'Entreprise et l'Homme" in December, 1981.

PART I THE DIVERSITY OF NATIONAL ENVIRONMENTS

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Chapter 1 THE MAIN SYSTEMS OF EMPLOYEE INFOIDU\TION CONSULTATION IN EUROPEAN INDUSTRIAL RELATIONS

AND

by Roger BLANPAIN

FOREWORD This paper on information and consultation of employees by their employers does not pretend to be either simple or exhaustive. Its only purpose is to highlight some salient points and indicate certain trends, taking a bird's eye view in order to lay the groundwork for a more profound discussion, which will hopefully encourage further research. After an introductory remark on labour relations, we try to define "information", "consultation" and "negotiation" (1). We then concentrate on the provision of information, in the framework of collective bargaining as well as in works councils and supervisory boards and on the scope and format of the disclosure of information(2). Finally, we discuss consultation. It is evident that some of the problems such as subject matter, involved entity, confidentiality and the like are equally relevant to both information and consultation. We hereby concentrate on information and consultation at the level of the enterprise, as well at the level of the (local) unit or establishment, the group of establishments as at the level of the enterprise as a whole. It is self-evident that a lot of what will be said will also be relevant for information, consultation and even negotiation which takes place at other levels, e.g. the branch of industry (regional or national), the interindustry-wide level (e.g. in national labour councils) and even at international level (inter alia in the framework of the E.C., the O.E.C.D., the I.L.O. and even the U.N.). ---13

1 - INTRODUCTION AND DEFINITIONS It has become a commonplace to state that labour relations are power relations; that a labour relations system gives an ever-evolving answer to the question, who, in management - labour relationships, has in law and in fact the power to make decisions? Or to put it another way:· what is the influence of labour on management decision making? Management decisions can obviously be influenced by labour in different ways or dimensions which in order of importance may be listed as follows: information consultation co -decisions (..:;e,...:._.g.._.=--___;l~·n:;,:__.=t-=h=e=----=f:..:r:..:a=m=e-=w-=o-=r:..:k~_o=...;;;.f collective bargaining) • A.

Information The meaning of the word "information" seems rather simple: it is "the communication of knowledge" (1). Disclosure of information to employees means that the employer provides information about which an explanation can be asked and questions can be raised; information which will eventually be discussed. B.

Consultation The meaning of the word "consultation" on the contrary is less clear and much more ambiguous. There are different angles from which consultation can be defined. B. HEPPLE indicates that consultation "refers to subjects within the scope of managerial prerogative" while negotiation "refers to matters within the power of joint regulation by management and trade-unions" (2). He thus refers to (a) the "subject" of consultation, as well as to the (b) dimension of the influence. Others lay emphasis on the (c) nature of the exercise: consultation would then concern questions of common interest, whereas negotiation would relate to problems where management and labour have adversary relationships(3). A. MARSH indicates that "theoretically the distinction between consultation and negotiation depends on the proposition that consultation is non-competitive and integrative in nature, whereas negotiation is competitive and concerned with temporary and unsatisfying compromise, consultation, therefore, being equipped 14

to resolve conflict and negotiation merely to contain it" (4). In this sense, principle 56 of the I.L.O. Declaration on multinational enterprises, which reads as follows: "In multinationals as well as in national enterprises, systems devised by mutual agreement between employers and workers and their representation should provide, in accordance with national law and practice, for regular consultation on matters of mutual concern. Such consultations should not be a substitute for collective bargaining". Webster's definition of consultation relates to the impact on decision-making: "to ask advice or opinion"(5), whereas negotiation is defined as "to confer with another so as to arrive at the settlement of some matter"(6). It is in this last sense, namely from the point of view of the dimension influence of management, that I would like to define "consultation": consultation means that advice is given to the employer, leaving the decision-making power of the employer intact. It means that the employer retains the power to make the decisions he thinks best, having listened to the views of the employee representatives. This advice does not require either unanimity or a majority vote and can take place either at the request of the employer or at the request of labour.

c.

Negotiation Negotiation on the contrary is a "method of joint decision making" involving bargaining between representatives of workers and representatives of employers, with the object of establishing mutually acceptable terms and conditions of employment •.. "(7). As a general rule the concept of negotiations implies an effort to reach agreement by the parties concerned; but even in the U.s .A. where there is a duty to bargain in good faith, negotiation does "not compel either party to agree to a proposal or require the making of a concession" (8). Between consultation and negotiation, which is already so difficult to distinguish in practice, stands the expression used in the Common Market Social Directives: "consultation with a view of reaching agreement" (9). It seems to me that this expression goes further than consultation in the strict sense, where the employer asks for the benefit of the ideas of the employees on the rna tter; here more is required: the parties are 15

also asked to try to reach an agreement, which actually means that one leaves the area of consultation and is, in fact, in the area of negotiation(10). Close to negotiation is the situation where the employer has to justify his decision, when he does not follow the advice of e.g. the works council. This is inter alia the case in France and the Netherlands. In the Netherlands (since 1979) in such a case the employers' decision is suspended for a month and during that period the works council can appeal to the Enterprise Chamber of the Amsterdam Court. This chamber can oblige the enterprise to withdraw its decision totally or completely. Recourse is possible to the Dutch Supreme Court (Hoge Raad) (11). Furthermore, in Austria, the works council (in enterprises with more than 400 employees) - if it believes that a given decision in spite of its advice is contrary to economic welfare in general can appeal to a competent authority. A decision, which would entail closure of the enterprise, will, in case of appeal, be suspended for a period of four weeks(l2). In many countries the decision is null and void if the employer does not seek the advice of the employees' representatives(13). It seems also indicated that according to the rule 'q~i potest major, potest minor', the greater degree of influence includes the lesser degree. In other words, when an advisory function is attributed to a works council it can only reasonably perform this function if it disposes of the right kind of information. 2 - PROVISION OF

INFO~ATION

The obligation of employers to provide information finds its origin in sometimes overlapping, ever opposed values and aims, as diversified as the promotion of collective bargaining, the promotion of collaboration between employers and employees (integrative) or of workers' control (polarising). It is self-evident that those different aims, as well as ensuing strategies, have their bearing on the subject matter of information, levels, to whom the information is destinated, secrecy and the like.

16

A.

In the framework of collective bargaining The provision of information is generally seen as a measure to facilitate the collective bargaining process. It is obviously "in the general interest that negotiation should take place on the basis of full and accurate information"(14). "With this information, the parties are in a better position to negotiate advisedly and to avoid certain arguments about points of fact"(15). With this in view the International Labour Conference adopted at its 67th Session in 1981 a "Recommendation concerning the Promotion of Collective Bargaining" which contains under the heading of means of promoting collective bargaining the following directives: "12 ( 1) Measures adapted to national conditions should be taken, if necessary, so that the parties have access to the information required for meaningful negotiations. (2) For this purpose a) public and private employers should at the request of workers' organisations make available such information as necessary on the economic and social situation of the negotiation unit and the undertaking as a whole, to the extent to which its disclosure is not prejudicial to the undertaking; the information to be made available may be agreed upon between the parties to collective bargaining; b) the public authorities should make available such information as is necessary on the overall economic and social situation of the country and the branch of activity concerned, to the extent to which the disclosure of this information is not prejudicial to the national interest." Similar guidelines can be found in the 1977 I.L.O. Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy(l6) in the principles 54-55, which read as follows: "54 Multinational enterprises should provide workers' representatives with information required for meaningful negotiations with the entity involved and, where this accords with local law and practice, would also provide information to enable them to obtain a true and fair view .of the performance of the entity 17

or, where appropriate, of the enterprise as a whole. 55 Governments should supply to the representatives of workers' organisations on request, where law practice so permits, information on the industries in which the enterprise operates, which would help in laying down objective criteria in the collective bargaining process. In this context, multinational as well as national enterprises should respond constructively to requests by governments for relevant information on their operations". The O.E.C.D. Guidelines for Multinational Enterprises (1976) also indicate in the chapter on Employment and Industrial Relations that "Enterprises should within the framework of law, regulations and prevailing labour relations, and employment practices, in each of the countries in which they operate, 2(b) provide to representatives of employees information which is needed for meaningful negotiations on conditions of employment". It seems typical that in countries where collective bargaining is the way par excellence to influence managerial decision making, requirements are foreseen to provide information in the context of collective bargaining. The duty to bargain in good faith under the National Labour Relations Act (1935) involves in the United States of America "the duty, on request, to provide the other side with information that is directly related to the controversy" (17). Consequently, an employer must furnish all information necessary and relevant to the performance of the union's collective bargaining responsibilities. This applies to the administration as well as to the n~gotiation of the collective agreement. In the United Kingdom the Employment Protection Act of 19 7 5 provides that it shall be the duty of the employer to disclose to representatives of a trade union, on request, "all such information relating to his undertaking as is in his possession or that of any associated employer, as is both (a) information without which the trade union representatives would be to a material extent impeded in carrying on with him such collective bargaining and (b) information which it would be in accordance with good industrial relations practice that he should 18

disclose to them for purposes of collective bargaining". These legal provisions were supplemented in 1977 by a Code of Practice prepared by the Advisory Conciliation and Arbitration Service (18). Under Sweden's 1976 Act concerning joint regulation "an employer shall keep a workers' organisation, in relation to which he is bound by collective agreement, continuously informed of developments in the production and financial aspect of his business and also of the principles on which his personal policy is based. He shall additionally afford the organisation of workers an opportunity to examine his books, accounts and other documents which concern his activity, to the extent that the union needs in order to take care of its members' common interests in relation to the employer (19). The idea is that "the established union might be given the same insight and overview as the employer himself and therewith greater equality in negotiations. Information should be such that all individual employees get a good picture of the activity of the enterprise in general and of how their own contributions fit into the larger patterns"(l9). In Italy, T. TREU reports "the roost important national agreements have introduced clauses obliging the employers or employers' associations to inform the territorial unions or the 'delegates' of their programme of investments and long-term business policies influencing employment and working conditions and, on occasion, to examine the same matters in conjunction with the unions"(20). "Provisions relating to the provision of information to the negotiating parties, though quite common and detailed in industrialised countries, are more exceptional and usually less specified in developing countries"(21). B.

Works Councils - Supervisory Boards Next to promoting collective bargaining, information is given to employees - mostly to works council, committees of hygiene, sometimes union delegates - with the idea of keeping the employees informed about their situation in the enterprise, to allow those councils to fulfil their advisory role and, sometimes, co-determination activities(22). One and another is in very general terms laid down in the above quoted principle no. 54 of the I.L.O. Declaration and Guideline three of the 19

Employment and Industrial Relations chapter of the O.E.C.D. Guidelines, which reads as follows: "Enterprises should, within the framework of law, regulations and prevailing labour relations and employment practices, in each of the countries in which they operate: 3. provide to representatives of employees where this accords with local law and practice, information which enables them to obtain a true and fair view of the performance of the entity or, when appropriate·, the enterprise as a whole". Information to councils is given inter alia in Austria, Belgium, Finland, France, Federal Republic of Germany, Norway and the Netherlands. In the systems where documentation is given to works councils, the provision of information is, contrary (in some of the cases) to disclosure for collective bargaining (where trade unions have to request the information, as in the U.S. and the U.K.) (23), automatic: the employer has the (legal) obligation to provide information. ~vorks councils have as a general rule been set up with the idea of promoting collaboration between the employees and the employer. This was explicitly stressed in the German Works Constitution Act of January 1972, underlining "that employer and works council have to work together in a spirit of mutual trust". The underlying idea seems to be that the employees, as integrated and fully-fledged members of the enterprise, have a self-evident right to know; to be informed. This is also clearly interwoven in Article three of the 1973 Belgian Decree on economic and financial information to be given to the works council: "the purpose of this information is to give the employees a clear and correct view of the situation, its evolution and the projects of the unit or groups to which it belongs". Mention in this context must also be made of employees and (or) trade unionists, who are members of supervisory boards or management boards of compan1es, as happens in the Federal Republic of Germany, Austria, Spain, France, Denmark, Norway, Sweden and Luxembourg. These members are entitled to the same information as are the other (shareholder representing) members of those company organs.

20

C. Scope and format of the disclosure of information In order to evaluate the kind of information which is given to employees, a number of questions must be asked; the most important concern the (1) subject matter, (2) the entity about which information has to be given, (3) when information has to be given, (4) to whom information has to be given, (5) the obligation of the headquarters to help their subsidiaries and (6) the problems concerning confidentiality. 1. Subject matter Examining the different points on which information has to be given, one is, of course, baffled by the wide diversity and difference between the different (national) systems and provisions. There is, however, an obvious trend to have information cover not only wages and conditions of employment in the strict sense but also worker organisation and economic and financial decisions. This trend goes along with the widening scope of collective bargaining(24). Sweden seems to be one of the most progressive countries in this area: extensive information has to be given, as indicated earlier. Almost all aspects of the business are covered by this obligation... Belgium also imposes extensive obligation of information. Information in Belgium has to be disclosed to the works council on the following topics: Economic and financial matters Basic information: - company statutes; - the competitive position of the enterprise in the market; - production and productivity; financial structure of the enterprise; - budget and calculation of costs; - personal costs; programme and general prospects for the future of the enterprise; scientific research; - public aid; - the organisation chart of the enterprise Annual information - updating the basic information; - balance-sheet, profit and loss account, etc. Periodic information sales; orders; market; 21

- production; - costs; - cost prices; - stocks; - productivity; - employment; - programme. Occasional information - all important events Social matters - employment policy; - structural changes; - closure of enterprises; - personnel policy. In the Federal Republic of Germany as well, far reaching information must be given to the works council. The Council is entitled "to information which is necessary in order to discharge its duties, including the inspection of the payroll (§ 80 II Works Constitution Act) .•• (25). The employer has to inform the council on any plan concerning the construction, alteration or extension of production, administration and other premises, of technical installation, of working processes and operations or of work places"(26). The same trend can be found in other regulations. In the proposed Statute for European Companies, it is indicated that "the board of Management shall provide written information on any matter, which, in the opinion of the European Works Council, affects the fundamental interests of the employees (art. 113) (27). In the U.K. information for longer-term investment planning can be obtained by the Secretary of State for Industry under the Industry Act 1975. He may require the employer to make disclosure of certain information relevant to long-term planning to independent trade union, after the matter has been considered by an advisory committee(28). The U.S .A. may be at the other side of the spectrum: in the U.S.A. information about pay, wages, hours and all other terms and conditions of employment has been listed as "relevant" and "necessary" for collective bargaining. Financial data, however, need not be disclosed unless the employer makes his financial position an issue in the negotiations by claiming he cannot afford to pay. The trend for more information is also clearly confirmed in the above quoted social E.C. Directives on collective dismissals(29) and 22

acquired rights(30), the proposed E.C. Directive in information and consultation, the I.L.O. and O.E.C.D. Guidelines. The I.L.O. principle No. 26 reads as follows: "In considering changes in operation (including those resulting from mergers, take-overs or transfers of production) which would have major employment effects, multinational enterprises should provide reasonable notice of such changes to the appropriate government authorities and representatives of the workers in their employment and their organisations so that the implications may be examined jointly in order to mitigate adverse effects to the greatest possible extent. This is particularly important in the case of the closure of an entity involving collective lay~offs or dismissals". The O.E.C.D. Guidelines contain a similar principle, namely in guideline 6 of the Employment and Industrial Relations Chapter. One and another does not mean that the employer is not entitled not to disclose certain information, such as in Sweden, where information is to be given "to the extent that the union needs it". In Sweden "outside of the duty to give information falls private circumstances, arrangements in connection with dispute situations, certain cases to which a challenge aspect applies, research and development work of a particularly secret nature and matters connected with tenders made in competition with other firms ... "(31). In the U.K. no employer can be required to disclose, inter alia, any information the disclosure of which would be against the interests of national security, any information which has been communicated to him in confidence, any information relating specifically to an individual or any information "the disclosure of which would cause substantial injury to the employers' undertakings for reasons other than its effect on collective bargaining"(32). In Belgium, the works council is not entitled to information when this information would be prejudicial to the enterprise or when this is justified by the necessities of the commercial policy of the undertaking and specifically by the competitive position of the undertaking". In some countries, for example Belgium, the Netherlands, Germany and as already mentioned the U.K., privacy of employees is protected. One can thus conclude that the employer's duty to inform would be waived 23

if other values come into play, such as the prejudicial effect on the enterprise, national interest(33) and privacy. The question then remains, who in the case of conflict decides whether information is of prejudicial nature, of national interest, privacy, etc? This can be a court or as for example in Belgium, a government official. 2. The involved entity Although in most cases information will be limited to the local entity or to the national group of enterprises (e.g. in the Federal Republic of Germany) there is a clear indication to give information on the (international) group as a whole. This is not only the case in Belgium but especially in the inter!lational instruments. The I.L.O. Recommendation on Collective Bargaining (1981) asks for information on the negotiating unit and the undertaking as a whole. The I.L.O. Guidelines depart from the idea that "the complexity of these multinational enterprises and the difficulty of c~early perceiving their diverse structures, operations and policies sometimes give rise to concern" and the O.E.C.D. Guidelines recommend in the chapter "Disclosure of information" to provide information - to the public at large - on the enterprise as a whole(34); while the Employment and Industrial Relations chapter indicates that they should provide representatives of employees with information which enables them to obtain a true and fair view of the enterprise as a whole (guideline 3). A similar principle can be found in the I.L.O. Declaration on Multinationals. Obviously, as already indicated earlier, the E.C. proposed Directive on information wants enterprises to give information on the enterprise as a whole. 3. When? "The" question par excellence, is of course, when should information be given? Obviously if employees are to have a possibility of influencing certain decisions which are going to affect them, the giving of information only makes sense if information is given in advance. This is certainly true in the case of collective dismissals, substantive modifications and the like. Different expressions are used to convey this idea. 24

In the Federal Republic of Germany the works council must be informed in time about a planned alteration of the establishment, which is defined as: the reductions of operation in or the closure of the whole or important departments of the establishment the transfer of the whole or important departments ... (§111 Work Constitution Act) (35). In Belgium if the employer has to undertake collective dismissals the works council will have to be informed immediately and certainly before the actual decision has been taken. The E.C. Directive on acquired rights (1977) provides that information must be given "in good time, before the transfer is carried out, ..• in any event before his employees are directly affected by the transfer (art. 6, 1°)". Furthermore the O.E.C.D. Guidelines for multinationals indicate that advance information should be given ... "Management", states O.E.C.D.'s I.M.E. Committee, "is encouraged to adopt an open and co-operative attitude to the provision of information to employees relevant to the objective of this paragraph, which could include information on future plans"(36). The same goes for Guideline 6 of the Employment and Industrial Relations Chapter, which reads as follows: " in considering changes in their operations which would have major effects upon the livelihood of their employees, in particular in the case of the closure of an entity involving lay-offs or dismissals, provide reasonable notice of such changes to representatives of their employees so as to mitigate to the maximum extent practicable adverse effects". The I.M.E. Committee clarified this as follows: "The notice to be given has to be sufficiently timely for the purpose of mitigating action to be prepared and put into effect; •.. it would be in conformity with the general intention •.• if management were able to provide such notice prior to the final decision being taken(37). Obviously specific circumstances of each case have to be taken into account; especially compelling reasons of confidentiality may prevent early information. 4. To whom information has to be given Here again there are different possibilities, which are covered by the term, workers' representatives. These can be the trade-unions (especially in case of collective bargaining) or 25

employees of the firm, represented by a union delegation (shop stewards), a works council, a committee of hygiene, or economic committee (F.R. Germany) or by representatives in the supervisory or management boards of enterprises. To whom information is given is obviously not neutral; the impact and outcome will also be affected by the attitudes of the recipients involved. 5. The obligation of headquarters to help their subsidiaries The employer, responsible for the involved entity, has obviously the duty to provide the required information. This will generally be, depending on national law and (or) practice, the local manager. The I.M.E. Committee of the O.E.C.D. addressed itself to this problem: "if an entity in a given country is not able to provide information to the employees in accordance with paragraph 2(b) and 3, the other entities of the enterprise are expected to co-operate and assist one another as necessary to facilitate observance of the Guidelines. Since representatives of employees may experience difficulties in obtaining such information at the national level, the provision of the Guideline introduce a useful supplementary standard in their respect" (38). Headquarters thus must see to it that the subsidiaries get sufficient information in due time in order to be able to fulfil their obligations under national law and practice and the Guidelines. The same idea can be found in the proposed E.C. Directive on information and consultation 1 n undertakings with complex structures. 6. Confidentiality In all systems employees' representatives are in one way or another bound to observe discretion or secrecy. In Sweden "in respect of information which the enterprise wishes to keep secret, therefore, we have to distinguish between information which is given under the Act on Board Representation and information which is given under Joint Regulation Act. Under the former act the worker representative acquires information in his capacity as a member of the Board and is placed under the same duty of confidentiality as the rest of the directors ••• In regard to information under the Joint Regulation Act, it is the rule that the employer may impose a duty of confidentiality but 26

that the information may always be conveyed to the rest of the members of the union branch committee"(39). In Belgium, when communicating information to the works council, the employer should mention when necessary - any confidential aspect of that information the diffusion of which would create problems for the company. If there is a disagreement in the works council about this subject, the confidential nature of the information should be submitted to an official of the Department of Commerce for a decision. In Luxemburg the Director of the Labour Inspection Service will in case of conflict about confidentiality make a binding decision(40). The proposed E.C. Directive on information and consultation provides similar obligations as far as confidentiality is concerned. Confidentiality entails a great dilemma: how can the rank and file participate in a meaningful way if the information given to a minority of them must be kept secret? Is there (real) participation if, for instance, only 30 employees - members of a council out of 9, 000 employees are informed? Personnel meetings, in which the works council in the presence of the employer (every three months in the Federal Republic of Germany, every six months in Austria), may be of some help here. In Germany the employer must organise a yearly meeting in which he explains the situation and answers the questions of the employees(41). 3 - CONSULTATION Consultation takes place mostly, but not exclusively, in the framework of works' councils and other comparable committees. It is obvious that trade unions and other unions can also have "consultative" status. Subject matter The subject matter of consultation is usually less wide compared with the subject matter of information(42). Thus (one example), the Belgian works council, which has consultative competence concerning: Economic and financial matters: Works organisation and productivity. Social matters: (1) Supervision of labour standards; (2) Vocational training and re-training; A.

27

(3) Structural changes; dismissals and (4) Criteria regarding recruitment; (5) Job classification; of handicapped (6) Social rehabilitation workers; (7) Use of language; (8) Destination of fines. The same is true for the other councils and for the consultation provided for in the E.C. social Directives and in the proposed E.C. Directive on information and consultation 1n complex structure undertakings and the other quoted international instruments (I.L.O. principle n°26; O.E.C.D. Guideline 6 Employment Industrial Relations Chapter), quoted above. The consultation refers specifically to closures, collective dismissals, structural changes, amalgamations and the like. The consultation will usually be limited to the mitigation of the adverse effects of managerial decision making, thus the E.C. Directive on collective dismissals: "the consultation shall, at least, cover ways and means of avoiding collective redundancies or reducing the number of workers affected and mitigating the consequences" (art. 2, 2) (43).

The involved entity. Access to real decision 2. makers. The employer, obliged to consult, will be mostly the local employer but could also be some one else when the local manager is not the real decision maker. The E.C. proposal for a Directive foresees such a possibility. "Where the management of the subsidiaries does not communicate to the employees' representatives the information required under paragraph (3) or does not arrange consultations as required under paragraph (4), such representatives shall be authorised to open consultations, through authorised delegates, with the management of the dominant undertaking with a view to obtaining such information and, where appropriate, to reaching agreement on the measures planned with regard to the employees concerned". These provisions of the E.C. proposal correspond to the idea laid down respectively in O.E.C.D. Guideline 9, Employment and industrial Relations Chapter and in principle n ° 51 of the I.L.O. Declaration, namely that employees should 28

have access to real decision makers(44). This principle is a basic one, which should ·cover all labour relations of the enterprise, negotiations as well as consultation. It seems self-evident that employees must be able to consult (co-operate says the O.E.C.D. Guideline n°6) with managers who are competent to take decisions necessary to mitigate adverse effects. The expression "authorised to take decisions" has self-evidently a universal meaning. Someone who has authority is more than a mere messenger, more than a go-between. It means that he has the power to determine the content of the decision to be taken; such as the wages to be paid, hours to be worked, investment or disinvestment and the like, of course, within certain guidelines; taking the broad principles of company policy into account; with reporting to the board or what have you but not asking permission all the time at every step which is taken. Normally that "authority" will be most of the time "delegated" authority. The question is then: can all decision-making power be delegated to local managers? Theoretically one could say yes, (although this would mean the end of the M.N.E.) but for some decisions you must talk with someone who has a total view of the problem. Here the decision making structure of the M.N.E. comes into play. This decision-making structure is, of course, complicated; there is quite obviously an input from below, from the local manager. But this does not deny that at the end of the day one can indicate who has (the main) authority to decide. In our study (MORGAN, BLANPAIN 45 we discussed the locus of decision-making. Our outcome was - and my views have not changed - that M.N.E's are more centralised than they think they are. Most M.N.E's have a centralised decision-making process concerning investment and technology creation and control of pension funds(46). One cannot reasonably say - except maybe for really big subsidiaries - that investment and other major decisions are mainly made by local management. If they are not - if at centralised level there is an important input - then delegation becomes a fiction and employees are not able to talk with real decision makers. If investment, technology, pensions are bargainable issues following national law or 29

practice and those decisions are not mainly taken at national level then employees are entitled to negotiate or to consult with centralised management. Otherwise paragraph 9 has little sense. C.

When? With whom? Confidentiality Here there is really no fundamental difference with what has been said in relation to information and we re.fer to that part of our paper(47). RESUME In this study, we certainly did not exhaust the problems we dealt with; some were not even touched upon, e.g. the availability of information, especially for smaller companies, the special costs involved, the way of presenting the information (orally, in writing; whether notes can be taken ..• ), so that employees can meaningfully understand and participate .•• , training for the handling of information(48), the role of experts(49), how to consult (effectively) and the like (50). Our closing remarks can thus only be very tentative. With these precautions taken into account I believe that our study indicates: 1. An extension of information, consultation and even negotiation (co-decision) , with a corresponding growing influence on managerial decision making; there is less managerial prerogative. This trend is continuing and fostered by international instruments adopted by the E.C., the O.E.C.D. and the I.L.O •. 2. Information and consultation, consequently, cover not only the traditional wages and conditions but also work organisation (technology) and financial and economic decision making (inter alia investment decisions). 3. Information takes place, mainly within the framework of collective bargaining or with the idea of keeping employees informed about their situation or to allow "councils" to fulfil their advisory role. It seems that information in the framework of "the councils" (integrative) is more abundant and more automatic: the employer has the (legal) obligation to provide information whereas in the framework of collective bargaining, unions 30

4. 5. 6. 7.

8.

9.

most of the time have to request the information and, in fact, prove that they need it. The employer can waive his duty to inform if the disclosure of information would have adverse effects, such as prejudicial effect on the enterprise, national interest or privacy. There is a clear indication to give information on the multinational enterprise as a whole. Information, especially in view of consulting employees on the effects of major decisions is to be given prior to the final decision being taken. Headquarters must see to it that the subsidiaries get sufficient information in due time so that they are able to fulfil their obligation under national law and practice as well as under the Guidelines. Employees should have, as far as negotiation as well as consultation are concerned, access to real decision makers. It is self-evident that employees must be able to consult with managers who are competent to take decisions inter alia "necessary to mitigate adverse effects". This means that multinational headquarters have to delegate authority to local managers or have direct consultations (eventually negotiations). Finally, the problem of confidentiality entails a great dilemma: how can the rank and file participate if only a minority of employees are informed, consul ted? Has one not created a new elite of employees: those who get information, training, job security and others who are less, or not, involved at all.

*

*

*

Disclosure of information and consultation only has full sense if employees, and or their representatives, are equipped to use it and have the necessary training and facilities to do so.

31

REFERENCES (1) (2) (3) (4)

(5) (6) (7) (8) (9)

(10) (11) (12) (13) (14)

32

Webster's Dictionary, 1965, p. 433. Great Britain, International Encyclopaedia for Labour Law and Industrial Relations (ed. R. BLANPAIN), 1980, n°42. See I.L.O., La participation des travailleurs aux decisions dans l'entreprise, Geneve, 1981, p. 22 and the I.L.O. Recommendation, n°94 of 1952. Concise Encyclopaedia of Industrial Relations, Oxford, 1979, p. 170. The same idea seems to prevail in Japan, see HANAMI, T., International Encyclopaedia for Labour Law .•• , 1978, n°207- although HANAMI reports "confusion" in the application of the notions. p. 179 p. 567 1·1ARSH, A., o.c., p. 208; see also DION, G., Dictionnaire canadien des relations du travail, Quebec, 1976, p. 233 and 98. GOLDMAN, A., United States of America, Encyclopaedia for Labour Law ... , 1979, n°488. Directive of February 17, 1975 on the approximation of the laws of the Member States relating to collectives redundancies (art.2); directive of February 14, 1977 ... relating to the safeguarding of employees' rights in the event of transfer of undertakings, business or parts of businesses (art. 6, 2) ; see also the proposal for a Directive on the information and consultation of employees in undertakings with complex structures. This is, I believe , illustrated by the text of art.6,5 which ~tates: "and, where appropriate, to reaching agreement" (initial proposal of October 24, 1980). BAKELS, H.L. - OPHEIKENS, L., Schets van het Nederlands Arbeidsrecht, Deventer, 1980, pp.206-207. B.I.T., La participation des travailleurs aux decisions dans l'entreprise, Geneve, 1981, p.138. E.g. in France; see: DESPAX, M., - ROJOT, J., International Encyclopaedia for Labour Law ••• , 1979, n°356. CLARKE, 0., Workers' participation in management in Great Britain, International Institute for Labour Studies, Research Series, n°58, Geneve, 1980, p.11.

(15) I.L.O., Promotion of Collective Bargaining, Report V(l), Geneve, 1980, p.29. (16) GUNTHER, H., International Encyclopaedia for Labour Law ••• , 1980. These principles are good practice for all, as well for multinational, as, where relevant for national enterprises (principle 11). The same is true for the O.E.C.D. Guidelines (guideline 9 of the introduction); see: BLANPAIN, R., The O.E.C.D. Guidelines for Multinational Enterprises, Labour Relations, Experience and Review, 1976-1979, Deventer, 1979, 309pp. ( 17) GOLDMAN, A. , o. c. , n ° 4 9 6. For Canada, see: ARTHURS, H. W. , CARTER, D. D. , GLASBEEK, H. J. , Canada, International Encyclopaedia for Labour Law .•• , 1981, pp. 203-204. (18) ACAS, Disclosure of information to trade unions for collective bargaining purposes, (London, H.M.S.O., 1977). See: HEPPLE, B.A. o . c . , no 4 51-4 53 ; CLARKE , 0 • , o . c . , p . 11 ; I.L.O., o.c., p. 30. ( 19) SCHMIDT, F. , Law and Industrial Relations in Sweden, 1977. (20) Italy, International Encyclopaedia for Labour Law .•. , 1981, n°439. (21) I.L.O. I o.c. I p. 31 (22) I.L.O. I o.c. I p. 31 (23) See also the I.L.O. Declaration. (24) The preoccupation \vith security of employment has thus furnished the occasion for the expansion of the scope of collective bargaining to include even the investment policy of undertakings in some cases (I.L.O., o.c.' p. 48). (25) The same is true in the Netherlands, BAKELS, H. L., OPHEIKENS, L., Schets van het Nederlands Arbeidsrecht, Deventer, 1980, p. 199. (26) RAMM, T., Federal Republic of Germany, International Encyclopaedia for Labour Law ••. , 1979, n°557, 566. (27) See: "Worker's Participation in the European Company", Bulletin of Comparative Labour Relations, n°8, 1979, Deventer, p. 254. (28) HEPPLE, B.A., o.c., n°451. ( 29) Art. 2, 3, provides that the employer will supply workers' representatives with all relevant information and in any event in writing the reasons for the redundancies, the number of workers to be made redundant, the number of workers normally employed and the 33

(30)

( 31 ) (32)

(33) (34)

34

period over which the redundancies are to be effected Art. 6, 1, indicates that the employer is required to inform of the following: the reasons for the transfer, the legal, economic and social implications of the transfer for employees, measures envisaged in relation to employees. SCHMIDT, F. , o. c . , p. 11 7 • I.L.O., o.c. p. 30. ACAS will decide on this question in respect of the Employment Protection Act (1975). See: BLANPAIN, R. and others, relations between Management of transnational Enterprises and Employee Representatives in certain countries of the European Communities, International Institute for Labour Studies, Research Series, n°5l, 1979, p. 32. See also the I.L.O. Recommendation on the Promotion of Collective Bargaining, quoted above. This chapter reads as follows: Enterprises should, having due regard to their nature and relative size in the economic context of their operations and to requirements of business confidentiality and to cost, publish in a form suited to improve public understanding a sufficient body of factual information on the structure , activities and policies of the enterprise as a whole, as a supplement, in so far as is necessary for this purpose, to information to be disclosed under the national law of the individual countries in which they operate. To this end, they should publish within reasonable time limits, on a regular basis, but at least annually, financial statements and other pertinent information relating to the enterprise as a whole comprising in particular: (i) the structure of the enterprise, showing the name and location of the parent company, its main affiliates, its percentage ownership, direct and indirect, in these affiliates, including shareholdings between them; (ii) the geographical areas where operations are carried out and the principle activities carried on therein by the parent company;

(iii) the operating results and sales by geographical area and the sales in the major lines of business for the enterprise as a v.rhole; (iv) significant new capital investment by geographical area and, as far as practicable, by major lines of business for the enterprise as a whole; (v) a statement of the sources and uses of funds by the enterprise as a whole; (vi) the average number of employees in each geographical area; (vii) research and development expenditure for the enterprise as a whole; (viii) the policies followed in respects of intra-group pricing; (ix) the accounting policies, including those on consolidation, observed in compiling the published information. 1. For the purpose of the guideline on disclosure of information the term "geographical area" means groups of countries or individual countries as each enterprise determines it appropriate in its particular circumstances. While no single method of grouping is appropriate for all enterprises, or for all purposes, the factors to be considered by an enterprise would include the significance of operations carried out in individual countries or areas as well as the effects on its competitiveness, geographic proximity, economic affinity, similarities in business environments and the nature, scale and degree of inter-relationship of enterprises' operations in the various countries. ( 3 5) RAMM, T., o.c. n°573. (36) Review of the 1976 Declarations and Decisions on International Investment and Multinational Enterprises (Report by the Committee on International Investment and Multinational Enterprises to the Council), Paris, 1979, par. 64. (37) Review of the 1976 Declarations and Decisions on International Investment and Multinational Enterprises (Report by the Committee on International Investment and Multinational Enterprises to the Council), Paris, 1979, par.67 35

(38) Review of the 1976 Declarations and Decisions on International Investment and Multinational Enterprises (Report by the Committee on International Investment and Multinational Enterprises to the Council), Paris, 1979, par. 65. ( 3 9) SCHMIDT, F. , o. c. , p. 118. (40) B.I.T., La participation des travailleurs aux decisions dans l'entreprise, Geneve, 1981, p. 145." ( 4 1 ) B • I. T . , o . c . , pp . 1 3 6 -13 8 . (42) One exception is the European Works Council which can give its opinion on any matter, which affects the fundamental interests of the E.C. or of the employees (art. 123). (43) See also O.E.C.D. Guideline 6 of the Employment and Industrial Relations Chapter and Principle n°26 of the I.L.O. Declaration and Articles 124, 125 of the proposed European Company Statute. (44) Guideline 9 reads as follows: Enterprises should "enable authorised representatives of their employees to conduct negotiations on collective bargaining or labour management relations issues with representatives of management who are authorized to take decisions on the matters under negotiation". The I.M.E. Committee clarified in its meeting of December 10, 1980, Guideline 9 as follows: "In carrying out their responsibilities management of the enterprises as a whole would seem to have a range of possibilities among which it would choose or that it would combine, taking into full account the need to respect prevailing labour relation practices in the country where the negotiations have been initiated. Its choice depends on various circumstances such as the matters under discussion, the decision-making structure within the enterprise and the importance of the decision to be taken. A number of possibilities are open to this end without suggesting any order of preference. Examples of such possibilities include: to provide the management of the subsidiary with adequate and timely information and to ensure that it has sufficient powers to conduct meaningful negotiations with representatives of employees; 36

(45) (46)

(47)

(48) (49) (50)

to nominate one or more representatives of the decision-making centre to the negotiating team of the subsidiary in order to secure the same result as in the preceding example; to engage directly in negotiations". The Industrial Relations and Employment Impacts of Multinational Enterprises, O.E.C.D., 1977, Paris, p. 22. These (technology - pensions) are subject to bargaining in many countries, presumably also in the U.S. On the "when", for the Netherlands, see: BAKELS, H.L. o.c., p. 201; for France, see: CATALAIN, L'entreprise, Paris, 1980, p. 799: "Ces avis doivent @tre prfialables ~ la decision envisagee et rfisulter d'un libre debat". JAIN, H.C., "Information, Training and Effective Participation" in: Worker Participation Success and Problems, New York, 1980, pp; 324-344. As such e.g. in Belgium and France. See: BLANPAIN, R., "Provision of information" in: Workers Participation. A document prepared for an International Management Seminar convened by the O.E.C.D., Versailles, 1975, pp. 89-97; INSTITUT SYNDICAL EUROPEEN, Certains droits syndicaux fondamentaux dans les entreprises d'Europe occidentale, Bruxelles, 1980, 172 pp.

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Chapter 2 THE MAIN SYSTEMS FOR INFORMING EXTERNAL PARTIES IN FINANCIAL AND CO~ll1ERCIAL LEGISLATION Professor Sidney GRAY

The primary purpose of this section is to provide a review of accounting and information disclosure by corporations in the E.E.C. which issue shares to the public and which regularly provide information to shareholders and other external parties in corporate annual and other reports. This may be viewed as relevant background to the discussion concerning extensions in the disclosure of information to employees in the context of consultation and participation in corporate decision-making processes. t1any writers have shown that accounting and information disclosure is influenced by the economic, social and political environment in which the corporation is based(l). The political system and type of economy, the stage of economic development, the social climate, the legal system, the management and ownership structure of corporations, the accounting profession, the tax system and the nature and stage of development of the capital market are all important environmental factors which determine both the accounting systems used and the extent to which information is publicly disclosed. The influence of these factors may vary between countries at any point in time and both between and within countries over time. Accounting and information disclosures is thus a product of its culture and environment. It is, moreover, the outcome of an evolutionary process of some complexity in view of the growing number of cross-cultural influences such as those arising from colonisation and war, the activities of multinational corporations and the supranational arrangements of organisations such as the United Nations, the Organisation for Economic Co-operation and Development and the European Economic Community 39

(E.E.C.). The E.E.C. is especially significant at the present time in that any agreement on the harmonisation of accounting and information disclosure has the force of law throughout the Community countries. As a result of similarities in environmental factors and the influence of cross-cultural factors, many countries exhibit similar patterns of accounting and information disclosure (2). Whilst efforts to identify country groupings are still in the early stages of development, it seems clear that continental European countries such as France, West Germany and Italy are significantly different from the U.K. and U.S .A. At the same time, the U.K. is different in many ways from the U.S.A. with both countries serving as representatives for distinct patterns of accounting. Not surprisingly, the U.K. can be grouped with many British Commonwealth countries, whilst the U.S.A. can be grouped with Canada, Mexico and Japan. The Latin American countries, including ,Argentina and Brazil, are again significantly different from other patterns as are, of course, centrally planned countries such as the U.S.S.R. and Czechoslovakia. Whilst the development of accounting and information disclosure is an evolutionary process, it is also dynamic with occasionally dramatic shifts such as those likely to result from the influence of E.E.C. harmonisation on different culturally~determined systems especially those prevailing in France and Germany as compared with the Netherlands and the U.K. Before examining recent events and trends in accounting and information disclosure in the context of E.E.C. harmonisation, let us consider the major factors that have influenced the historical development of corporate accountability and the public disclosure of information. To conclude this section, there will then be a brief review of information disclosure and regulation in practice with special reference to significant issues and technical problems. l - MAJOR FACTORS INFLUENCING THE DEVELOPMENT OF ACCOUNTABILITY A major factor influencing the public disclosure of information in the E.E.C. countries, as well as the U.S.A. and other market economies, was the recognition of corpo~ations as legal 40

entities with the public ownership of shares and the right of limited liability i.e. in the event of failure of the corporation the liability of shareholders was to be limited to their investments. (3) Thus many individuals were encouraged to invest in risky ventures in the knowledge that they did not stand to lose their entire personal wealth. Information disclosure was required to protect lenders and suppliers as well as shareholders. Lenders of finance, in the form of long-term loans or working capital, were considered to need information about the financial position and performance of the corporation in order to judge its liquidity, solvency and ability to pay interest. The security of their investment was determined solely by the resources of the corporation. The ability of the corporation to pay suppliers was similarly determined. Shareholders as investors in and owners of the corporation were also considered to need protection as they were often not directly involved in the management of business operations this being handled increasingly by professional managers. Information disclosure was thus considered to be a means by which managers, acting as agents for the shareholders as owners, could be held accountable for their actions. At the same time, shareholders could be informed about the financial position and performance of the corporation as a basis for making a valuation of their investment. Corresponding to the growth in the number, size and complexity of public corporations was the demand for finance both in the form of loans and shares or what is termed equity investment. This gave rise to the development of capital markets where the raising of loans and investment could be facilitated. A major factor, perhaps the most significant of all, influencing the public disclosure of information, was the emergence of stock exchanges or markets in equity investments where new shares are issued i.e. the primary market and where existing shares are traded i.e. the secondary market. The importance of the secondary market lies in the fact that it offers shareholders the opportunity to liquidate their shares for cash, without liquidating the corporation or to alter their holdings or portfolio of investments to suit risk and return preferences in the light of changes in economic circumstances. The secondary market also provides the means by 41

which prices for shares can be determined on a regular basis thus indicating the market price at which new shares may be issued and finance found for investment by corporations in new projects. The growth of stock exchanges brought with it the need to make information available to potential investors as well as shareholders. Corresponding to this development was the need for specialists to analyse and interpret corporate information for the bulk of investors who lack specialist knowledge. In view of the fact that potential investors are often unknown, the medium of communication used included the financial press and investment journals. The information needs of investors and specialist advisors or financial analysts in particular has acted as a constant pressure on corporations and their management. Thus the emergence of the stock exchange or equity market has served to both deepen and broaden public disclosure. The predominant influence of· the stock exchange in determining the extent of publicly available information is confirmed by the strong correlation between active and well-developed markets and the extent of public information disclosure in corporate reports. (4) Development has been by no means uniform with relatively well-developed markets such as the U.S.A. and U.K. exhibiting a much greater extent of public disclosure than markets in countries such as France, West Germany, Belgium and Italy. The basis for these differences would seem to lie in the relatively lower demand for public disclosure that has existed in the continental European countries which in turn has been a function of differences in environmental factors including especially the political system and role of government, the type of economy, the ownership of business and the nature and stage of development of the capital market. In France and West Germany, for example, the public ownership of shares in corporations is much less widespread than in the U.S.A. and U.K. (5) In France, the government plays a major role in the provision of loan finance to corporations. In West Germany, the banks are the source of significant amounts of loan finance, corporations being more extensively financed in this way than in the U.S.A. and U.K. Banks are also often major equity investors in their own right. Not only are accounting systems influenced 42

more by lender interests but such groups also have the power to gain direct access to detailed and more up-to-date information and do not have to rely solely on publicly disclosed information as do shareholders and potential investors who are relative 'outsiders'. (6) Despite being owners of the corporation, shareholders are only nominally so as they generally have the least access to information and very little control over management in practice apart from the discipline enforced through the stock exchange medium of the share price with its effect on financing potential and the possibility of takeover. Whilst share prices are of concern to management in corporations with widespread public ownership, this is unlikely to be the case in countries where the stock exchange is of relatively minor significance, as in France and West Germany, except perhaps for the very largest corporations with multinational operations and stock exchange listings in a number of countries. Reinforcing this relative lack of demand for increases in public disclosure in many continental European countries has been the influence of governments, formally and informally, in the development and use of accounting systems which facilitate the provision of information for national economic planning control purposes. In France, for example, a uniform national accounting system for corporations has been developed for planning p~rposes and to serve as a basis for corporate taxation (7). This is an entirely different orientation from the U.S.A. and U.K. where professional accountants have played a major role in the development of accounting systems and where the emphasis of accounting and disclosure has been primarily towards uses by investors, lenders and suppliers, who do not have direct access to information about the corporation(8). Whilst public disclosure by corporations has historically developed in response to those with a financial interest viz. shareholders and lenders, in recent years there has been an increasing acknowledgement that the providers of finances are not the only parties affected by the operations of a corporation. Many corporations accept that there is an obl'igation to provide information to a wider audience which included employees, trade unions, consumers, government agencies and the general public. 43

However, the impact of this extension in the groups of shareholders recognised by the corporation has been manifested in significantly different ways according to the main perceived uses of the information to be disclosed which are, in turn, a reflection of the economic, social and political environment of the particular country concerned. In continental European countries, for example, there is much more concern to provide information to employees about social matters, often in a separate corporate social report, than in the u.S.A. where there appears to be more attention given to matters affecting consumers and the general public such as pollution, corruption and minorities. (9) Furthermore, in some countries such as Belgium, France and West Germany, the law requires that a regular supply of information be made directly available to trade unions or employee representatives at works council or supervisor board level rather than through the medium of publicly disclosed corporate reports. In contrast, an important medium of communication in the U.K. and the Netherlands is through the publicly available corporate annual report as well as special employee/ social reports. Moreover, such information disclosure is for the most part not regulated but is supplied voluntarily by management. In conclusion, the public disclosure of information by corporations can be understood and differences between countries explained only by reference to the influence of economic, social and political factors and their historical development. There is nothing static about this, however, and cross-cultural influences are, in fact, increasing in Europe with the establishment of the European Economic Community and its involvement in accounting harmonisation. The activities of supranational inter-governmental organisations such as the U.N. and O.E.C.D. in developing accounting standards for multinational corporations provide an additional dimension to influence of this kind but in a broader international context. 2 - THE HAID10NISATION OF ACCOUNTING IN THE E.E.C. The establishment of the European Economic Community in 1957, following the signing of the Treaty of Rome, was a highly significant event in the development of information disclosure in 44

Europe. The aims of the E.E.C. are to achieve economic and ultimately political union through the creation of a common market whereby people, goods, services and finance can move freely between countries. The intention is that corporations should have the freedom to do business and compete within a common framework of law, taxation and financial resources throughout the E.E.C. Thus the eventual harmonisation of company law, including taxation and the creation of a European capital market are considered essential. An important part of this process is the public disclosure of reliable information to protect the interests of shareholders, lenders, suppliers and others involved in corporations whose operations often extend to other E.E.C. countries. In view of the differences in accounting and information disclosure within the E.E.C. countries, it is not surprising that a major goal of the company law harmonisation programme has been to ensure that corporate reports provide information which is comparable across countries. There has also been ·a growing concern to extend the public disclosure of information which may be of interest to investors, including potential investors as well as shareholders, as a basis for developing a truly 'European' capital market with well-developed stock exchanges in all countries. This has led to the adoption of the U.K. 'true and fair view' concept which implies that corporate reports will be required to have much more of an investor decision-making orientation. However, progress in what is termed the 'harmonisation' of accounting has been slow with the major event to date being the adoption of the Fourth Directive on Annual Accounts in 1978 (10). This is now in the process of being introduced into the national law of each E.E.C. country and will give rise to some significant changes in practice. The intention of the Fourth Directive is not to produce uniformity in corporate reporting throughout the E.E.C. but rather a co-ordination of existing legal · requirements governing accounting and disclosure by corporations with the right of limited liability. This was not to be decided at the level of the lowest common denominator, however~ but rather at the level of best practice. Thus harmonisation in practice has been the outcome of a political process with France, West Germany and the U.K. having a major influence on developments. The result is a compromise between 45

the continental European and U.K. patterns of accounting with perhaps the emphasis rather more on disclosing the nature and effect of differences in accounting between countries than in bringing them together, which will require much more time. Nevertheless, the Fourth Directive is a significant event because it provides a common structure for the classification and presentation of information and incorporates requirements concerning content that will raise the level of public disclosure, particularly in countries such as Belgium, Luxembourg, Italy, Denmark and now Greece. Even in the U.K. there will be a disclosure impact with the newly-adopted requirement to provide a more detailed profit and loss account or income statement. (11) Whether or not the U.K. 'true and fair view' concept, which is incorporated in the Fourth Directive as an objective that may require additional information or, in exceptional circumstances, different information, will have any discernible effect in the continental European countries remains to be seen. But, with the basis that the Fourth Directive provides, it seems likely that further efforts will be made to extend public disclosure where necessary and to consider innovations. The Seventh Directive on group accounts, proposed in 1976 and adopted in 1983, is of special interest in the context of multinational corporations and the subject of some debate largely on account of issues relating to criteria for group identification and the disclosure of sub-group information. (12) Even more contentious is the proposed (Vredeling) directive on employee information and consultation, issued in 1980, which would require corporations and especially multinationals to provide information on a regular six-monthly basis to employees about the whole group. (13) Furthermore, employees would need to be consulted when decisions proposed by management are likely to affect their interest e.g. in the case of closure or change in subsidiary activities. Related to developments in accounting and company law have been those concerned with the harmonisation of capital markets.· Directives concerning (1) minimum conditions and (2) the disclosure of information, for the admission of securities (shares) to official stock exchange 46

listing were adopted in 1979 and 1980 respectively. (14) The most recent Directive on interim reports, adopted in 1982, requires listed corporations to publish a half-yearly report of financial results together with information on trends and likely future developments in the current year of operations. (15) Apart from E.E.C. Directives, which carry the force of law, there are a number of other important influences bearing on harmonisation, albeit in a broader international context, at both the political and professional level. Whilst these are likely to be much less influential, at least in the short-term, than E.E.C. developments, there appears to be a growing degree of concern with the activities of supranational inter-governmental organisations such as the U.N. and O.E.C.D. At the professional level, the endeavours of the International Accounting Standards Committee (I.A.S.C.) to recommend world-wide standards are of much less practical significance but may, nevertheless, provide indications of harmonisation that are feasible and acceptable in the context of private as opposed to governmental reguiation. (16) Developments at the s~pranational inter-governmental level have been modest to date with the O.E.C.D. approving a set of guidelines on information disclosure by multinational corporations in 1976. (17) These are very brief and apply only to corporate reports prepared at group level. The United Nations, on the other hand, issued extensive proposals for information disclosure by multinational corporations in 1977, covering disclosure at individual subsidiary level as well as group level but agreement has yet to be reached on the content of a set of requirements or guidelines. (18) The I.A.S.C. has now issued a total of 16 international standards since its establishment in 1973. These are the outcome of a political process at the professional level and are compromises which reflect to a considerable extent the influence of U.S.A. and U.K. practice. A final influence on information disclosure and harmonisation to be considered here concerns that of the management of the corporations themselves. Many of the larger corporations are multinational and becoming increasingly so and may well be influenced by pressures for more disclosure exerted at national and international level, to the extent that information may be voluntarily provided in the hope that bargaining power in the 47

competition for finance and in relations with governments and trade unions -v;ill be improved with consequent benefit to the corporation and its management. It would appear that many corporations are responsive to changes in the economic, social and political environment in which they operate, as can be seen by the growing trend towards social and employee reporting especially in France, West Germany, the Netherlands and the U.K. (19). On the other hand, there are many corporations that do not perceive their interest to be served by disclosing more than the minimum information requirement. 3 INFORMATION PRACTICE

DISCLOSURE

AND

REGULATION

IN

A brief review of significant areas of accounting and information disclosure will now be carried out with reference to the prevailing regulatory, framework, corporate reporting practices and, most importantly, developmen·t at the E.E.C. level. Reference will also be made to the U.N., O.E.C.D., and I.A.S.C. where appropriate. An attempt will be made to indicate problems and to evaluate prospects for change where relevant. A. Income and wealth measurement: accounting for inflation Inflation is a world-wide phenomenon and many E.E.C. countries have become vulnerable to its ravages, notably the U.K., Italy and France. There has been increasing concern in some countries to adopt accounting systems which will overcome the defects of historical cost accounting and reveal the impact of inflation on income and assets or wealth. (20) The problem with historical cost accounting is that because the prices recorded by the accounting system are out-of-date, there will be a tendency for profits to be over-stated and assets under-stated. The situation is further confused by the fact that historical cost accounting is applied in different ways in different countries. Continental European countries such as France and West Germany adopt a much more conservative approach, which is consistent with the influence of bankers and tax law, compared to the U.K. which is relatively more optimistic, which is consistent with the influence of investors and the financial community. (21) 48

The measurement of income and wealth is of fundamental concern to all groups interested in evaluating the financial performance and future prospects of corporations and yet it poses such a complex problem in an international context that it is not surprising that little progress has been made towards understanding the different traditions of accounting measurement let alone resolving the issue of accounting for inflation. The term 'inflation accounting' covers a wide variety of systems. However, the major alternatives can be grouped together as 'general purchasing power accounting' and 'current value accounting' . The former refers to systems which are designed to account for changes in the general level of prices by a method of indexation. The emphasis is on maintaining the purchasing power of the shareholders' capital invested in the corporation. 'Current value accounting' , on the other hand, refers to systems designed to account for changes in specific prices. These include 'current cost accounting' and 'replacement value accounting' which emphasise the maintenance of the physical capital of the corporation i.e. its capacity to produce goodi and services. Whilst there is no world-wide consensus on the most appropriate form of accounting for inflation, the trend in many countries, including the Netherlands and the U.K., is towards the acceptance of some form of current value accounting based on the maintenance of physical capital. (22) However, the use of 'inflation accounting' systems is not at all well-developed. Even though the Netherlands is renowned for the development and use of 'replacement value accounting' since the 1930's, there is no legal compulsion to use the system nor even a professional standard on the subject. In the U.K., a mandatory professional standard (S.S.A.P. 16) was introduced in 1980, after a long period of debate, which requires 'current cost accounting' financial statements, largely based on replacement values, to be presented either as supplementary statements or as the main accounts with the provision that historical cost data must also be provided. (23) The current cost accounting system provides for four adjustments: depreciation, cost of sales, monetary working capital and gearing. The gearing adjustment is the subject of controversy as it incorporates an element of the general purchasing power approach by recognising that there is a gain through holding 49

net monetary liabilities in a period of inflation. In West Germany, by way of contrast, there is very little enthusiasm and indeed opposition to the introduction of 'inflation accounting'. This is based largely on the belief that it may institutionalise inflation and prevails despite a long history of ideas on the subject and a professional recommendation in 1975 to introduce supplementary adjustments on a replacement value basis. In France, proposals for an 'inflation accounting' system have also been rejected. There have, nevertheless, been instances of periodic revaluations, using government indexes, being required or permitted with the most recent experience in 1977 and 1978 when revaluations were required for all long term or fixed assets. At the E.E.C. level, the Fourth Directive is permissive in that Community countries may authorise (Article 33) alternatives to historical cost accounting including 'replacement value accounting', 'general purchasing power accounting', or other methods including periodic revaluations to reflect changes in prices. It would seem that any attempt at harmonisation must await the results of further experience in the use of 'inflation accounting' systems. B.

Consolidated Financial Statements The growth of corporations has been brought about both by internal means, including the formation of related legal entities in different countries and by the acquisition of other corporations often in different lines of business. The consequence has been the formation of groups of subsidiary corporations controlled and co-ordinated by a parent corporation. It is thus the financial performance and future prospects of the group as an economic entity that is of growing concern to all interested parties. Consolidation is currently accepted in practice as the means by which information about the assets, liabilities, revenues and expenses of individual legal entities are combined on a 'line-by-line basis' into income statements, balance sheets or financial position statements and funds statements relating to a single economic entity. In the case of multinational corporations, world-wide consolidated financial statements will, of course, be necessary if the income and resources of the M.N.C. as an economic entity are to be revealed. At the same time, it is increasingly 50

recognised that consolidations are likely to be less than revealing, given the compexity of H.N.C. operatio·ns, without some disaggregation or segmentation of the information accumulated. Regulation relating to the disclosure of consolidated financial statements is perhaps not as widespread as might be expected, especially in some E.E.C. countries which are home bases for a significant number of M.N.Cs e.g. West Germany, France and Italy. (24) In Germany, whilst domestic subsidiaries are required to be consolidated, there is no legal requirement to include foreign subsidiaries. On the other hand, there are no legal requirements at all in France and Italy. They are joined by Luxembourg and Greece. In France, however, the stock exchange authority (Commission des Operations de Bourse) and National Accounting Council (Conseil National de la Comptabilite) appear to be influential in persuading a . growing number of corporations to disclose their operating results and financial position on a world-wide consolidated basis. Furthermore, voluntary world-wide disclosures are provided by some corporations in West Germany and, to a lesser extent, Italy, without legal compulsion to do so. At the E.E.C. level, the Seventh Company Law Directive of June 13, 1983 requires world-wide consolidation of financial statements. A compromise had to be found between British and German practice. The u. K. approach to defining a group is to emphasise the legal power to control another corporation whereas the German approach is to emphasise the existence of management control through contract or agreement. (25) In addition, in contrast to the U.K., the law in West Germany effectively prohibits the proposed equity method of accounting for associated corporations in which the investor company holds a significant but not controlling interest i.e. where the ownership share of earnings of the associate are included in the consolidated financial statements as opposed to dividends only. The Directive also permits (article 32) the use of the proportional method of consolidation especially in the case of joint ventures whereby the ownership share of assets, liabilities, revenues and expenses are consolidated pro-rata on a 1 line-by-line 1 basis. This is an innovation which is increasingly used in France and, to some extent, the Netherlands. 51

A proposal of significance to M. N. Cs is the suggestion that non-E.E.C. multinationals should provide a sub-group consolidation at E. E. C. ·level by combining, if necessary, the financial statements of sub-groups based in different countries. This is an issue of some controversy but it is interesting to note that the U.N. (1977) recommends the disclosure of sub-group consolidated financial statements at 'country' level presumably on the grounds that it is likely to be useful to governments and trade unions concerned with the impact of M.N.Cs at national level. (26) A further problem to be resolved at the E.E.C. level which arises from the consolidation process concerns the treatment of goodwill or the difference on consolidation i.e., the difference between the purchase price and the value of the net assets of an acquired corporation. (27) Treatment varies with, for example, the usual practice in the Netherlands to write off any goodwill against earnings in contrast to the U.K. where goodwill may be amortised over time against earnings, written off immediately or left in the balance sheet at its original amount. In West Germany and, to a lesser extent, France the practice is quite different in that any difference on consolidation is calculated at the date of each balance sheet rather than just at the date of acquisition with the result that the size of the consolidation difference will vary from year to year. Whilst there has been a growing demand for consolidated financial statements and, in the case of M.N.Cs, a world-wide basis of presentation, there are many problems to be resolved in the context of country differences in concepts and practices in the E.E.C. The impact of the agreement that was reached on the Seventh Directive will be considerable as both regulation and practice relating to consolidated financial stements are not well-developed in many community countries. C. Funds Statements The funds statement or statement of changes in financial position is becoming increasingly recognised as an essential component of the set of consolidated financial statements. It provides an analysis of the sources and uses of funds accruing to the corporation during the year. The term "funds" does not necessarily imply "cash flows" though the focus of some statements is the net change in cash or liquid balances as opposed to 52

other approaches such as an emphasis on changes in working capital. The purpose of the funds statement is to provide further insight into the financial performance and prospects of the corporation. Funds statements are widely used by financial analysts and bankers. There is nothing new about their use but so far as public regulation is concerned they would appear to be something of an innovation in many countries despite the fact that a significant number of large corporations are voluntarily disclosing funds flow information. In the E.E.C. countries, there are no legal requirments governing the disclosure of funds statements. ( 28) In France, however, a funds statement is recommended by the National Accounting Council in accordance with the Plan Comptable General. In the U.K. and Ireland a mandatory professional accounting standard in the form of S.S.A.P. 10 was introduced in 1976. However, this was limited to a specification of the main items to be disclosed, matters of presentation being left to the corporations themselves. Thus funds statements have yet to be widely accepted as necessary for regulation and even where regulation exists it tends to be minimal. It is perhaps not surprising, therefore, that the E.E.C. Fourth Directive and Seventh Directive make no reference to funds statements. On the other hand, it is conspicuously absent when comparisons are made with the U.N. (1977) proposals which recommend elevating the funds statement to a primary financial statement. The disclosure of a funds statement is also recommended by the O.E.C.D. (1976) and by the International Accounting Standards Committee in IAS 7 issued in 1977. With this international pressure for the disclosure of a funds statement and the growing practice by large corporations, it seems likely that E.E.C. proposals will eventually follow. There is, however, considerable variety and some confusion in the preparation and presentation of funds statements with special reference to the definition of "funds" used, the items disclosed, the measurement of funds from operations and the form of presentation(29). D.

Segmental Information The counterpoint to consolidated financial statements, including the funds statement, is the disclosure of segmental or disaggregated 53

information. This is especially relevant in the case of multinational corporations which have become more complex as they have diversified into new lines of business and different geographical areas. Consolidated financial statements have become correspondingly opaque in such circumstances and thus of declining usefulness without appropriate disaggregation. Segmental information is, therefore, increasingly recognised as necessary if assessments of the financial performance and future prospects of a corporation are to be fully informative. In contrast to the U.S.A., which would seem to have the most comprehensive requirements world-wide, regulation in the E.E.C. countries is limited and, where it exists, modest. (30) The U.K. is the most well-developed with legal requirements to disclose sales and operating results by line of business together with sales by geographical area following the implementation of the Fourth Directive in the newly adopted Companies Act 1981. This is supplemented by a stock exchange requirement to disclose operating results by geographical area. The only other E. E. C. country with regulations prior to the Fourth Directive is the Netherlands with a legal requirement to disclose operating results by line of business. This is supplemented by a professional recommendation to disclose sales, operating results and the number of employees by geographical area. At the E.E.C. level, both the Fourth Directive and Seventh Directive are limited to the disclosure of sales only by line of business and geographical area. In contrast to the U.N., O.E.C.D. and I.A.S.C. requirements these are minimal requirements. The U.N. (1977), for example, recommends the disclosure of sales, operating results, assets, new investments and employees. Furthermore, the value of transfers between segments and the transfer pricing policies used must be disclosed. But for most E.E.C. countries the requirements of the Fourth Directive represent a significant development though many large corporations in France and West Germany, for example, already disclose more information than regulation will prescribe. Despite the growing body of regulation relating to segmental information, this is a disclosure innovation which has yet to be fully developed. The few countries that have introduced regulations have done so only relatively recently 54

and have framed their requirements very broadly. Even in the U.S.A., geographic disclosures were not required until 1976 by F.A.S.B. 14. International Accounting Standard No. 14 was also recently approved and became effective in 1983. Experience in the U.S. A. and U.K. indicates that a major problem of regulation in practice is that many corporations do not provide segmental information at a level of disaggregation sufficient to make informed judgements. (31) The lack of effective criteria by which to identify line of business and geographical segments is a fundamental weakness of the requirements in these countries - a weakness which can also be found in the requirements/recommendations of the U.N., O.E.C.D., I.A.S.C. and E.E.C. There are many problems to be resolved in the development of identification criteria including whether or not disclosure will be meaningful when a corporation's operations are highly integrated. Issues of competitive disadvantage, transfer pricing and overhead cost allocation must also be dealt with. Further problems concern the information content to be disclosed, the measurement of income by segment, and the form of presentation. Segmental reporting has so far been limited to the disclosure of summary data such as sales, operating results and so on but could well be extended to include the presentation of financial statements dis aggregated, for example, by country as a more comprehensive response to the problem of gaining an effective insight into the complex operations of large corporations and especially M.N.Cs. E.

Foreign Currency Translation A unique problem for multinational corporations in the preparation of consolidated financial statements and segmental information is the translation of the financial statements of foreign subsidiaries and associates denominated in foreign currencies. (32) If consolidated financial statements are to be prepared in the currency of the parent corporation then translation is essential. Translation is a process of restatement from one currency to another and should be distinguished from a transaction which gives rise to an exchange of money in one currency for money in another. If information disclosure in the home currency is to be at all meaningful then foreign currency 55

translation must be meaningfully carried out as it is such an essential part of the system of information processing and reporting about group operations as a whole. The relatively recent growth of JI1.N.C.s combined with the volatility of exchange rates has meant that this is an area which is only now receiving the attention it deserves. The major problem is how to account for changes in exchange rates: which rate should be used to translate the financial statements? How should any gains and losses arising out of the translation be treated? Should inflation be accounted for and, if so, should this be done before or after translation? .As regards the exchange rate to be used there is considerable controversy. The choice is essentially between the historic rate i.e. the rate applicable when the transaction was initially recorded in the accounts and the current rate i.e. the market rate applicable to the period for which the financial statements are prepared. A variety of methods have been developed including the 'temporal method' which applies the current rate to all i terns measured in current money terms, including long-term liabilities and the historic rate to all items measured in historic terms. The 'closing rate' method, on the other hand, applies the current rate to all items. Controversy over the treatment of translation gains and losses arises from the question of whether such gains/losses should be included in earnings or treated as an adjustment to shareholders' equity. This is complicated by the questions of whether and how the impact of inflation should be accounted for. Given the relationship that exists between inflation and exchange rate changes it would seem that both elements would need to be accounted for if information disclosure is to be meaningful. In the E.E.C. countries, regulation relating to foreign currency translation is sparse(33). Whilst the method of translation used is required to be disclosed in the Netherlands and the U.K., there is no specification that any particular method should be used. In the U.K., the 'closing rate' method has been widely used in practice and is now required by S. S .A. P. 20. This can be compared with the U.S.A. where F.A.S.B. 52 now requires the use of the 'closing rate' method following heavy criticism of F.A.S.B. 8 which 56

1 temporal hitherto required the use of the method 1 • ( 3 4) Irrespective of method, there is always the problem of how to treat the gains/losses on translation. In the U.S.A., F.A.S.B. 52 now requires a~l gains/losses to be included as an adjustment to shareholder equity. In the U.K., on the other hand, a similar though somewhat more flexible approach is evident. At the E.E.C. level, little attention has been given to this issue with the Fourth Directive and Seventh Directive requiring only disclosure of the method of translation used. Nevertheless, foreign currency translation is a matter of fundamental importance in the disclosure of consolidated and segmental information. Any flaws in the process of translation will have repercussions in all areas of information disclosure. Moreover, the usefulness of translation is dependent on the foreign subsidiary financial statements providing meaningful measurements in the first place especially under inflationary conditions. Given the complexity of the problem and the current lack of development world-wide, an interim measure may be to move towards more disclosure of the methods used, including the treatment of translation of gains/losses and the location of assets/liabilities in different currencies.

F.

Transfer Pricing and Related Party Transaction The disclosure of information about transfer pricing and transactions between related parties in a group of corporations, i.e. between subsidiaries or between parent and subsidiaries, is an issue of apparently prime concern to trade unions and governments(35). However, it is an area of disclosure that is not well-developed. All related party transactions are eliminated in the process of preparing consolidated financial statements. Hence, this issue must be considered in the context of financial information relating to segments or individual corporations comprising the group. Much of the detailed information about related party transactions that will be necessary may be considered confidential and, thus, it may often be more appropriate to provide it in special reports to the specific user group concerned as opposed to the general purpose corporate report. The United Nations (1977) recognises, for example, that in many areas, including related party transactions, the detailed needs of trade 57

unions and governments will often be best served by special reports. Areas identified as more appropriate for special reporting include information relating to the balance of payments, development planning, tax laws, employment policy, collective bargaining, future prospects, environmental impact and corrupt and doubtful payments. Whilst some information may be disclosed in a general purpose corporate report, this will, in most cases, require that it be supplemented by detailed special reports. Specific recommendations by the U.N. include disclosure of the value of transfers between geographical areas and lines of business including the accounting policy used. There is, in addition, a general requirement to disclose the accounting policies used for all transactions between group corporations including associated corporations. Information about the members of the group is also required including the names of corporations, ownership percentage and country of location. Furthermore, the amounts of inter-corporate long-term receivables, current receivables, loans and current payables are to be disclosed. In the income statements, related party transactions are to be disclosed for revenue and expense items. In the E.E.C. countries, legal requirements in this area are sparse, especially as regards the disclosure of the value of transfers between segments and transfer pricing policies(36). Information about subsidiary and associated corporations is required, however, in France, West Germany and the U.K. Balance sheet information about receivables, payables and loans is much more widespread with legal requirements in West Germany, Italy and the U.K. At the E.E.C. level, the Fourth Directive is limited to the disclosure of balance sheet and income statement items together with information about associated corporations. Information disclosure in the area of related party transactions is in the early stages of development. Problems to be investigated concern the type of information that is likely to be relevant, the means of communication and the costs and benefits involved to multinationals, as preparers and governments and trade unions as major users. G.

Non-Financial or Social Reporting The final area of information disclosure to be reviewed here concerns non-financial reporting 58

which refers to information additional to the conventional financial statements Vl.Z. income statement, financial position statement and funds statement. The focus here is on information, often with some financial content, which is likely to be of interest to user groups concerned with the 'social' impact of corporations on employees and society in general. This type of reporting is often referred to as 'social reporting' with a number of user groups in mind including governmental organisations, employees and trade unions and consumer groups. (37) Relevant disclosures in this context include information relating to employment conditions and prospects, corporate organisation, production, investment plans, value added and forecasts. Whilst 'social reporting' is a subject of growing interest and concern, it is not at all well-developed in terms of identifying the information needs of the user groups involved, the means by which social costs and benefits will be measured and the criteria by which corporations are to be held accountable for their 'social' performance. The United Nations (1977) recommended the disclosure of a wide range of information in general purpose corporate reports(38). Whilst the provision of separate 'social' reports was favoured, it was recognised that further study and research was necessary before this would be feasible. The information that would be required under the U.N. proposals includes the following. Firstly, labour and employment information should include a description of labour relations policy and the number of employees both in total and segmented by line of business and geographical area. At the individual subsidiary level, the information would be more detailed, including, for example, the number of women employees, labour turnover, accident rates and employee costs (including social expenditures and costs of training.) Secondly, production information should include the physical output by lines of business and a description of significant new products and processes. At the individual subsidiary level, this would be extended to include information about the source of raw materials and average annual capacity utilisation.· Thirdly, information about investment programmes should include descriptions of announced new capital expenditure, main projects including their impact on employment and announced 59

mergers and takeovers, including their cost and impact on employment. Fourthly, information about organisational structure should include a description of the management structure, the names of directors and the numbers of shareholders including the names of principal shareholders. Finally, a description of major environmental measures carried out would be required, together with the costs involved. Compared to this substantial list of disclosure requirements, the E.E.C. Fourth Directive and Seventh Directive are quite modest in scope. They require that the average number of employees, categorised by function, be disclosed together with employment costs, showing social security costs and pensions separately. There are also rather general requirements for the corporate report to "include at least a fair review of the development of the company's business and of its position" and to give an indication of "the company's likely future development" (Article 46) . In contrast, however, the proposed (Vredeling) directive (1980) on employee information and consultation is considerably more extensive in scope. This would require (Articles 5, 11) the regular six-monthly provision of information to employees, at subsidiary level, about the activities of the group as a whole. This information would include information relating to organisation structure; employment; the economic and financial situation; probable developments in production, sales and employment; production and investment programmes; rationalisation plans and plans for new working methods or other methods that could have "a substantial effect" on employee interests. Much of the financial information would seem to be required already by the Fourth Directive, albeit on an annual basis only. On the other hand, the emphasis of the proposal, in particular the revised text of 1983, is on providing employees with more up-to-date and future-orientated information and it is this latter aspect especially that has generated considerable debate and controversy despite the rather general nature of the requirements and the fact that many corporations already provide some of this information, usually qualitative, in their annual reports. Apparent major problems from the multinational corporation perspective concern the direct costs of providing such reports, i.e. data collection, processing, printing, auditing and the 60

possible competitive disadvantages that may arise if sensitive information were to become· publicly available. Even more contentious, however, is the proposal (Article 4) that employees would need to be informed and consulted where proposed decisions by management are likely to affect their interests, e.g. in the case of a closure, transfer of operations, restrictions of activities and major modifications to the organisation of a subsidiary. Such consultations would be required to take place before management takes any final decisions thus bringing into question the role of employee participation in management decision-making and the problem of potentially costly delays. At national level, regulatory developments are currently very sparse apart from France where large corporations are required by a 1977 law to publish a social report (Bilan social). (39) It is quite separate from the corporate annual report and may, therefore, be regarded as a special report. Detailed information must be disclosed about a wide range of matters including employment, wages, salaries and social security payments; hygiene and safety; conditions of work; training and trade union activities. The emphasis of these requirements is on the impact of the corporation on employees. Although France is the only E.E.C. country with extensive legal requirements, it is evident that there is a growing trend in voluntary disclosures by large corporations, especially in West Germany and the Nether lands where additional special 'social' reports are often provided. (40) In the U.K. there is also a significant move towards the disclosure of value added statements in corporate annual reports and the provision of special or simplified reports to employees. (41) Not surprisingly, reporting practices vary across countries according to social/societal pressures and it is interesting to note, for example, the European concern with employee welfare and trade unions in contrast to the U.S.A. concern with consumer interests, pollution and minority groups. (42) Whilst 'social' reporting is clearly an area of considerable and growing concern, an extensive amount of further research and development seems likely as it is still very much at the experimental stage. Moreover, the costs and benefits associated with information disclosures of this nature have yet to be fully appreciated. 61

4 - CONCLUSIONS The nature and extent of corporate accounting and information disclosure in the E.E.C. countries can be understood only by reference to the economic, social and political environment in which the corporation is based. This is the outcome of an evolutionary process of some complexity especially in view of the growing number of · cross-cultural influences at work. A factor of major significance in the extension of public disclosure by corporations in Europe. is the establishment of the E.E.C. and the recent development of its accounting 'harmonisation' programme. Although progress has been slow, there is growing awareness of the role of accounting information in the process of economic integration and recognition of the need for a 'European' capital market with well-developed stock exchanges in all E.E.C. countries. Thus the historically significant influence of investors on public disclosure is being actively extended in the context of promoting European economic development. Whilst the interests of a wider audience, including employees and trade unions, are of growing concern, they have yet to receive universal consideration. However, much of the information about the financial performance and future prospects of corporations which is of interest to investors and other finance providers is likely to be of interest to these groups also. Differences in information needs and priorities are more probably reflected in the areas of related party transactions and non-financial or social reporting, both of which are still in the formative stages of development. A review of information disclosure and regulation in practice reveals that reporting systems are not at all well-developed, at both the conceptual and technical level, in a number of significant areas, especially foreign currency translation, segmental information and funds statements. Furthermore, the issues of 'inflation accounting' and consolidated financial statements have given rise to considerable controversy and a variety of approaches. Whilst the process of E.E.C. harmonisation will minimise some of the differences between countries and raise the overall level of disclosure, it is in key areas of concern that the basis for future development remains uncertain. If 62

policy-makers are to be fully informed of possible innovations/alternatives, together with associated costs and benefits, then a substantial research effort seems essential.

63

REFERENCES (1)

(2)

(3)

(4)

( 5)

(6) ( 7)

64

See: MUELLER, Gerhard G. International Accounting (New York: Macmillan, 1967); Zeff, S.A. Forging Accounting Principles in Five Countries: A History and an Analysis of Trends (Champaign, Illinois: Stipes, 1972); CHOI, F.D.S. and MUELLER, Gerhard G. An Introduction to Multinational Accounting (Prentice-Hall, 1978) ch.2, GAMBLING, T. Beyond the Conventions of Accounting (London: Macmillan, 1978); NOBES, C.W. and PARKER, R.H. Comparative International Accounting (Philip Allan, 1981) Ch.7; ARPAN, Jeffrey S. and RADEBAUGH, Lee H. International Accounting and Multinational Enterprises (Warren, Gorham and Lamont, 1981) Ch.2. Important attempts at classification include: MUELLER, G. G. Op. Cit.; HUELLER, G. G. "Accounting in the United States versus those Generally Accepted Elsewhere" International Journal of Accounting (Spring 1968) pp. 91-103; NAIR, R.D. and FRANK, vl.G. "The Impact of Disclosure and Measurement Practices on International Accounting Classification" The Accounting Review (July 1980) pp. 426-450. See: Chatfield, . Michael. A History of Accounting Thought (New York: Robert E. Krieger, 1977); LEE, T.A. and PARKER, R.H. The Evolution of Corporate Financial Reporting (Nelson, 1979). See, for example, BARRETT, M. Edgar "Financial Reporting Practices: Disclosure and Comprehensiveness in an International Setting" Journal of Accounting Research (Spring, 1976) pp. 10-26; GRAY, S. J. "Segment Reporting and the E.E.C. Multinationals" Journal of Accounting Research (Autumn, 1978) pp. 242-253. See, for example, READMAN, Peter et al; The European Money Puzzle (London: Michael Joseph, 1973); SAMUELS, J.M.; GROVE, R. E. V. and GODDARD, C. S. Cmnpany Finance in Europe (London: Institute of Chartered Accountants in England and Wales, 1975). NOBES, C.W. and PARKER, R.H. Op. Cit. Part 1. See: ENTHOVEN, Adolf, J. H. Accountancy and Economic Development Policy (Amsterdam: North-Holland, 1973); BEENY, James H. European Financial Reporting France (London:

(8) (9)

(1 0)

( 11)

(12) (13)

(14)

(15) (16)

Institute of Chartered Accountants in England and Wales, 1976). BENSTON, George J. Corporate Financial Disclosure in the U.K. and the U.S.A. (Saxon House and the Institute of Chartered Accountants in England and Wales, 1976). See, for example, LEE, T.A. (Editor) Development in Financial Reporting {Philip . Allan, 1981) Ch. 8 and 10; SCHOENFELD, H.H. The Status of Social Reporting in Selected Countries (Contemporary Issues in International Accounting, Occasional Paper No. 1, University of Illinois, 1978); SCHREUDER, Rein. "Employees and the Corporate Social Report: The Dutch Case" The Accounting Review (April, 1981) pp. 294-308. European Economic Community. Fourth Counci 1 Directive for Co-ordination of National Legislation Regarding the Annual Accounts of Limited Liability Companies (Brussels, 1978). For a review of the impact of the Fourth Directive in the E.E.C. countries, see: Ernst and Whinney. The Fourth Directive (London: Kluwer, 1979); see also U.K. Companies Act 1981. Commission of the European Communities. Proposal for a Seventh Directive concerning Group Accounts (Brussels, 1976, revised 1979). Commission of the European Communities. Proposal for a Directive on Procedures for Informing and Consulting the Employees of Undertakings with Complex Structures, in particular Transnational Undertakings (Brussels, 1980). · European Economic Community. Directive on Conditions for the Admission of Securities to Official Stock Exchange Listing (Brussels, 1979); Directive on the Particulars Required to be Published for the Admission of Securities to Official Stock Exchange Listing (Brussels, 1980). European Economic Community. Directive on Interim Financial Information to be Disclosed by Companies whose Shares are Admitted for Official Quotation (Brussels, 1982). International Accounting Standards Committee. The Work and Purpose of the International Accounting Standards Committee (London, 1977).

65

(17) Organisation for Economic Co-operation and Development. International Investment and Multinational Enterprises (Paris, 1976, revised 1979) p. 18. (18) United Nations. International Standards of Accounting and Reporting for Transnational Corporations (New York: U.N., 1977). (19) See: MAUNDERS, K.T. "Employee Reporting" in LEE Op. Cit. Ch. 8~ SCHOENFELD Op. Cit.; SCHREUDER Op. Cit.~ also: GLAUTIER, Michael, W.E. and ROY, Jean-Louis "Social Responsibility Reporting" in LEE Op. 'cit. Ch. 10. (20) See, for example, KIRKMAN, Patrick "Inflation Accounting" in NOBES and PARKER Op. Cit. ch. 10; KIRKMAN, P.R.A. Accounting Under Inflationary Conditions (Allen and Unwin, second edition, 1978); MILLER, Elwood L. Inflation Accounting (Van Nostrand Reinhold Company, 1980). (21) GRAY, S.J. "The Impact of International Accounting Differences from a Security Analysis Perspective" Journal of Accounting Research (Spring, 1980) pp. 64-76. (22) See, for example, KIRK~~N, P.R.A. in Nobes and Parker Op. Cit. Ch. 10. (23) WESTWICK, C.A. "The Lessons to be Learned from the Development of Inflation Accounting in the U.K." Accounting and Business Research (Autumn, 1980) pp. 353-373. (24) See, for example, Nobes and Parker Op. Cit. Ch. 9; Organisation for Economic Co-operation and Development. Accounting Practices in O.E.C.D. Member Countries (Paris 1980) Part 1. (25) Ibid (26) United Nations {1977) Op. Cit. p. 48. (27) NOBES and PARKER Op. Cit. Ch. 9. (28) O.E.C.D. (1980) Op. Cit. (29) See, for example, LAFFERTY, Michael and CAIRNS, David. Financial Times World Survey of Annual Reports 1980 (London: Financial Times, 1980) Ch. 7. ( 3 0) See, for example, GRAY, S. J. "Segmental or Disaggregated Financial Statements in LEE Op. Cit. Ch. 2; OECD (1980) Op. Cit. Part 1. (31) GRAY, S.J. and RADEBAUGH, Lee, H. "International Segment Reporting by Multinational Enterprises: A U.S. U.K. Comparative Study". Paper presented to the American Accounting Association, Annual Meeting, Chicago, August, 1981. 66

(32) See, for example, ARPAN and RADEBAUGH Op. Cit. ch. 5 and 6, FLOWER, John "Foreign Currency Translation" in NOBES and PARKER Op. Cit. ch. 11. (33) O.E.C.D. (1980) Op. Cit. Part 1. (34) See: NOBES, c.w. "A Review of the Translation Debate" Accounting and Business Research (Autumn, 1980) pp. 421-431. (35) See, for example, PLASSCHAERT, s. Transfer Pricing and Multinational Corporations (Saxon House/E.C.S.I.M., 1979). (36) O.E.C.D. (1980) Op. Cit. (37) See: LEE Op. Cit. Ch. 8 and 10~ SCHOENFELD Op. Cit.; SCHREUDER Op. Cit. (38) United Nations (1977) Op. Cit. pp. 36-40, 76-79. (39) See GLAUTIER, M.W.E. and ROY, J.L. in LEE Op. Cit. Ch. 10. (40) See: SCHREUDER Op. Cit.; also SCHREUDER, Hein. "Corporate Social Reporting in the Federal Republic of Germany: an Overview" Accounting, Organisations and Society (Vol.4 No. 1/2, 1979) pp. 109-122. (41) See: GRAY, S.J. and t1AUNDERS, K.T. Value Added Reporting: Uses and Measurement (London: Association of Certified Accountants, 1980); MAUNDERS, K.T. in LEE Op. Cit. Ch. 8. (42) See: LAFFERTY and CAIRNS Op. Cit. Ch. 24-29.

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C\ Taylor & Francis �-

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Chapter 3 DOES FORMAL POLICY OR LAW AS CONTRIBUTE TO IMPROVED EMPLOYEE PARTICIPATION?

USED IN EUROPE INFORMATION AND

by Dr. Frank A. HELLER

INTRODUCTION Since the end of the Second World War and probably affected by the ideals for which it was fought, people have increased their expectations of democratic life. These new aspirations have been carried into the sphere of work. In addition, there is evidence from attitude surveys that young people in the 1970s and 1980s have more opportunity to participate during their school career as well as in the home than was possible in previous decades (HELLER et al, 1979, 38~ YANKELOVICH, 1981). This could explain why there has been so much increased attention to leadership style in organisations and, at least in Europe, very substantial changes in legislation since 1950 to support or create participative practices. The European Economic Community has taken upon itself to further the development of information disclosures, consultation and Industrial Democracy and several E.E.C. initiatives in this direction were taken in the course of the 1970s. There are two main arguments used by business against the introduction of legal compulsion of Industrial Democracy. One argues that laws are not effective and others say that voluntary arrangements for employee participation are already extensive. What evidence is there in support or opposition to these arguments? We will review some relevant research which provides fairly good answers. The research will look at voluntary arrangements at top levels of organisations as well as lower down the hierarchy and will investigate the claim that formal legislative methods increase 69

the amount of participative decision-making at the lower levels of enterprises. One unfortunate side effect of the growing interest in this subject is a proliferation of terminology. This leads to confusion. We prefer to describe the range of available practices by a continuum from information sharing via consultation prior to the introduction of changes to more powerful forms of participation in decision-making, with autonomy or decentralisation as the other end of the continuum from information disclosure. All gradations of this Influence-Power-Continuum (HELLER, 1971) assume the availability of some information. Without information, consultative and participative practices are unlikely to be realistic. It would help if we reserve special terms like Industrial Democracy to very specific practices like having workers on Boards of Directors. It is not useful to confine the discussion of influence-sharing practices to the field of industrial or management-worker relations. They apply to every aspect of problem solving and decision-making at all levels of organisation. In the last decade, multinational companies have been the focus of political and economic discussion, legislation and E.E.C. initiatives. Some of the arguments have been based on emotional rather than objective considerations and this applies to the position of multinationals in using so-called democratic influence and power sharing practices. One recent E.E.C. initiative was at first intended to apply only to what is now called transnational organisations. When employer bodies objected to multinationals being singled out, the draft was extended to include all "employees of undertakings with complex structures, in particular transnational undertakings" (COM 423 80 FINAL). In this connection, the term 'complexity' is important. There is evidence that modern organisations, not only multinationals, are becoming more complex and they have to operate under conditions of uncertainty and turbulence. Are consultative-participative practices relevant under such circumstances? What kind of practices? What do they achieve and how can they be introduced? Is legislation necessary? Questions of this kind require research to obtain answers. 70

1 - THE ROLE OF RESEARCH Industry has been slow to use social science research. In many ways this is not surprising. Industry is often slow to use technological and biological research, even when findings are freely available. There was a time, after the Second World \'17ar, when European industry was noticeably less effective than competitors or counterparts in North America. Multinational organisations were growing rapidly but U.S.A. based companies returned a higher rate of profit for each unit of capital invested than European companies. The "gap" between European and North American performance was being investigated in relation to many different factors. Among the more serious analyses were detailed studies of the technological gap (O.E.C.D., 1968), the so-called research and development gap (DIEBOLT, 1968, ALLISON, 1969) and various other economic and efficiency gaps had been put forward as explanations (STARBUCK, 1966, CAVES, 1968). While each of these investigations was interesting to the experts and useful evidence was unearthed, it seemed that none of these so-called gaps produced the clear-cut evidence that had been hoped for. However, in relation to the technological gap, the investigation showed that there were many companies, both in Europe and the United States, which had ignored currently available knowledge and had suffered as a consequence. Since physical sciences are held in high esteem, it is not s.urprising that knowledge accumulating from other disciplines based on social research should be even less widely used. In 1968, SERVAN-SCHREIBER published a book that made a deep impact on Europe called "The American Challenge". He argued that the startlingly successful progress of American industry in Europe could not be explained by their superior financial resources since 90 per cent of the capital for American expansion in Europe was subscribed by Europeans themselves. Rather he saw the American superiority as the consequence of a different managerial approach. A number .of important studies were launched to ascertain what this different managerial approach amounted to in practice. The notion of a "managerial gap" centred around the assumption that decision-making procedures in the United States were more decentralised than the equivalent decision-making processes among the European companies. More 71

specifically it was said that democratic managerial styles were more prevalent in the U.S.A. and that autocracy was the preferred method of operation in Europe. While this assumption sounded plausible, it was not always clear why autocracy should be associated with lower economic efficiency. We will come to the findings stemming from the SERVAN-SCHREIBER hypothesis later; at this stage we simply want to show that practical, policy-oriented research developed as a result of the analysis of differential effectiveness. Behavioural science had developed very strongly in the United States during and after the Second World War. A great deal of this effort had pointed towards the need to analyse leadership practices in terms of interpersonal behaviour, that is to say, the understanding that people working in small groups have of each others' motivations and interests. Work on interpersonal sensitivity became a major force in the United States and large companies, particularly multinationals, were in the forefront in incorporating these theories based on psychological research into their management development programmes. The influence of social science research on development in the 1980s was very considerable. It led among other things to the development of structured programmes, later called "packages" of which BLAKE and MOUTON's managerial grid became the best known but there were many imitators. The emphasis on training the person to become more effective through being made "sensitive" spread f~om the United States to Europe but, as we shall see later, European philosophy and practice began to deviate from the American pattern in the 1960s and this momentum has increased over the last two decades. The most widely read social science literature was concerned with an analysis of democratic decision behaviour and the term used most frequently in this context was "participation". Accumulated evidence suggested that managers who allowed subordinates to participate in their decisions achieved better results that those who kept subordinates at arms' length. Explanations were various but the one most widely canvassed was that participation increased job satisfaction and this, in turn, improved peoples' willingness to do as they were told. It was alleged that the consequence of this acceptance of managerial orders was an increase in productivity. The theory 72

underlying these relationships has been called the Human Relations Model and it was well-described by MILES, (1965). The findings remained interesting but the explanation was far from perfect. It was shown that there was no consistent relationship between job satisfaction and output (BRAYFIELD et al, 1965, HERTZBERG et al, 1967). A better explanation and a better model developed as a consequence of the recognition .that causation is not a simple phenomenon. While participation may at times increase job satisfaction and this could lead to higher output, it was equally possible that organisations which were highly effective found it easier to allow their members to be less closely supervised and to participate more extensively in the decision-making process. A more complex theory, leading to the Human Resource Model adapted from MILES (1965), suggested that a critical variable in the relationship between participative decision-making and improved output was the belief in and the existence of skills in the workforce. This model was used in an eight country comparative research (HELLER and WILPERT, 1981) and we will briefly report some of the results. Top management decision making styles The research was carried out in 150 companies and covered nearly 2,000 senior managers; although most of the statistics are based on smaller samples to make them strictly comparable between the eight countries. The 129 companies in the final sample included many multinationals, although the research did not concentrate on these companies but selected organisations because they were large and efficient. Management decision-making styles were looked at by working with two closely interlocking levels of managers. The top level was the group that reported directly to the chief executive of each company and the second level was the senior, most experienced subordinates of each of the top level groups. Their decision-making methods were investigated by tackling each group separately by means of group administered questionnaires and careful standardisation between the different countries. The results were usually collected one hour before lunch and the researchers worked out some of the main results during the intervening lunch-time period and assembled in the early afternoon. In this way statistical information as well as in-depth qualitative data was obtained. All discussions were carefully tape-recorded . and later the content analysed (HELLER, 1969). V.lhile 73

complete anonymity was guaranteed, each top management knew that their immediate subordinates were also being investigated and the subordinates knew their senior managers had already given us detailed information. The comparison of results from these two closely interlocking senior decision-making levels in large successful companies can be reported as follows (HELLER, 1971, HELLER and WILPERT, 1981). Successful managers do not use the same decision method all. the time; they vary these methods substantially in relation to the different tasks that they are asked to carry out. The research used twelve standardised tasks which had been assembled because managers at those senior levels carried out these particular decisions fairly regularly. It was, therefore, possible for managers to answer questions based on actual behaviour which they could remember. The finding that tasks led to substantial variations in decision-making styles was in sharp contradiction with earlier American work that had assumed that there was more or less a standard method that could, with very few exceptions, be applied to all situations. The Blake and Mouton Grid was based on such an assumption of generality and for a long time most management training used similar theories. The second major finding related to the importance of competence. Competence is the skill and experience, sometimes related to age, which managers bring to bear on their task. There are two components of competence. One is the actual s~ill, education and experience managers have, including the amount of training provided on their jobs; and the other is the judgements about competence which managers make about their subordinates or their superiors. The research looked at both objective and subject dimensions of competence and it was found that both affected the amount of influence sharing in the decision-making process. The higher the amount of competence in any group the more participative was the decision-making behaviour. However, it was unexpected but for this reason particularly important to find in each of the countries that the judgements of competence that is to say the perception of other people's skills and experience - were more decisive in affecting participative decision-making style than the objective assessment of competence. Our finding suggests that one of the reasons why relatively little participation 74

takes place in many groups is due to the senior person's mistaken judgements of the amount of competence available in his subordinate group; since perceptions affect behaviour, misperceptions can lead to relatively ineffective behaviour. ll'Iember State. This then is a different "series" of Directives which, on the basis of Article 54 of the Treaty, concern the harmonisation of company law in the different Member States. The Directive on mergers lays down in Article 12 that protection of rights of the employees of each of the merging companies shall be regulated in accordance with the provisions of the "Transfers" Directive as discussed above. This means that the four principles of February 14, 1977 Directive, which were examined above, also apply in the event of merger, i.e. the safeguarding of contracts of employment and collective agreements, the limitation of dismissals, the protection of workers' representatives and the information and consultation of workers. The Directive came into effect in October, 1981. Council Directive of October 20, 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer(12) 1. Justification The differences that remain between Member States as to the scope of the protection of claims of salaried employees in the case of insolvency of their employer (which is not without importance in the context of the crisis) undermined the protection of the employees and may have a direct effect on the functioning of the Common Market. Workers are insufficiently protected by the provisions of insolvency laws in Member States based on the claims resulting from the relationship of employment. This because:

D.

129

either assets are not sufficient to cover outstanding claims, or the insolvency proceedings are long. (The employee runs the risk of not having adequate means of subsi~tence during these proceedings.); the procedure is very often incomprehensible for employees; their rights may be dependent on the high fees payable to legal counsel; the worker has no protection when the termination of payment does not lead to the opening of insolvency proceedings; the internationalisation of business makes it necessary to approximate laws relating to the protection of the claims of employees, arising from their employment relationships in the event of insolvency of their employer. These reasons constitute justification for the Directive. (2) Scope The Directive applies to employees' claims arising from contracts of employment or employment relationships and existing claims against employers who are in a state of insolvency. The Directive lays down two cumulative criteria to establish a state of insolvency. The first is a request to open proceedings involving the employers' assets, as provided for under the laws, regulations and administrative provisions of the Member State concerned to satisfy collectively the claims of creditors and which make it possible to take into consideration the claims of employees. The second is the fact that the competent authority has: either decided to open the proceedings; or established that the employers' undertaking or business has been definitively closed down and that the available assets are insufficient to warrant the opening of the proceedings. 3. Contents The Directive includes mandatory and optional provisions. (1) Mandatory provisions In the event of insolvency of the employer as defined in Article 2 of the Directive member States shall take the following measures to protect employees' claims resulting from contracts of employment or employment relationships. 130

First group of provisions (a) Guarantee institutions shall guarantee payment of employees' outstanding claims relating to pay for a period before a given date at the choice of Member States. ---b) detailed rules for the organisation, financing and operation of the guarantee institutions shall be laid down and shall cover in particular the fact that the asset of the institutions shall be independent of the employers' operating capital and be inaccessible to proceedings for insolvency and that employers or the public authorities shall contribute to financing and that the institution's liabilities shall not depend on whether or not obligations to contribute. to financing have been fulfilled. Second group of provisions These are the provisions concerning social security. Member States shall take the measures necessary to ensure the following provisions: (a) On the one hand, employees shall not be adversely affected in respect to their benefit entitlement from the insurance institutions; non-payment of compulsory contributions due from the employer, before the onset of this insolvency, under national statutory social security schemes, in as much as the employees' contributions were deducted at source from the renumeration paid. (b) On the other hand, salaried employees and persons having already left the employers undertaking or business at the date of the onset of the employer's insolvency shall be protected in respect to rights conferring on them immediate or prospective entitlement to old age benefits, under supplementary company or inter-company pension schemes outside the national statutory social security schemes. (2) Optional provisions There are five optional provisions: (a) Member States may apply or introduce laws, regulations or administrative provisions which are more favourable to employees. (b) Member States may limit the liability of guarantee institutions: - If Member States use this option they shall ensure the payment of outstanding claims relating to pay in respect to a minimum of the 131

last three months of a contract or relationship of employment, according to the date of onset. This notwithstanding, Member States may determine a ceiling for the guarantee of payment (the methods used to set this shall be communicated to the Commission) . (c) Member States may adopt measures necessary to avoid abuses. (d) Member States may refuse or reduce - the obligation of payment or - the obligation of guarantee if there are special links or common interests (collusion) between the employee and the employer. (e) Member States may exclude the claims by certain categories of employees - either because of the special nature of the contract or relationship of employment, or because of other forms of guarantee offering the employee protection equivalent to that resulting from the Directive. This Directive does not foresee any special provision on information and consultation of employees. Member States shall put in force the necessary legislative provisions within a period of three years from the date of notification, that is to say at the end of 1983. Conclusions It will be apparent from this analysis that in the very near future employees of undertakings situated within the Community will benefit from a uniform system of protection in some of the most important cases of internal structural adjustments of the undertakings which may threaten loss of rights or of employment. Collective redundancies, necessitated by economic and technical reasons, are often the consequence of workshop closures or of parts of business, if not of the undertaking as a whole. Mergers and transfers of part of the undertaking are very often the precursor of rationalisation programmes which may lead to a change in employment. And, finally, bankruptcy is obviously the hypothesis which brings in its wake the most definitive consequences. Th~ Directives have laid down a mandatory information and consultation system to employees before collective redundancies and before the 132

transfer of an undertaking or part thereof when this involves measures with respect to workers. The responsibility of information and consultation is incumbent on the local or other unit that is involved in a transfer. Outstanding problems remain in the event that this unit is part of a larger grouping and is not in a position to provide the necessary information and to carry out consultations. This is the reason that led the Commission to deem it necessary to present on October 20, 1980 a draft Directive on the information and consultation of employees in multinational undertakings. This will be dealt with in a separate chapter. 2 - INFORMATION AND CONSULTATION OF EMPLOYEES . IN THE STATUTE OF COMPANIES The Commission has also encouraged worker participation in companies in the context of, on the one hand, its efforts to create a "European" statute for companies or undertakings operating in several Community countries and, on the other hand, through the harmonisation of national company law with a view to avoiding any legislative distortion which could harm the proper functioning of the Common Market. A.

Community statute for transnational activities Two initiatives by the Commission aimed at creating a Community legal framework for company operations outside national frontiers merit particular attention: the draft regulation for the creation of a European Company and the draft regulation for the setting up of a European Co-operation Grouping. 1. The draft regulation for the creation of a European Company The central idea underlying the Commission's proposal was the creation of a legal framework for the transnational activities of companies in a Community that was becoming increasingly open and which constituted a vast territory for the movement of goods and persons. The Commission presented its draft based on the preparatory work of an expert committee chaired by Professor SANDERS(l3) to the Council on June 30, 1970 (14).

The Commission justified the need for this framework stating that amalgamations and mergers, with a view to setting up European undertakings, 133

were running up against considerable legal, fiscal and psychological difficulties. The draft regulation, based on article 235 of the E.E.C. Treaty, was intended to govern companies by a single law directly applicable in all Member States, thereby severing all legal links within a given country for this type of undertaking. The form of such an undertaking would be that of a share capital company "which most adequately meets the needs, both of financing and of management, for undertakings carrying out their activities at a European level". The statute of this company would be available to public limited liability companies constituted under the legislation of a Member State and of which two at least come under different national legislation. The structure of these companies would be very flexible. They would have to have a General Assembly of shareholders as well as a two-tier administrative body. On the one hand, this would be an executive board responsible for managing and representing the company, on the other, a supervisory body responsible for the nomination, supervision and, if necessary, the dismissal of members of the administrative board. The Commission has opted, therefore, for the two-tier or dual system used in Germany and the Netherlands, contrary to the single-tier system used in Great Britain, Italy, France and Belgium, where the only body to hold such powers is the board of directors. In the Commission's proposal the administrative body has to obtain prior authorisation from the supervisory body for a certain number of matters of major importance to the company, such as plans to expand or restrict company activities, as well as any changes made in the organisation of the undertaking or long-term agreements with other undertakings. In the context of this study, however, primary concern rests with the proposed provisions which would allow employees of the European undertaking to influence decision-making. There are three types of measures of interest. The proposal lays down firstly that the conditions of employment that employees shall be subject to may be determined by European collective bargaining agreements concluded between the company and the 134

trade unions represented in the different establishments. Secondly, it lays down that a European Works Council should be set up in all European Companies with establishments in several Member States. These would be responsible for representing the interests of all employees in matters relating to the undertaking as a whole or to several of its establishments. The responsibilities of this Works Council would be as follows: to be informed of the general economic situation of the company in a quarterly report on turnover, likely employment trends and investment decisions. These questions are discussed with the administrative body which should also provide any documentation given to shareholders and, in particular, annual accounts; to be consulted before the adoption of certain measures such as job assessment, salary scales, company closure or transfer, major limitations of activity or major changes in company organisation as well as the establishment of long-term co-operation with another undertaking; to give prior agreement to certain decisions relating to .company activities which have a particular interest for employees, such as recruitment policies, principles of remuneration, health and safety measures and the administration of social measures, holiday arrangements and times for starting and stopping work. Any decision taken on these matters without the agreement of the Works Council is null and void. It should be pointed out, however, that the responsibility of this council is limited solely to matters relating to the undertaking as a whole or to several of its establishments. All other matters remain the responsibility of the National Council. The responsibility of the Works Council is limited where the European Company is part of a group. In this case participation should operate at the level of the group. A joint body for all workers in the group should be set up. The "dominant" undertaking replaces in its relations with the other companies in the group the European company in its relations with national 135

establishments. The group Works Council has the same powers as the European Works Council. Thirdly and finally the proposed statute provides for the possibility of employees participating in the nomination of members of the supervisory body of the company. The 1970 proposal laid down that employees would nominate at least a third of the members of this body, the other two thirds being designated by the general assembly of shareholders. But this proposal was later modified on the basis of the opinion of the European Parliament. Furthermore, not all representatives would be persons employed by the undertaking. Where there are three representatives, one must come from outside the undertaking; more than four representatives, two must come from outside. In fact, these would be the "trade union experts". The employees' representatives on the supervisory board would have the same rights, the same duties and the same responsibilities as the other members of the board. Contrary to the situation in the European Works Council, the employees' representatives on the supervisory board would not be directly elected but selected by the Works Councils in the different undertakings or establishments at national level. These are the main points of the Commission draft of 1970. They were clearly inspired by the formulae of German joint management. Having obtained the opinions of the Economic and Social Committee and the European Parliament {15) , the Commission amended its initial proposal to take into account the suggestions made by these bodies. (16) It proposed, in particular, to increase the possibilities for access to the statute of "European public limited liability company" by, for example, reducing the minimum share-capital required. As far as worker participation on · the supervisory board was concerned, the Commission went along with the large majority of the Parliament in favouring the tripartite formula: one third of employees' representatives and one third elected by the representatives of the first two groups, this last third being made up of those who are independent of the two groups. The proposal has remained before the Council with no decision taken. 136

2. The draft regulation for a European Co-operation Grouping It was the Commission's wish, in submitting this draft to the Council on December 21, 1973(17), to encourage co-operation between undertakings in different countries, more specifically between small and medium-sized undertakings, to carry out joint actions of a limited duration such as joint tendering for a works contract or co-operation on a trading venture, etc .•. The Commission drew inspiration for this proposal from the French experiment with joint interest groupings (groupements d'interet commun). (18) The statute of the grouping comes under Community legislation since the draft has been submitted in the form of a proposal for a regulation, as was the case for the European public limited liability companies. Unlike a company, the grouping is not an economic entity which is separated from and independent of its members. It does not seek profit for, itself but serves rather as a staging post for the business activities of its members. No capital need necessarily be raised for the establishment of such a grouping. It also differs from a group in which one company can give binding instructions to others. The activities of such groupings are primarily the provision of services such as joint purchasing and sales offices, the management of specialised services, representation of members for specific operations and the co-ordination of technical activities between members. Such activities may also cover processing and the handling and packaging of goods for the exclusive use of the members of the grouping. Those constituting the grouping should be either natural persons or undertakings carrying out their business in the territory of two different Member States. The grouping is constituted by contract according to which those responsible for setting up the grouping determine the number, powers and arrangements for the functioning of the bodies involved. As a rule, the assembly, the sovereign body, may take its decisions under such conditions as it may deem appropriate. The second obligatory body is the administrative body, whose powers shall be determined according to the constitutive contract of the assembly. 137

Having obtained the opinion of the Economic and Social Committee and the Parliament, the Commission submitted a new draft to the Council on 28 April, 1978. In this new proposal, the Commission inserted a provision proposed by the European Parliament to more efficiently protect employees' interests. The new Article 1a is based on the provisions of the Council Directive of 14 February, 1977 relating to the maintenance of workers' rights in the case of transfer. This lays down that where the constitution of a European co-operation grouping gives rise to the transfer of an undertaking the national provisions enacted in conformity with the above-mentioned Directive shall also apply in this case. The proposal is still under examination by the Council. B. Harmonisation of national legislation on commercial companies The question of worker participation in company management arises in a different context, that of the harmonisation of national legislation on commercial companies. The basis for this is found in Article 54.3 of the E.E.C. Treaty which relates to freedom of establishment of natural or legal persons. It also charges the Community institutions - Council and Commission - in the context of the initiatives to be undertaken with a view to attaining freedom of establishment, with the task of "co-ordination to t;he necessary extent of the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms" (Article 54.3 g). On the basis of this general remit, the Commission has submitted no less than eight draft Directives to Council of which six have beeri adopted this far. (19) Two of these documents also deal with the problem of information and consultation of employees. The first concerns the Third Directive on mergers. This was dealt with in the chapter on the protection of workers in case of changes in the undertaking. The second is the proposal for a Fifth Directive on the structure of public limited liability companies and the powers and obligations of their organs. 138

The proposal for a Fifth Directive(20) According to the initial 1972 draft, all societes anonymes (public limited companies) should· have, in addition to the general meeting of shareholders, a management system which would include a management board and a supervisory board. The members of the management board would be nominated or removed by the supervisory board. The management board is responsible for management and representation of the company and should submit every three months a report to the supervisory board on the progress of company affairs. It should furthermore submit in the course of the three months following the end of the financial year the draft annual accounts and annual report. The authorisation of the supervisory board is required for: (a) the closure or transfer of the company or substantial parts of it; (b) substantial curtailment or extension of the companies' activities; (c) substantial organisational changes within the company; (d) the establishment or termination of long-term co-operation with other companies. The provisions of the draft Directive on the composition of the supervisory board are of great importance with respect to worker participation. Companies would have the choice between two systems. In the first, one third of the members of the supervisory board would be appointed by the workers or their representatives. In the second, all members of the supervisory board would be co-opted. The general meeting or the workers' representatives may make objections on the grounds either that a proposed member lacks the ability to carry out his duties or that, if he were appointed there would, with regard to the interests of the company, the shareholders or the workers, be an imbalance in the composition of the supervisory board. Where such objection is made no appointment may be made unless the objection is declared unfounded by an independent body. The Legal Affairs Committee of the European Parliament began examining this proposal for a Directive in February 1973 and continued its examination through 1974 on the basis of an initial working document drawn up by one of its members, Mr. SCHMIDT. The discussions were then broken off 139

to await the "Green Paper" of the Commission in 1975. In this document (21) the Commission confirms that the basic principles of its initial proposal, i.e. the dual structure and worker participation in the supervisory board, remain valuable and realistic objectives. However, in the light of the very different situations that prevail in the Community countries, particularly in so far as worker participation and the role of trade-unionism are concerned, it was necessary to introduce a more flexible formula for implementation at least during a transitional period. Companies could, during such a period, maintain the single board system, whilst providing a representative body within the company to allow the employees to be kept informed of company management and to influence it without directly participating in the supervisory board. Following this "Green Paper", the Commission submitted a working paper to the Legal Affairs Committee of the Parliament in 1978(22). Article 2, paragraph 2 of this document takes up the notion of a two-tier structure for the company (management board and supervisory board) which had already been put forward in the previous draft. It does, however, foresee the possibility for Member States to allow the companies concerned to choose, during a transitional period of five years, between the two-tier system provided for in the Directive and a single board system. Companies employing more than 500 persons would be able to choose between two formulae for worker representation: either the appointment, by the workers, of a third of the members of the management board or the setting up of a body for the representation of workers outside the board. Such workers' representatives would have the same rights and obligations vis-a-vis the management board as the other non-executive members of the board. Furthermore, they should be consulted in advance of any discussions at board level relating to the closure of the company or substantial curtailment of its activities or to organisational changes or to the establishment of long-term co-operation. As to the final phase, the document makes a distinction with respect to worker participation on 140

the supervisory board ( 23) between companies with less than 500 employees and others. In the former, the members of the supervisory board should be appointed by the general meeting. In the others, the choice of either of the two systems (one third, two thirds or co-option of members of the supervisory board with the right of veto for each of the groups) is maintained. The document makes it clear that the "minority" representation of workers enjoys the same entitlements as the other members of the supervisory board to receive the information that has to be provided by the management board on the progress of company affairs, the draft annual accounts and any special reports etc ••• Furthermore, workers' representatives should be consul ted in the four cases where the authorisation of the supervisory body is required before any decision is taken (closure, substantial curtailment or extension, organisational change and establishment of long-term co-operation). Finally, the document makes it clear that workers' representatives should be elected according to a proportional representation system with a secret ballot, that freedom of expression should be ensured, that all workers should be able to participate in the elections and that minorities should be protected. The Commission, having referred its new proposals back to the Parliament, the matter was taken up again for consideration in 1978. The Legal Affairs Committee of the Parliament approved the report by its rapporteur, Mr. SCHMIDT, on 26 April, 1979 by 11 votes in favour to one against and three abstentions. This report is based on the Commission's proposals but foresees that in the final phase, in companies with more than 250 employees or having an annual turnover of more than 1.5 m.u.a., the supervisory board should be composed of 1/3 workers' representatives, 1/3 shareholders' representatives and 1/3 independent persons approved by both groups. The Schmidt report was not able, however, to be brought to a plenary session before Parliament was dissolved in May 1979 to allow direct elections to take place on 10 June, 1979. In September 1979 the new Legal Affairs Committee started work and designated Mr. GEURTSEN, Dutch liberal, as rapporteur and he presented his report on January 15, 1982. (24) 141

This report proposed a much more flexible system which retained the principle of participation but left to the Member States the possibility of applying this principle without having to change completely the legal statute of companies. In adopting this report in May, 1982 by 158 votes in favour to 10 9 against with nine abstentions, the European Parliament carne out in favour of the introduction of a two-tier system but on an optional basis and for the introduction of a participation scheme in companies employing more than 1,000 employees. As to the appointments to the supervisory board, Parliament, in adopting the Beumer amendment, followed the notion of a joint system which would ensure equivalent representation of both shareholders and workers, to be introduced following a transitional period to be set by the Council. Based on the opinion of the European Parliament, the Commission submitted an amended proposal for a Fifth Directive on 19 August, 1983 (25). As far as the structure of the company is concerned, the Commission proposes leaving Member States the option of choosing a single (one tier) or two tier system. After five years of implementation, the Commission shall submit a report which shall, where appropriate, contain new proposals. Whichever system they choose, Member States are obliged to introduce some form of worker participation if the company employs at least 1,000 employees. Employees in subsidiary undertakings are taken into account in establishing the number of persons employed. This participation system may take one of the following four forms: ( 1) participation by the presence of employees' representatives on the supervisory board (minimum 1/3, maximum 1/2); (2) participation through the appointment of members of the supervisory board by co-option; (3) participation through a body representing employees at company level but outside of the administrative organs themselves; (4) participation through systems that are analogous to one of the three previous models but that are collectively agreed. 142

Participation by co-option does not have to be used if a one-tier system is adopted. These participation models are not obligatory if a majority of workers are opposed. Where participation of employees is ensured through a representative body, such a body is entitled to be regularly informed and consulted on the administration, situation, progress and prospects of the company, its competitive position, credit situation and investment plans. It shall also have the same rights to information as those conferred on the members of the supervisory organ, in the two-tier system or to non-executive members of the management organ in the case of the one-tier system. Furthermore, this body representing company employees should be consulted before a decision is taken by the supervisory or management organ in the following cases: (a) closure or transfer of the undertaking or of substantial parts thereof; (b) substantial curtailment or extension of the activities of the undertaking; (c) substantial organisational changes within the undertaking; (d) establishment of long-term co-operation with other undertakings or the termination thereof. If the supervisory or management organ does not share the opinion of the body representing the employees, then it shall inform them of its reasons. These then are the main provisions of the new proposal as submitted to Council. They represent considerable relaxation as compared to the earlier proposals and leave a great deal of latitude to Member States in the choice of management systems for public companies limited by shares and by guarantee and having a share capital. The same applies to the form of employee participation, the principle of which is retained, even if different means of organising such participation are now provided for. CONCLUSIONS Analysis of the above documents shows that insofar as the future statute of the "European Company" is concerned, as well as the harmonisation of company law, the Commission has opted for the principle of employee participation in the management organs of undertakings. 143

Of course, the likelihood of seeing the setting up of "European Companies" is one that will not come about in the near future. It appears that the European Co-operation Grouping has a greater chance of entering into actual Community legislation. None the less, the basic choice remains clear. On the other hand, if the new draft of the Fifth Directive were to be adopted by the Council, it is evident that it would result in a considerable extension of employee participation in "restructuring" decisions concerning the undertaking and even more so in an extension of the prior information and consultation of their representatives before important decisions are taken which may affect them. But, of course, this system would only apply in relatively large undertakings (more than 1 , 0 0 0 employees) . There remains, therefore, a problem for other undertakings.

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REFERENCES (1) (2) (3)

(4)

(5) (6)

(7)

(8)

(9)

(10)

(11) (12) (13)

Resolution of 21 March, 1971 October 1970 (O.J. no L 48 of 22.2.1975) Once the Directive has been adopted, Member States have a certain time (two or three years) in which to adapt non-legal provisions. As is stated in Article 189 of the Treaty "the Directive shall be binding as to the result to be achieved upon each Member State to which it is addressed but shall leave to the national authorities the choice of form and methods". The regulation, on the other hand, "shall have general application. It shall be binding in its entirety and directly applicable in all Hember States". (O.J. no L 61 of 5.3.1977) Com. (75) 419 final, 25.7.1975 Op. Cit. e.g. - the third Directive on company law (company mergers) - the draft regulation of the statute of the European Company the draft convention on international company mergers Draft regulation on concentrations between undertakings of 18 July, 1973 (O.J. no C 92 of 31 . 1 0 • 1 9 7 3 amended in 19 8 2 , 0 . J . no C 3 6 of 12.2.1982)

By "transferor" the Directive means any natural or legal person who, by reason of a transfer within the meaning of Article 1 (1) ceases to be the employer in respect of the undertaking, business or part of the business. The transferee is the natural or legal person who acquires this quality. The Directive defines as "representatives of the employees" the representatives of the employees provided for by the laws or practice of the r-1ember States, with the exception of members of administrative, governing or supervisory bodies of companies who represent employees on such bodies in certain !·1ember States. (O.J. no L 295 of 20.10.1978) (O.J. no L 283 of 28.10.1980) "Projet de statut des societes anonymes europeennes" (Draft statute of European public limited liability companies) by P. Sanders, 1967, Publications of the Commission of the 145

European

n ° 6)

Communities.

(Serie

Concurrence

(14) Supplement to the monthly Bulletin of the Commission no 8, 1970 (15) Opinion published in the Official Journal C 104 13.9.1974 (16) Proposal submitted to the Council 13 May, 1975 E.C. Bulletin Supplement 4/75 (17) E.C. Bulletin Supplement 1/74 (18) Statute of 23 September, 1967 (19) The First Council Directive of 9 March, 1968 (O.J. L 26 of 14 March, 1968) is designed to co-ordinate the safeguards which are required in different Member States for the protection of the interests of members and others. It relates to the publication of instruments of incorporation, the validity of social undertakings, powers of representation, etc ..• The Second Council Directive of 13 December, 1976 (O.J. L 26 of 31 January, 1977) is intended to co-ordinate safeguards in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to protecting creditors and to ensure equal treatment of shareholders. The Third Council Directive of 9 October, 1978 (O.J. L 295 of 20 October, 1978) concerns the co-ordination of safeguards for the protection of members and third parties in the case of mergers of public limited liability companies coming under the jurisdiction of a single Member State. The Fourth Council Directive of 25 July, 1978 (O.J. L 222 of 14 August, 1978) concerns the co-ordination of safeguards of the drawing up of annual accounts, valuation methods and the publication of such documents. The proposal for a Fifth Council Directive concerns the co-ordination of safeguards on the structure of public limited liability companies as well as the powers and obligations of their organs. It also relates to representation of employees (submitted to Council on 9 October, 1972, the O.J. C 131 of 13 December, 1972). The Sixth Council Directive of 17 December, 1982 concerns the division of public limited liability companies (O.J. L 378 of 31 December, 1982). 146

(20)

(21) (22)

(23) (24) (25)

The Seventh Council Directive of 13 June, 1983 concerns consolidated accounts (O.J. L 193 of 18 July, 1983). The Eighth concerns the approval of persons responsible for carrying out statutory audits of the annual accounts of limited liability companies (submitted to the Council on 24 April, 1978, O.J. C 112 of 13 May, 1978). One should also add to this list a) the Directive of 5 March, 1979 on the co-ordination of conditions for the admission of securities to official stock exchange listings (O.J. L 66 of 16 March, 1979); b) the Directive of 17 March, 1980 on the co-ordination of requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock exchange listings (O.J. L 100 of 17 April, 1980). Proposal for a Fifth Directive on the co-ordination of the safeguards required by Member States of Companies within the meaning of Article 58, para. 2 of the Treaty for the protection of the interests of members and others, with respect to the structure of public limited liability companies and the powers and obligations of their organs. Draft submitted on 9 October, 1972 (O.J. C 131 of 13 December, 19 7 2) Supplement 875 to the Bulletin of the European Communities "Employees participation and company structure in the European Community" Doc III/11/78 Working paper drawn up by the services of the Commission with a view to discussions in the Legal Affairs Committee of the European Parliament on the proposal for Fifth Directive on "Company Law" . Unless the principle of participation is rejected by the majority of the personnel. European Parliament: 1981/82 session - Doc 1 - 862/81 of 15 January, 1982 New proposal of 19 August, 1983 (O.J. C 240 of 9 September, 1983) and Supplement 6/83 to the Bulletin of the European Communities

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C\ Taylor & Francis �-

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Chapter 6 THE PROPOSAL FOR A DIRECTIVE ON PROCEDURES FOR INFORMING AND CONSULTING THE EMPLOYEES OF UNDERTAKINGS WITH COMPLEX STRUCTURES, IN PARTICUI,AR TRANSNATIONAL UNDERTAKINGS Francois VANDAMME

1 THE COMMISSION 1 S MOTIVES PROPOSAL FOR A DIRECTIVE

IN

PRESENTING

ITS

In. examining the motives behind the proposal for a directive, it becomes clear that this text, which was something of a surprise to the parties concerned, logically fitted in with the pattern of concerns expressed by the European Community and particularly by the Commission over the last few years. The exercise by undertakings of the right of establishment guaranteed under the E.E.C. Treaty was supposed to encourage a progressive interpenetration of national economies. The favourable climate for international investments in the 1950s and 1960s meant that important changes in the industrial structures of Europe were taking place and thus made it seem likely that this goal would be attained. The Community institutions appeared to be unequivocally in favour, in the early years of the Community 1 s existence, of the concentration of undertakings taking place within the limits laid down for efficient and balanced competition, without neglecting the inevitable social consequences of such developments. (1) In its 1973 statement on "multinational undertakings in the context of Community regulations" (2), the Commission, whilst recalling the aim of transnational integration of the industrial structures of· Member States, did not hide its "deep concerns, particularly with respect to employment", caused by "the growing hold of these (multinational) undertakings" over the economic, social and political life of the countries in which they operated. It was of the opinion that the Community constituted the 149

appropriate framework for the establishment of a political counterweight. Containment measures were not only intended to bring about proper supervision of such undertakings but also formed part of the Community's approach to social policy. Today, such containment is of greater importance given that the economic crisis encourages economic actors, who manipulate large financial means and jobs, to institute rationalisation of their activities. The changes now underway in industrial structures and their social consequences clearly show the importance of greater transparency and of better information on the activities of large-scale undertakings as a whole, particularly as these changes may have direct bearing on workers' futures. It is for this reason that there is a need to submit large-scale undertakings with complex structures to the same obligations as are incumbent upon other undertakings, particularly with respect to their employees in the Community, wherever their registered place of business may be. With a view to protecting the rights and interests of workers the Commission previously proposed directives relating to collective redundancies and to the specific case of transfers of undertakings. These two proposals, \vhich became Council Directives of February 17, 1975(3) and February 14, 1977(4) obliged f..J:ember States to establish procedures for the information and consultation of workers' representatives about decisions of an economic nature. The Commission also justified its new proposal as an extension of these earlier initiatives, which were also adopted as part of the approximation of legislation (Article 100 of the E.E.C. Treaty). It is difficult to understand why these principles of information and consultation of workers were questioned in the present discussions, given that the proposal for a directive applies to procedures and circumstances similar to those of earlier Directives. It is indeed true that these procedures did not resolve all the problems that arose. The Commission notes that a consequence of the development of such undertakings has been that worker information and consultation systems are no longer consistent with the structures of these undertakings. On one hand information and consultation have remained confined to a local level, in the entity 150

where the workers are employed. On the other hand, they have been organised within the context of labour laws whose application is territorially limited. Furthermore, the practical effects of such procedures are not identical throughout the Community. Thus, whilst the undertakings and to a lesser extent, the trade unions are organised at international level, workers - like their employers at local level - risk being inadequately informed of the decisions or activities planned, at a higher level outside the scope of their local situation. Such decisions may well have "serious repercussions" on their future. The Commission was of the opinion that workers were entitled to be informed as to give them a clear and complete picture of the activities and performance of the undertaking as a whole and that they are entitled to be consulted when such activities or decisions directly affected their employment or working conditions. Such consultation is understood to imply that it is held with a view to reaching an agreement on the measures which may affect them. It should no longer be possible to close an establishment on the basis of a decision taken in a different state, without the workers having been informed within a reasonable period before implementation of the decision. Harmonisation of such information and consultation procedures were necessary to avoid difference in the treatment between Member States of workers affected by the decisions of the same undertaking. The Commission had the problem of justifying the direct effect on the operation of the Common Market, which some felt to be insufficiently substantiated. This direct effect was also viewed in the light of the aims of the Community: i.e. that economic activities develop harmoniously throughout the territory of the Member States. Divergent laws or practices affect the decisions of economic actors as interests which may not be those of balanced development or distribution of economic activities. It should also be remembered that the social action programme of the Council of January 21, 1974, had as one of its aims "increasing worker participation in the life of undertakings". Thus, to support harmonisation, the Commission always tries to bring about the approximation of legislation at a fairly high level, based on a common denominator of existing national legislation. There are information and 151

consultation systems in all Member States but the Commission's proposals for directives are generally based on the most highly developed national legislations. Article 16 of the draft Directive leaves it quite open to Member States to apply or introduce provisions that are more favourable to workers. But there is a need for an obligatory minimum threshold. Given that the Commission had a legal basis, the E.E.C. Treaty, it has chosen a binding instrument to attain its objectives. The Commission, whilst not neglecting possible recommendations by other international organisations for a code of conduct for multinational undertakings, does not believe in the efficacy of a voluntary framework for ensuring that workers in large scale undertakings are informed and consulted. Such a code would be impracticable ("unworkable" according to Commissioner RICHARD) and would only bind those undertakings which showed goodwill. Taking into account the instruments available to the Community for taking action in this field, it was hoped that it would take a binding initiative. Would it be reproached with default or failure to meet its obligations in this respect? When, in December, 1974, the European Parliament discussed the above-mentioned Commission statement during the debate on the Leenhardt report(5) and it expressed serious doubts about the efficacy of a voluntary code of conduct, due to the lack of penalties. Parliamentarians stressed the possibilities offered by the institutional framework of the Community. The rapporteur had stated that priority should be given to binding measures. Pertinent questions were put to the Commission on the specific rules by which it proposed to put its plans into practice. Finally, it should be remembered that the proposals of the directive are not only intended to cover undertakings that are transnational. They may relate to national undertakings with several establishments. It seemed advisable to submit them to the same obligations for information and consultation of workers as laid down for transnational undertakings, given that certain national legislation on the notion of the establishment required that the information be provided to the economic entity of which they form a part. By laying down the same obligations for· all so-called "complex structure" undertakings, i.e. those with multiple places of business or 152

establishments, the Commission aims to prevent discriminatory treatment between undertakings and workers coming under the same type of organisational structure, where the problems of information or rather the absence of information are alike. 2 - THE SUBSTANCE OF THE PROPOSAL The Commission draft submitted on October 24, 1980(6) was based on Articles 100 and 117 of the Treaty of Rome. The first of these articles lays down that the Council should issue directives "for the approximation of such provisions laid down by law, regulation or administrative action in Member States as directly affect the establishment or functioning of the Common Market". As far as Article 117 comes under the social policy title of the Treaty, where "Member States agree upon the need to promote improved working conditions and an improved standard of living for workers, so as to make possible their harmonisation while improvement is being maintained .•. Such development will ensure from ..• the approximation of provisions laid down by law •.• " Thus the Commission is pursuing a social policy objective of improving the working conditions of employees of transnational undertakings. The means used to attain this goal is the approximation of the legislation of Member States relating to worker information, since the incidence of different national laws has a direct effect on the functioning of the Common Market. The proposals for a Directive signify that this is an act of secondary Community law which is binding on each of the Member States and as provided for in Article 189 of the Treaty of Rome, the f1ember States themselves should transpose these principles (= the result to be achieved) into their own national legal system, with the choice of means being left to them (provisions in law or collective agreements). In this way then, these rules will fit into a legal "arsenal" with which undertakings are already acquainted and in the context of which local labour relations have been developing. The proposed Directive is divided in two parts. One relates to transnational undertakings; the other to undertakings with complex structures, i.e. national undertakings with subsidiaries in the same country. The provisions are virtually 153

identical for each. We shall summarise these provisions, by focusing attention on the undertakings concerned and on the existing obligatory procedures for informing and consulting employees. A.

The undertakings concern~d The Directive relates to two categories of undertakings: first, transnational undertakings: - whether or not their "decision making centre" is in the Community; - whose subsidiaries in the Community employ at least 100 employees; and second, undertakings which control several subsidiaries or establishments located in the same Member State as that in which they have their decision-making centre, provided that these subsidiaries or establishments employ at least 100 persons. The first of these instances is dealt with in Artie les 4 to 9 of the Directive, the second in Articles 10 to 14. The decisive cumulative criteria in the scope of application of the Directive are therefore: (1) the existence of a group of undertakings which depend on a joint decision-making centre. Generally speaking, this is where the management of the "dominant" undertaking is located; (2) the threshold of 100 employees employed by subsidiaries or establishments depending on the dominant undertaking. These terms themselves call for certain explanations. The Commission makes certain presumptions: the "dominant" undertaking is that which controls other undertakings, referred to as subsidiaries; the concept was drawn from the draft directive on groups of companies, where it was discussed at great length before being accepted. A subsidiary undertaking is one "where the dominant undertaking, either directly or indirectly, (a) holds the majority of votes relative to the shares issued or (b) has the power to appoint at least half of the members of its administrative, management or supervisory bodies where these members hold the majority of the voting rights" (Article 3.2). The Commission came up against a problem in defining large-scale undertakings. This is a fundamental problem in international legislation. To define large-scale undertakings the Commission has opted for three criteria: 154

a "decision-making centre" is where the main decisions relating to the groups' enter~rises are taken; - the control is exercised by one undertaking over others. The undertaking exercising the control is the dominant undertaking: that over which control is exercised is the subsidiary or the establishment, depending on whether or not it has a legal personality; an important criterion with respect to establishments is that they should employ at least 100 employees. It is only the establishments which should necessarily be within the Community; the decision-making centre itself may be located outside the Community. In this way then dominant undertakings located in countries outside the Community are also covered by this text, which is, indeed a novel aspect but one which is admittedly, difficult to implement. The extra-territorial scope of the Directive has succeeded in causing criticism from the very start, particularly in the United States. The Commission had, however, stated its intention since 1973 to cover enterprises located outside the Community to the extent that acts or modes of behaviour within the Common Market were involved, for which the responsibility lay with an entity situated outside the Community. B. Requirements relating to the provision of information to employees Company managements are subject to a twin requirement: on the one hand, to provide employees' representatives with regular and prec~se information giving a picture of the activities of the group of undertakings as a whole; - on the other hand, to hold consultations with employees' representatives when they are planning decisions which they consider liable "to have a substantial effect on employees' interests" "with a view to reaching agreement on the measures planned in respect to them". As far as the requirement to provide information is concerned, the Directive lays down in Articles 5 and 11 that the management of the dominant undertaking shall forward "at least every six months to the management of its subsidiaries in the Community" the information listed below. "The management of each subsidiary shall be required to communicate such information 155

without delay to employees' representatives in each subsidiary". What information has, therefore, to be provided on a regular basis? The information to be provided by management should be "relevant information .•• giving a clear picture of the activities of the dominant undertaking and its subsidiaries taken as a whole" (Articles 5 and 11) . As to the nature of such information it should relate in particular to: (a) structure and manning, (b) the economic and financial situation, (c) the situation and probable development of the business and of production and sales, (d) the employment situation and probable trends, (e) production and investment programmes, (f) rationalisation plans, (g) manufacturing and working methods, in particular the introduction of new working methods, (h) all procedures and plans liable to have a substantial effect on employees' interests. In its comments on this provision(?), the Commission points out that this list is the same as that it had already put forward in its amended proposal for a Regulation establishing a statute for European companies. (8) "It was approved ••. by the European Parliament and raised no major objections at the time on the part of any of the bodies consulted. In addition, the list corresponds to the provisions of national legislation in those Member States which are most advanced in this field", namely the Federal Republic of Germany, Belgium and the Netherlands. The list has, however, been the subject of much discussion (see below). C. Requirements relating to the consulting of employees Decisions planned by the management of the dominant undertaking which will result in the opening of the consultation procedure are "namely those relating to: - the closure or transfer of the whole or major parts of an establishment; restrictions, extensions or substantial modifications to the activities of the undertaking; - major modifications with regard to organisation; - the introduction of long-term co-operation with other undertakings or the cessation of such co-operation". 156

The Directive lays down in Articles 6 and 12 that in such cases the management of the dominant undertaking "shall be required to forward precise information to the management of each of its subsidiaries within the Community not later than 40 days before adopting the decision, giving details of: the grounds for the proposed decision~ the legal economic and social consequences of such a decision for the employees· concerned~ the measures planned in respect to these employees". Consultation shall not relate to the principle of the decision. What happens is that "the management of each subsidiary shall be required to communicate this information without delay to its employees' representatives and to ask for their own opinion within a period of not less than 30 days". This is the first phase of consultation at the level of the subsidiary. The second phase is undertaken in the following hypothesis: "where, in the opinion of the employees' representatives, the proposed decision is likely to have a direct effect on the employees' terms of employment or working conditions, the management of the subsidiary shall be required to hold consultations with them wi~h a view to reaching agreement on the measures planned in respect to them". The Directive does not define the agreement or its scope and does not provide for any consequences in the absence of agreement. In this case, therefore, one should refer back to the practices of labour relations in each Member State. The Member State may only lay down penalties (see below) if consultation has not functioned. Where a transnational undertaking, whether or not it has its decision-making centre in the Community, has one or more establishments (not subsidiaries) in at least one other Member State, the management of the undertaking shall be required to implement the requirements laid down under the Directive via the management of these establishments (to the extent that these employ more than 100 employees) • The same rule shall apply to undertakings with complex structures, whose decision-making centre is located in the same country as that where the establishments that depend upon it are situated. In both the types of undertakings considered under the Directive, it is possible that a body 157

representing employees could exist at a higher level than that of the subsidiary. In such a case the information relating to the employees of the subsidiaries thus represented should be given to that body and consultations should take place under the same conditions as those which apply to this procedure. These rules should also apply to any body representing all the employees of the dominant undertaking and its subsidiaries within the Community if such a body were to be created by means of agreements to be concluded between the management of the dominant undertaking and the employees' representatives. D. The right of "appeal" to the decision-making centre The Directive also wished to make possible information and consultation of employees in a transnational undertaking whose decision-making centre (that of the dominant undertaking) is situated outside the Community but which controls one or more undertakings in the Community. In such circumstances, the management of the dominant undertaking should as a rule ensure the presence of at least one person able to fulfil these two requirements in the Community. If this is not done, then the proposal provides that "the management of the subsidiary that employs the largest number of employees within the Community shall be responsible for fulfilling the obligations imposed on the management of the dominant undertaking by this Directive" (Article 8). The Directive did envisage the situation in which the management of the subsidiaries or of the establishments did not fulfil the obligations incumbent upon them. However, the text does not use the same terms with respect to the two requirements. It introduces an entitlement to direct access to information by employees' representatives. Where the management of the subsidiaries is unable to communicate (because they have not received it) the periodic information on the activities of the group to employees' representatives, the management of the dominant undertaking must communicate such information to any employees' representatives who have requested it to do so. Where the management of the subsidiaries does not fulfil the two steps of the consultation 158

procedure, employees' representatives shall be authorised to open consultations through authorised delegates, with the management of the dominant undertaking with a view to obtaining such information and, where appropriate, to reaching agreement on the measures planned with regard to the employees concerned. In the context of these procedures, the Directive requires members and former members of bodies representing employees to maintain discretion as regards information of a confidential nature. Member States shall empower a .tribunal or other national body to settle disputes concerning the confidentiality of certain information. E.

Penalties The Directive lays down that Member States shall impose appropriate penalties in cases of infringement of the requirements of the Directive. Member States shall only impose penalties in cases of infringement of the requirement to disclose information, to consult and not to disclose secrets. In the context of the consultation procedure, Member States "shall, in particular, grant to the employees' representatives concerned by the decision the right of appeal to tribunals or other competent national authorities for measures to be taken to protect their interests". F.

General remarks The requirement to disclose information to employees and that to consult with employees may be distinguished from each other by their nature and their frequency. As we have said, the first of these requirements relates to all activities of the group and should be periodic (at least every six months, in the original proposal). The second is only implemented when decisions are planned which may affect employees and relates only to those measures which may concern such employees. By "management" the Directive means the person or persons responsible for the management of an undertaking under the national legislation to which it is subject. By "employees' representatives" the Directive also means those defined by the legislation or practices of the Member States. These definitions and procedures show that the Commission does not intend to modify the legislation of Member States with respect to the institutional organisation of labour relations, 159

nor the organisation of undertakings. In fact, in many important aspects, transnational undertakings are an integral part of the different national labour relations schemes and these schemes determine to a great extent, via information and consultation, the relations between company management and the representatives of their employees. It is recognised that for their own public image, transnational undertakings generally conform with local practices in labour relations(9). The provisions for the implementation of the requirements on disclosure of information and consultation laid down in the Directive were even supposed to facilitate labour relations in these types of undertaking in several respects. They are based on a cascade mechanism incumbent on company managements. Whether indeed it is a matter of providing information or of holding consultations, the management of the dominant undertaking or its representative in the Community, if the undertaking has its principal place of business outside the Community, is required to provide information to employees' representatives via the management of its subsidiaries or establishments. There is thus a sharing-out of responsibilities between the managements of the undertakings. Labour relations are facilitated in all undertakings with complex structures because the Directive also lays down that information should be provided both to employees and to local managements. Experience with large-scale undertakings has shown that, on several occasions, the managements of subsidiaries have not always been invited to participate in decisions taken at a higher level which affect their undertaking. As a result, therefore, they were unable correctly to inform or consult their employees. From now on local managements will also have to assume their responsibilities with respect to the proper functioning of the procedures proposed. It is undoubtedly true that the texts are not always absolutely clear on all points and have, therefore, given rise to criticisms and questions, particularly with respect to the right of employees' representatives to have direct access to the management of the dominant undertaking when the procedures have not functioned. Doubts have in fact been expressed about the "practicability" of this right. 160

3 - THE REACTIONS OF THE PROFESSIONAL ORGANISATIONS The proposal for a directive gave rise right from the outset to numerous reactions, both in Europe and in the United States. The entrenched positions expressed on this occasion either in favour or against this text have to a certain extent dramatised the debate which was situated at both a political and social level. Was this initiative really necessary given the existence of certain codes of conduct in different international organisation where agreement had been "snatched" after long and difficult negotiations between all the interested parties? The official reaction of the professional organisations expressed with a great deal of force points of view that were so apparently incompatible that one was entitled to ask oneself what had become of past achievements, both at the level of Member States as well as that of the European Community, with respect to the minimum framework for the dialogue between the social partners in undertakings. Before discussions even got properly underway in the official consultative bodies, the bodies representing employers and the trade unions in the E.E.C. had already made their position known. A.

The point of view of U.N.I.C.E. (10) Having pointed out that procedures for information and consultatiot:l of employees in undertakings were important elements in the dialogue between the social partners, the employers went on nevertheless to say that the proposal for a directive was "neither necessary, nor useful". U.N.I.C.E. criticised several elements contained in the proposal. Their general view was that the "Guidelines" of the Organisation of Economic Co-operation and Development were adequate and Community legislation was not required. (11) 1. Questions of advisability In this respect the U.N.I.C.E. position is based firstly on the consideration that the proposal for a directive neglects important aspects of labour relations and company management. In this context, given the very different traditions that exist in Member States (collective bargaining agreements, conciliation bodies in undertakings etc.), it is unrealistic to propose a common framework. The imposition of a bureaucratic type of administrative measure on large-scale companies 161

is something which does not meet the need for rapid decisions in the present situation of economic difficulties. A second argument used by U.N.I.C.E. is based on the spirit of O.E.C.D. and I.L.O. recommendations, according to which undertakings are invited to join in local labour relations. This implies particularly recognising the responsibilities of company managements "whose duty it is in each unit to ensure that labour relations are carried out in conformity with national legislation and practices". The proposal for a directive would run counter to this spirit, in particular when it gives employees' representatives the right of direct access to the real "decision-making centre" of undertakings with complex structures. In this way the proposal is weakening local management, not to mention the abusive use that could, i.t is feared, be made of this possibility. Another argument used is that of discrimination. By imposing specific obligations on undertakings with complex structures which have subsidiaries or establishments situated in the Community, the proposal is discriminating against them on the one hand, as compared to single structure undertakings and, on the other hand, as compared to multinational undertakings operating outside the Community. There are reasons to fear that this may threaten the competitiveness of European undertakings, given the very burdensome administrative demands and restraints imposed on company operations by the proposal for a directive. The nature and scope of these obligations would reduce the operational flexibility of these European undertakings with complex structures and could furthermore risk discouraging investments in the E.E.C. The confidentiality requirement imposed on employees' representatives does not convince employers either. The Commission, it is claimed, has not sufficiently substantiated its position in favour of specific measures for undertakings operating in the E.E.C., in addition to the O.E.C.D. rules, just as it has not sufficiently set out the grounds on which it bases the need for these rules for the proper functioning of the Common Market (see the legal basis: Article 100 of the E.E.C. Treaty). 2. Arguments relating to the substance of the Directive Several provisions of the proposal have been subject to particular criticism. 162

Firstly, the approach to undertakings with complex structures. The concepts used to define the management of the "parent company" do not properly reflect the complex realities of the organisation of large undertakings. Furthermore, European employers feel that the mechanism by which the Directive is applied to undertakings where the "dominant" undertaking has its "decision-making centre" outside the E.E.C. and is not represented within the Community, is totally inadequate. Nothing can justify the assertion that in this respect the largest subsidiary would be- able to provide the information referred to in the Directive. This subsidiary does not have the necessary powers to oblige the dominant undertaking and the other subsidiaries to divulge Such information. As far as the actual information to be provided is concerned, the argument used by the Commission according to which the list of. such information was accepted in the context of discussions on the European Company, is not one that convinces U.N.I.C.E. The draft regulation on the statute of such companies provides for a voluntary structure only and no firm was, therefore, obliged to conform to the requirements it introduced. The nature and the amount of the information to be provided were also subject to criticism. U.N.I.C.E. reproaches the text inter alia with applying to information relating to the activities of a single undertaking whilst the principle of the requirement concerns the group and with mixing information that is normally made public with other information of a confidential nature. The timetable proposed for the communication of such information is furthermore unrealistic. U.N.I.C.E. refers to the legislation in force in certain Member States concerning the information to be provided by quoted companies (where the disclosure of confidential information could have repercussions on the stock market) and non-quoted companies, where it would be paradoxical for the staff to receive more information than the public authorities who are responsible for the application of company law. As far as the requirement to consult is concerned, U.N.I.C.E. further rehearses the above-mentioned arguments concerning the ·rigidity of the system proposed and the risks inherent in such a system for the proper ·functioning of labour 163

relations at a local level. The decision-making process in large-scale undertakings does not necessarily coincide with this procedure. Furthermore, such a procedure would overlap with the procedures for informing and consulting employees already provided for in other E.E.C. Directives (collective redundancies and transfers of undertakings) . The secrecy requirement incurr~ent upon employees' representatives does not relieve the fears of U.N.I.C.E., who do not consider it, moreover, appropriate to allow these representatives to assess the confidential nature of the information in question. Finally, the employers' organisation does not believe in the efficacity of the penalties which would accompany infringement of the information and consultation requirement. B.

The point of view of the trade unions The trade unions have for their part welcomed the Community's initiative. (12) They have stressed the important political aspect of the proposal, to the extent that it crowns several years of trade union struggle. On a general level they felt the proposal to be positive and that there was room for improvement. 1. The proposal is a positive one The trade unions particularly approved of the binding nature of the Directive, which is a useful addition to the non-binding codes of conduct drawn up in the framework of the O.E.C.D. and the I.L.O. But, of course, a critical note was quite in place. "Politic ally the Commission decisions are a step forward, even if one is still a long way from what has been demanded by the trade unions (which) will ensure that the Directive does indeed guarantee that consultations with the trade unions are real consultations ... " Given the reinforced centralisation of decision-making powers in multinational undertakings, the main concern of the trade unions is to allow employees' representatives to deal as equals with the upper echelons of complex structure groups. With a view to achieving this, they wish to see an international body responsible for information and consultation set up, which would be empowered to apply directly the rights deriving from the proposal at the level of the multinational decision-making centre. The management of the undertaking and the trade unions concerned would 164

decide jointly on the form that this body would take, which would represent the interests of all employees of a subsidiary and of its establishments in the Community. Under such conditions one could better guarantee that real consultations are held.(13) 2. There is room for improvement More specifically, the trade unions feel that the proposal for a Directive could be improved with respect to the following points. As far as the two requirements incumbent on undertakings are concerned, the trade unions have stressed the need for information to meet definite quality, intelligibility and reliability criteria. Such information should relate both to the dominant undertaking as well as to each of the individual undertakings in the group. Employees should enjoy a general right to submit questions for reply, which should also include the right for employees' representatives to put questions directly to multinational decision-making centres. In the specific context of consultations, the trade unions have insisted that these should be held "in time" and "on a regular basis". The procedure whereby consultations should be held "with a view to reaching an agreement" should provide for measures to resolve possible cases of conflict. Far from rejecting the idea of creating a body representing the interests of all employees of the parent company and of its subsidiaries in the E. E.C. countries, the trade unions have expressed their regret that this idea is put forward only as an option, whereas the other provisions of the text are binding in nature. "The indicative form of the initial Commission proposal should be reintroduced". This body for representing employees' interests. should be created by means of agreements between the management of the dominant undertaking and the trade unions concerned when the employees' representatives of the majority of subsidiaries so request. As far as penalties are concerned, the trade unions considered these to be too weak in the proposal for a Directive. They stressed the need for such penalties to be made in nature. Without real penalties, there would be no real rights. Finally the trade unions expressed their desire to have a wide-ranging discussion of these issues around this proposal and for this text to 165

make progress through the different E.E.C. institutions. The European Trade Union Confederation felt the Directive to be essential for the strengthening of democracy in the European economy. The above-mentioned Confederation made the publication of its position coincide with the launching of a major campaign to draw attention to the rights of workers in multinational undertakings. On October 9, 1981 they released a "list of arguments" drawn up by an ad hoc working party and the E.T.U.C. secretariat, in which answers are given point by point to the arguments advanced by U.N.I.C.E., whose attitude - one of straightforward opposition was criticised and judged "untenable". The "trench warfare" between them has been further exacerbated on other occasions. The E.T.U.C. also published a series of case studies (covering firms such as Massey-Fergusson, Ford and many European-based multinationals) which go to show that provision of information on closures and redundancies in such undertakings generally occurs after the final decisions have been taken at a central level and that advance consultation of the type provided for in the "Vredeling" plan had not taken place in practice in most cases. Following this publication, U.N.I.C.E. responded by issuing an immediate press release claiming that the approach of the E.T.U.C. was "unilateral, incomplete and sometimes incorrect". U.N.I.C.E. continues to believe that the E.T.U.C. had said nothing that proves the need for a Community directive on this question. (1_4_)__ The terms used by the two partners, who were invited to reach agreement, were therefore very different. It was also clear that neither of the social partners was fully satisfied with the initial Commission proposal. In the meantime, however, the Commission had undertaken to revise its proposal in the light of the opinions delivered by the Economic and Social Committee and by the European Parliament. C. The opinion of the Economic and Social Committee (15) The opinion adopted by the Economic and Social Committee on January 27, 1981 (by 79 votes to 61 with 11 abstensions) approved the Commission's proposal and was accompanied by a minority statement by members of the Employers Group. 166

The Committee referred firstly to the fact that it has always advocated proper information and consultation of employees. All employees should be kept informed of the policies and activities of their firm and of any group to which their firm may belong. They are entitled to receive adequate and relevant information and to be consulted about decisions which may directly affect them. These principles should be applied in all undertakings, at least those of a given size. The Committee has always considered that there should be no discrimination between undertakings according to whether they are national or transnational or transnationals based within or outside the Community. In the light of these opinions, the Committee endorses the objective of appropriate legislation being introduced to reassure workers that they will be informed and consulted in time on decisions that would affect them. The Committee is of the opinion that the harmonisation pursued by this proposal is justified, particularly with respect to the operation of the Common Market, given the risk of competition distortions due to differences in consultation and information requirements. The Committee is convinced that in the light of the complexity of these procedures in transnational undertakings, the Directive is all the more important in clarifying business policy for the employees of both multinational groups and complex undertakings. The Committee is of the opinion that it is in the management's interest to discuss planned decisions with employees' representatives. The management's powers of decision are in no way diminished by the draft Directive. "As far as transnational undertakings are concerned, the problems which the draft Directive seeks to solve cannot currently be tackled adequately under collective agreements, since these are confined to national level. Similarly, the issues involved cannot be dealt with under national legislation alone where the decisions largely have international repercussions". There is in any case a social aim: "Can there be areas within the Community where basic rules of democracy do not apply?" The Committee notes that the draft Directive ties in with the existing provisions in many Member States and that it tries to provide for the necessary minimum. The proposal also 167

strengthens in a very useful way the role of the management of subsidiaries who, when kept informed themselves in their turn, will be in a better position to inform and consult their employees. The Committee "notes with satisfaction" that the proposal does not call for exhaustive information. All that is required is that it should be relevant and provide a clear picture of the activities of the group as a whole. It is axiomatic that those primarily affected by closures or transfers should be informed and consulted in time. The Committee interprets the scope of the Directive in this respect as meaning that it should only apply to those employees in subsidiaries whose interests are .substantially affected. We do not consider it necessary to go into further detail about the minority statement made by the Employers' Group, since the majority of the arguments advanced have already been brought up by U.N.I.C.E. When it comes down to it, the only point on which the two groups were able to agree seems to be that they both recognise that the proposal for a directive may have a significant impact on labour relations but they were unable to agree on the scope of that impact. D.

Abroad The "Vredeling" proposal has not failed to provoke reactions in industrial quarters abroad, particularly in the United States. Very precise threats of disinvestment or of a shift in activities have been made to the Community cbuntries. Bills intended to limit the impact of the Vredeling proposal on multinationals operating in Europe but whose parent companies are situated in the U.S.A. have been brought before the American Congress. Representatives of the European Commission have travelled to the United States to hold meetings with American businesses and whilst they may have been able to note a certain evolution in the course of 1982 in the thinking of people in these quarters in so far as their approach to the problem was concerned, the pressure brought to bear on the European authorities, including officials and parliamentarians, has not let up. Whilst the issue was being debated in the European Parliament, press conferences were being held and films financed by American firms operating in Europe were being shown, all of which relayed the conflict between the European employers and trade unions. 168

Such lobbying undoubtedly contributed to the Parliament's decision to postpone initially its vote on the proposal for a Directive. Nevertheless, several parliamentarians, as we have seen above, did not share the opposition expressed by the industrial sector, although certain of them did seek to limit the scope of this "plan". 4 - THE DEBATES IN THE EUROPEAN PARLIAMENT A.

The debates The European Parliament devoted an important debate to discussion of the proposal for a Directive in the course of its September, 1982 session, centered on the Spencer Report, drawn up on behalf of the Committee on Social Affairs and Employment. The Parliament did, however, postpone the vote on the numerous amendments until its October, 1982 session, with a view to clarifying them and reducing their number. At this second session, the Parliament approved several important amendments and adopted (166 votes to 42 without the Socialist Group) a text which, generally speaking, softened the initial proposal. It then waited for the responsible member of the Commission, Mr. RICHARD, to comment (November, 1982) on the different amendments made, before voting (December, 1982) on the resolution which closed the debate.

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The Parliament did not go along entirely with what had been suggested by Mr. SPENCER. Amongst the amendments proposed by the Committee on Social Affairs and Employment, those that were not adopted include the proposed extension of the legal basis to make reference to article 117 of the Treaty as well (in the preamble), the procedure to be followed in the judicial proceedings in the case of non-compliance with the requirements of the Directive (Article 6), the conferring of responsibilities within the subsidiary with respect to the fulfilment of these requirements, when the dominant undertaking has its place of business outside the E.E.C. (Article 8) and the request to Member States to report to the Commission on the effects of the Directive, three years after its entry into force (Article 17) . The Committee of Social Affairs and Employment had strengthened workers' rights in a series of proposed amendments 169

which, when seen in the light of the lively struggle going on between the industrial quarters and European trade unions, may well have seemed unrealistic and rightly so. adopted by the European B. The Amendments Parliament (1°) The scope of the Directive (Article 1) Certain undertakings are excluded. These are undertakings whose main objectives are, generally speaking, political, religious, charitable, scientific or related to public information. Member States may lay down special provisions that take into account the specific nature of such undertakings. (2°) Employees' representatives (Article 2) These should be elected by secret ballot directly from the employees in each subsidiary undertaking or establishment, excluding those "persons engaged in the management of the establishment or senior staff ... " The Social Affairs Committee, which had proposed an amendment going even further in this respect, did not fully substantiate the reasons that led it to make this important proposal, except by referring, inter alia, to the electoral principles adopted by the Legal Affairs Committee in the proposal for a Fifth Directive on Company Law with respect to the structure of public limited liability companies. (3°) The threshold for implementation The requirement to provide information that is incumbent upon the management of a dominant undertaking whose decision-making centre is situated within a Member State of the Community and which has one or more subsidiaries in at least one other Member State shall not apply unless this undertaking employs at least 1,000 employees in the group as a whole and at least 100 in the subsidiaries concerned (Article 4). This proposal would match up with the proposal for a Fifth Directive on Company Law mentioned above. (4°) Information "Intelligible general" (in the place of "relevant") information should be provided at least once a year. As far as the scope of information to be provided is concerned, rationalisation plans and the introduction of new working methods have been deleted from the original Commission list. A link 170

is proposed with the proposal for a 7th Directive on Company Law (consolidated accounts) saying that "the information provided may not in general be · more extensive than that required for shareholders under the 7th Directive". As to the confidentiality of information, on the one hand information "may not contain any company secret or business secret"; on the other hand the managements of,subsidiaries shall make it quite clear what information is of a confidential nature, if such information is given "when they reply - and this is a new element too - to the questions put to them by employees' representatives with a view to obtaining oral explanations" (amendment to Article 5, paragraph 3). The organisation of such a meeting had been proposed by the Committee on Economic and Monetary Affairs. (5°) The "direct access" procedure (by-pass) Two substantial amendments were made to the requirement to provide information. On the one hand, Parliament introduced a time limit to be respected by employees before approaching the dominant undertaking when the management of the subsidiary is not able or willing itself to give the information laid down in the Directive. Employees may grant the management of the subsidiary 30 days in which to reply to their request for information. On the other hand, however, if no response is made within this period to the request from employees representatives, then they may approach the management of the dominant undertaking in writing and the latter shall be obliged to communicate the relevant information to the management of the subsidiary (and no longer to the representatives who had made the request) . (6°) Penalties in respect of the information requirement (Article 5, paragraph 5). Parliament, in place of simply referring back to the provisions made by Member States, proposed on the one hand that employees' representatives be given the right to require one of the managements involved (probably one coming under the jurisdiction of a Member State) to fulfil the obligations to provide information and on the other hand, that "Member States provide for appropriate penalities for failure to comply with the obligations laid down", in the context of the requirement to provide information. 171

(7°) Consultations (a) Important distinctions were made in Article 6, paragraph 1 of the Commission's proposal. The decisions covered are those concerning the dominant undertaking or one or more subsidiaries in the Community, which are liable to have a substantial effect on the interests of employees in the Community. It is the management of the subsidiary concerned which should first receive the information, 40 days before implementing the proposal decision. (b) In the list of examples of possible decisions, co-operation with other undertakings is omitted but rationalisation projects and working practices are added. (c) Of greater importance is the change to the consultation procedure proposed by the Commission to make it simpler, with a view to attempting to reach agreement and holding-up for a period specified as being 30 days the implementation of the undertaking's decisions. The oral explanations provided for above (Article 5, paragraph 3) should apply mutatis mutandis (accordingly) • (d) The procedure of direct access to/or consultation with the management of the dominant undertaking is abolished. these (e) Penalties for non-compliance with requirements are proposed on the same lines as in the context of the information requirement. (8°) Representative bodies at a higher level than the subsidiary (Article 7) Parliament followed and indeed went even further than the amendment proposed in the Spencer Report. It only accepted consultations being held in such bodies (whether already existing or yet to be created) on the condition that the representatives of employees directly affected by the decision and the local management should both agree to transfer their right to be consulted to the higher level. ( 9°) The responsibility clause applies in cases where the decision-making centre of the dominant undertaking is situated outside the E.E.C. (Article 8). Such undertakings should ensure the presence of an authorised agent (in place of a person able to fulfil the requirements as laid down in the Commission proposal) within the Community, who should be responsible for fulfilling the main requirements of the Directive. If this is not done, then management of each subsidiary concerned 172

shall be responsible for fulfilling the obligations resulting from the Directive. (10°) By analogy, a whole series of similar amendments, indeed sometimes identical in nature, were voted on with respect to the section devoted to national undertakings with complex structures, although certain parliamentarians did criticise the dual nature of the proposal. (11°) The secrecy requirement (Article 15). This is a very wide-reaching requirement. The Commission had in this respect, (a) imposed a requirement to maintain discretion on the part of members and former members of bodies representing employees as regards information of a confidential nature. They should not divulge secrets regarding the undertaking or its business to third parties. The Parliament extends this requirement for discretion to all business secrets and company secrets which employees' representatives may have been informed of in their capacity as representatives, as well as to all matters in respect of which discretion is obligatory or of which they should recognise the confidential nature. (b) The Commission had laid down that Member States should empower a tribunal to settle disputes concerning the confidentiality of certain information. The Parliament did not pick up this idea. It added in this paragraph that the preceding provision should be equally binding on the experts consulted by employees. No confidential information shall be communicated to them unless they give a written undertaking to maintain discretion. On this point, the Parliament adopted the opposite tack to the amendment contained in the Spencer Report which had wished to make the position of trade union experts rather easier in the case of dispute. The Parliament furthermore went along with the Commission's proposal for Member States to impose appropriate penalties in cases of infringement. C.

Assessment of the Parliament's work Do these amendments improve the draft Directive? We do not believe that this is so on all points. The amendments proposed seem to us more realistic and practicable in so far as the intervals at which information is to be provided 173

(since most of such information has anyway to be collected for other purposes, on an annual basis), as well as with respect to the "direct access" procedure in the context of the information requirement and the "responsibility clause". We deplore, however, the weakening of the consultation procedure. This is indeed the key question in the whole Directive and it is on this specific point that a European initiative could usefully complement the guidelines of the international organisations. The problems relating to the secrecy requirement remain confused. No improvement has in our opinion been made in this respect. Commissioner RICHARD told the Parliament in November, 19 8 2 ( 16) that he could accept the main body of the suggestions made by the Parliament, particularly with respect to the following elements of the Directive: frequency of information, threshold for implementation of the Directive; the "by-pass" procedure, the element of extra-territoriality and the type of information covered by the secrecy requirement. 5 - THE REVISED COMMISSION PROPOSAL Following the official and unofficial consultations it held on its proposal for a Directive, the Commission presented an amended proposal for a Directive on procedures for informing and consulting employees to the Council. ( 17) The changes made relate both to the substance of the problem and to the form of the instrument. The structure of the text has been simplified with a view to avoiding the repetitions which had burdened the previous proposal. It is true that at the very outset it was not intended to apply the principles of the Directive to national undertakings with complex structures. The new text is shorter. It could be made even clearer in a final phase, if compromises yet to be found so permit. The Commission has further developed the reasons that led it to take this initiative in the "recitals" (or whereas clauses) which precede the exacting terms. These define more precisely the objectives in view and the scope of this proposal in relation to other Council Directives already in force and which also provide for procedures for prior information and consultation of employees on proposed decisions, that is to say in the event of 174

collective redundancies and transfers of undertakings. "These information and consultation requirements do not aim to cover all situations likely to affect the employees' interests and, in particular, do not extend specifically to decisions taken at parent-company level rather than independently by the employing subsidiary". Thus "appropriate provisions must be adopted to ensure that the employees of an undertaking within the Community are properly informed and consulted where the undertaking in question is a subsidiary of an undertaking outside the Community" . New recitals, furthermore, provide additional explanations on the scope of the information and consultation 11 Steps requirements. should be taken to ensure that the employees' representatives are informed and invited to give their opinion in good time before the adoption of any decision significantly affecting the employees' interests and that they are consul ted with a view to attempting to reach agreement on the measures to be taken in this context in respect of employees concerned". The dropping of the provisions which would have given employees' representatives the right to apply directly to the management of the parent undertaking, where no consultations are held at the level of the subsidiary, meant that it was necessary to specify (although this does not clearly appear in the text) according to the Commission, that the management of subsidiaries would receive all appropriate information from the parent company and should have the necessary powers to conduct consultations with their employees in good faith. Such powers are particularly important when it is necessary to negotiate social and financial measures in favour of employees. Finally, the Commission wished to reassure those who feared changes in the formal (normal) framework 11 Steps of labour relations in the undertakings. should be taken to ensure that these requirements (to inform and to consult) can, in so far as possible, be fulfilled within the framework of institutions already established to represent employees under the laws and customary practices of Member States". A final recital deals with the problems caused by the confidential nature of certain information and we shall come back to this later in more detail. The definitions of the undertakings concerned and of employees' representatives had been subject to critic ism and in this respect the Commission's task was made easier by the adoption in the 175

meantime of the 7th Council Directive of June 13, 1983 on the co-ordination of company law governing consolidated accounts. (18) The Commission proposes to borrow the definition of parent undertaking and subsidiary from this Directive. The relationship between a subsidiary located within the Community and a parent undertaking located outside the Community is to be determined according to the law of the Member State to which the subsidiary is subject. In defining employees' representatives, the Directive has taken the definition of the former accepted in the "transfers Directive" rather than referring back to this Directive. The Commission did not feel it should follow the opinion of the Parliament which had requested the compulsary introduction in all Member States of a system of direct elections by secret ballot, since such an amendment would effectively widen the scope of the Directive, which should be limited to procedures for informing and consulting employees. The threshold for implementation has been changed, following in this matter a Parliament amendment. The total number of employees employed by the parent undertaking and all its subsidiaries should be at least 1,000 employees within the Community. The Council may decide furthermore to introduce an additional threshold for subsidiaries. The earlier clause on responsibility had been quite rightly criticised as being unrealistic. Who is in the best possible position to fulfil the information and consultation requirements when the parent company is located outside the Community? In principle, the management of this undertaking could be represented in the Community by an agent who is responsible for fulfilling the requirements of the Directive. In the absence of such an agent, according to the new proposal and here the Commission has followed an amendme'nt put forward by the Parliament - the management of each subsidiary concerned in the Community shall be held responsible. This is a more logical solution. However, it would not appear to offer all the guarantees hoped for if one were to put oneself on the side of the employees' interests. Important changes are proposed with respect to the information requirement. As far as frequency is concerned: this has been reduced to once a year. If in the meantime, however, the information has been brought up to date after the (annual) date fixed for communication of this information to 176

employees" representatives, with a view to being communicated, in implementation of the relevant legislation, to shareholders and creditors, then it shall also be forwarded to employees' representatives in a form that is readily accessible to them. As far as the subjects which such information should relate to: the new draft lays down that "specific information on a particular sector of production or geographical area in which the subsidiary is active" should be provided. This information would no longer relate to rationalisation plans or manufacturing and working methods, the situation of the business (but would still relate to the probable development of business) or investment programmes (though it would still relate to "future investment prospects"). Information (that may be considered) of a confidential nature does not have to be provided by the management of subsidiaries. As for employees' representatives, they may ask the management for oral explanations and obtain answers (which may in certain cases be given on a confidential basis) . If after 30 days they have not received the information requested, they may approach in writing the management of the parent undertaking. That undertaking shall be obliged to communicate the relevant information without delay to the management of the subsidiary. Thus in the context of the information requirement, "by-pass" is maintained but under attenuating conditions: an initial waiting period, no direct contact between the management of the parent company and the employees' of the subsidiary. The managements of the parent companies shall communicate with the managements of their subsidiaries. The dropping of the possibility of a "direct approach" ("by-pass") to the management of the parent undertaking in the context of the consultation requirement is, in the eyes of industry, the most important amendment made to this requirement. The text attempts to specify that the proposed decisions which would form the subject of consul tat ions are those that are liable to have serious consequences for the interests of the employees concerned (according to the official notification of subsidiaries in the Community). Consultations should not relate to all employees in the Community. The Commission feels that consultations should be held before the final decision is taken (instead of "not later than 40 177

days before adopting the decision" as was laid down in the initial proposal) and that consultations should be held between partners entitled to take decisions, without wishing to impose a right of co-determination. This wish on the part of the Commission is not explicit in the text, unless it is found in the phrase that consultations should be held with employees' representatives "with a view to attempting to reach agreement" (in place of "with a view to reaching agreement") on the measures planned in respect of the employees. The new proposal confirms, therefore, that consultations relate only to such measures and not to the principle of the proposed decision. In this respect, the new proposal adds to the type of decision which should form the subject of information prior to consultation: which also now covers modifications with regard to organisation (of work) resulting from the introduction of new technologies and measures relating to workers' health and to industrial safety. Information on such decisions should be communicated in writing by the management of each subsidiary concerned to employees' representatives to ask for their opinion. In this context an exception is granted for information that may be considered as being secret in nature. However, when the information is treated as secret, the management of subsidiaries is none the less required, at least 30 days before putting into effect any decision directly affecting conditions of work or employment, to hold consultations with the employees' representatives. Statutory means of appeal are granted to employees' representatives in the event of failure .·to comply with the obligations laid down in the Directive. However, in order not to delay the taking of the decision, the competent national authority shall ensure that measures are taken .within a maximum period of 30 days to compel the management of the subsidiary to fulfil its obligations. Another amendment allows employees' representatives to decide whether or not they wish their right to be consulted to be transferred to a body representing employees at a higher level than that of the subsidiary, where such a body already exists or is created. This amendment had been suggested by the Parliament. The rules on secrecy and confidentiality have been strengthened in the amended proposal for a Directive. The new provisions protect at one and the same time undertakings against disclosure of 178

information (for example, on new products or transfer or merger. plans); if (and the confidential nature is defined) disclosure of such information "could substantially damage the undertaking's interests or lead to the failure of its plans" and also protect employees against the risk that undertakings may get round the information and consultation requirement by treating information as secret. Protection of the latter is ensured by the provision, already examined, that in any case consultations shall be held on any decision liable to have serious consequences for the interests of employees and by their right to refer to experts. It is clear that in such a case and this is laid down in the text "employees, their representatives and the experts to whom they refer shall not reveal to third parties any information which has been given to them in confidence". Furthermore, "Member States shall ensure that a tribunal or other competent national authority can settle disputes concerning the secret character of any information" that has either been withheld or provided. Finally, in a new article proposed by the Parliament, the Directive grants Member States to whom it is addressed the option of laying down special provisions to protect the freedom of charitable, political or public information bodies (freedom of the press). The comments on this article state the "special provisions are, however, only authorised to the extent necessary to ensure that the undertakings in question (let us say those whose aims are not commercial) - may exercise the freedom to which they are entitled under national law". 6 - GENERAL ASSESSMENT AND PROSPECTS "The content of the proposal owes much to creative and innovative thinking by the European Trade Union Confederation". This phrase, which is taken from the introduction to the Spencer Report to the European Parliament, undoubtedly reveals one of the main causes of the harsh reactions of employers to the proposal. "The key to this exceptional hostility may well be that the proposal is part of a much wider argument about transnational companies conducted worldwide in the United Nations, the 179

International Labour Organization, and the Organization for Economic Cooperation and Development. The debate involves external factors, and neither E.T.U.C. nor U.N.I.C.E. wish to concede points of principle which may have an influence in other discussions". The attitude of U.N.I.C.E. is, to a certain extent, rather surprising when the proposal for a Directive is seen in the light of earlier Community initiatives something pointed out by the Parliament itself - where similar requirements have been imposed on undertakings in the course of a long process of consultation carried out by the Commission. Long negotiations between the parties concerned have also resulted in the recommendations of other international organisations. Does the Commission's initiative run counter to the spirit of these texts? In this respect it is worth pointing out that the Commission did participate (above all in the I.L.O.) in the preparation of these texts and continues to follow, in order to ensure proper co-ordination, the deliberations going on with a view to their revision. These deliberations in the context of the procedure laid down, for example in the Committee for !nternational Investment of the O.E.C.D., do in any case allow the conformity of these rules (which are more or less binding depending on their origin) with the development of labour relations both in large-scale undertakings (where "cases" are submitted for discussion) as well as at an international level, to be checked in the light of the development of investments in the regions where these rules have been applied. The discussions that have been going on around the central theme of deciding whether or not there was a need for a Directive on this matter, in the light of the existence of the aforementioned texts and procedures, "came to centre on the question" writes Mr. SPENCER in his introduction "of the efficacy of voluntary action". Now it would seem that the efficacy of the guidelines produced by the international organisations is assessed differently depending on the interpretation one gives to them. There are still, according to a study produced by I.N.S.E.A.D. (which the rapporteur of the Committee on Social Affairs and Employment of the European Parliament was able to refer to) , major differences of opinion as to such interpretation. This Committee agreed that there was a role for the Community in this field. 180

The German example of worker participation would seem to suggest that one should not necessarily fear any negative repercussions on international investments as a result of these regulations. The list of the information which has had to be provided is based on the German legislation. The essential point would seem that the social partners' actions should be clear and that they should be able to find grounds for constructive confrontation. Discussions in Council will not be easy following the amended proposal presented by the Commission but Council can no longer avoid assuming its responsibilities. Would not the absence of a Directive, by creating uncertainty, serve to exacerbate the tensions that already exist? Discussions must go on and must make progress. For without this we fear that there will be a collapse in confidence between the social partners at European level, which could well affect labour relations in the context of the implementation of other Community Directives, as well as any attempt by the Commission to reach a consensus on this issue. Such a consensus does seem possible to us, to the extent that particular attention is paid to the results obtained in the context of the O.E.C.D. In a different study (18) we expressed the opinion that the proposal for a Directive was of interest inter alia in that it proposes a special practical solution to certain points of the O.E.C.D. recommendations on labour relations in rnul tinational undertakings, particularly by attempting to better organise discussions on the local level, than of the subsidiaries. Why should the discussions within the E.E.C. take a different approach? This implies creating conditions that will encourage such a dialogue at local level, at which level labour relations may be established. On the basis of social harmony, the need for which has been stressed particularly in certain B.I.T. (International Labour Office) studies. The other international organisations have underlined the need to take such practices into account and to draw .maximum profit from them with a view to improving the social climate in groups of undertakings.

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REFERENCES (1) (2) (3) (4) (5) (6) (7) ( 8) ( 9)

(10) (11) (12)

(13) (14) (15) (16) (17) 182

Le probleme de la concentration dans le Marche Commun, collection Etudes, serie concurrence n° 3, Brussels, E.E.C. 1963. Doc. COM(73) 103, .November 7, 1963. O.J.E.C. N° L 48 - February 22, 1975. O.J.E.C. N° L 61 - March 3, 1977. Dr. K. WELLENS, Internationale reglementering van transnationale ondernemingen, Ced Samson, Brussels, 1979, pp. 105-107. O.J. N° C 297 - November 15, 1980. See doc. Cm-1(SO) 423 final, of October 23, 1980. Bulletin of the European Communi ties Supplement 4/75. R. BLANPAIN, T. ETTY 1 A. GLADSTONE, H. GUNTHER, "Relations entre la direction des entreprises transnationales et les representants des travailleurs dans certains pays de la Communaute Europeenne", Institut International d'Etudes Sociales, Geneva, 1979, pp. 47 and following. U.N.I.C.E. position, Council doc. EEC 5152/81 SOC 59, February 26, 1981. Commission reply to a parliamentary question, O.J.E.C. N° C 345, December 31, 1980, p. 7. M.F. HELLMAN, "Les positions de la Confederation europeene des syndicats (C.E.S.) et des Communautes Europeennes a 1 I egard des groupes multinationaux: documentation pour la C.E.S. en collaboration avec l'Institut Syndical Europeen", Brussels, March, 1981 and particularly the decision of the Executive Committee of the European Trade Union Confederation (E.T.U.C.) meeting in Brussels on December 4, 1980. EUROPOLITIQUE, Dossier June 10, 1981 N° 782, "La proposition VREDELING sur la consultation des travailleurs", p.4. European Industrial Relations Review, October, 1982, p. 2 (news). Doc. COM (82) 758 final, November 17, 1982, Mr. RICHARD's statement to the European Parliament, November 17, 1982. Commission of the European Communities COM (83) 292 final July 8, 1983, O.J. N° C 217, p.3. Official Journal of the European Communi ties N° L 193, July 18, 1983, p.1.

(18) Frangois VANDAMME, "L'Information et la Consultation des travailleurs dans les entreprises a structure complexe, en particulier transnationale", Revue du Marche Commun, August, 1981.

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PART III

THE ECONOMIC CONTEXT

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Chapter 7 THE ECONOMIC IMPLICATIONS OF INFORMING AND CONSULTING EMPLOYEES IN MULTINATIONAL UNDERTAKINGS by Professor Sylvain PLASSCHAERT

INTRODUCTION This paper was first prepared for the symposium, organised by the Trans-European Policy Studies Group and the Institute for Research on Multinationals, in Brussels, in May, 1982. Accordingly, the contents of the paper relate to the Vredeling proposal in its original version, as proposed by the Commission on October 24, 1980. The final version of this paper has benefited from comments made by participants to the Symposium, who obviously should not be held accountable for the views expressed here. In the meantime, the Vredeling proposal has undergone some substantial alterations in the European Parliament where a large number of important amendments have been adopted. The Commission, in its "final" version, submitted on June 15, 1983, has taken some of those amendments into account. The final version is much shorter than the original one; despite the numerous changes, the basic framework of the proposal, however, still stands out. In its present shape, this paper is still predicated on the initial draft of the Vredeling proposal. Although some references to the final version of the Commission•s proposal have been inserted in the text and in the footnotes, it was not deemed advisable to rewrite the text in the light of developments since the proposal was first submitted by the Commission in 1980. There are three reasons for this attitude. First, the items covered in this paper generally go beyond those that are related to particular articles of the proposal; only in Section 5 are two individual provisions of the proposal discussed in depth. The paper focuses on some issues which, in the view of 187

this writer, are fundamental and which have not been sufficiently heeded. Second, while I accept the claim made by the Commission and Workers' organisations that, in given circumstances, employees at the subsidiaries' level should be entitled to obtain information and even to engage in consultation with the management of the multinational enterprise at headquarters, it is also contended that the framework, outlined in the Vredeling proposal (even in its final version), cannot be viewed as the most efficient one to secure such objectives. In other words, this paper discusses issues which largely transcend particular draft points. Last, not least, judging from reactions (mainly from organisations of employers), the text, submitted by the Commission in June, 1983, does not seem to have restored peace in the rather fierce debate about the Vredeling proposal. Hence, the text of the Directive, which would ultimately be adopted by the Council of Ministers may differ from that presented by the Commission. However, such adoption is not expected to take place in the near future. As long as that ultimate stage is not reached, the Vredeling proposal is likely to stir further controversies and cannot be considered as closed. 1 - SCOPE AND FOCUS OF THIS PAPER In this paper, I approach the above subject matter from a basically economic viewpoint and much less in political or social terms. My concern is with the economic significance and implications of (a) information, forwarded by the "dominant" unit as it is called in the original. Hereafter, I will refer usually to the "parent company" or to "headquarters" to employees or more often to representative unions ~ in foreign subsidiaries or branches (the distinction between these legal forms or affiliates is of minor relevancy to economists and will not be maintained hereafter) and of (b) consultative arrangements between the same parties. To avoid misunderstandings, some comments about the relationship between economic and social policy are in order. No responsible economist would hold that such eminently economic categories as high productivity, optimal allocation of investible resources and an adequate profit performance of a firm can be divorced from social aspects, such as enhancing the material and psychic 188

welfare of employees or that the latter must remain subordinated in all respects to the former. In fact, a higher level of production is not an end in itself but a step towards and a precondition of better living standards of the population. These connections between economic and social aspects also carry an important implication. A favourable "social climate" and satisfactory "industrial relations" are conducive to a better economic performance of a firm. Co-operation within the firm between the various sub-groups of producers is also advisable as they all have a stake in the preservation and the growth of the firm on which their livelihood depends. Yet, it cannot be denied that employees and employers exert competing claims on the value added within the firm; in the present context, the latter concept must be viewed not only in its financial dimension but also contains elements of psychic income, such as improved working conditions. Differences of opinion and clashes of interests may result in a sharp strife: preferably, they should be resolved through mutually agreed and more or less rational procedures; this is precisely what collective bargaining arrangements are about. This paper was prompted primarily by a feeling of dissatisfaction about many of the arguments which are brought to the fore by opponents and defenders of the (initial) Vredeling proposal and which tend to be put predominantly in legalistic categories or in terms of political postulates. Hence, this attempt to correct the neglect of economic considerations in the discussion. lt looks for guidance that may emerge from a brief analysis of typical patterns of management in M.N.E., on the one hand and of the "economies of information" , on the other hand. In other words, insights derived from "positive" economics may be helpful in arriving at some "normative" statements about the wisdom of the rules contained in the Vredeling proposal. I propose to concentrate on three fundamental aspects of the problem: (a) how the problem of inadequate information arises at the local subsidiary level, within M.N.E (Section 2 ) . (b) in which fields decisions tend to be taken, either at the level of the subsidiary or at the parent company level. (Section 3) • 189

(c) what may be the usefulness and the use of information conveyed by parent companies to unions at the subsidiary's level (Section 4). This is followed, in Section 5, by comments on the contents of the information flow envisaged in the Vredeling proposal, before summarising, in Section 6, the main conclusions that emerge from this paper. 2 - THE "PROBLEM" IN ESSENCE Bargaining between management and labour unions about wages and other facets of industrial relations occurs on the level of the plant (or segments of the plant's workforce, as is widely the case in Great Britain), the company as a whole, a given economic sector or even country-wide. The relevant point for our purposes, however, is that the arrangements which follow from collective bargaining only apply within the particular country concerned. The "territoriality" rule would create no problems whatsoever if each productive unit or company were a self-contained entity. But this is not the case as regards the foreign subsidiaries of M.N.E. The latter consists of a set of geographically-distant subsidiaries which, while subject to different national jurisdictions, share a common purpose and a common strategy that are determined by the parent company . It follows that, when negotiating, the local union (i.e. the one operating at a level of a given subsidiary) would be put at a disadvantage, to the extent useful information about matters which do have a material impact on the condition of the subsidiary's employees are only available at headquarters and are not being disclosed to the union's representatives. Each of the above provisos, of course, is important. But, before we move to them, let us illustrate our problem by reference to a hypothetical and rather extreme case. Let us suppose that in a given host-country A, the managers of the local subsidiary enjoy no managerial autonomy whatsoever and are teleguided by top managers at the parent company. Not only strategic matters but even day-to-day problems would be decided upon at the parent company's level. In such a highly-centralised M.N.E., the overall profitability of the M.N.E. as a whole would prevail over the interests of the local

190

subsidiaries. Some of those "system-optimising" decisions in local subsidiaries may be highly artificial; to exemplify one strategem consists in over-invoicing the price of sales by the parent company to the subsidiary, if the corporate tax burden in the home country happens to be lower than that in the host country. The profit performance, as officially reported, of the foreign subsidiary would thereby be negatively affected. (1) If adequate information about the overall firm and the inter-relations between the various units were not available to the local trade union, the .latter would be put in a weakened bargaining position, as it would only be able to view one segment out of a much wider structure. This is admittedly a rather extreme hypothesis, as strictly centrally-managed M.N.Es appear to be rare. But the exa.mple highlights the basic question which was specified a moment ago, viz. to what extent and in what fields are decisions relating to foreign subsidiaries left to the discretion of the local managers or, inversely, "delegated upwards", so to say to the managers at headquarters? 3 EMPIRICAL EVIDENCE DECENTRALISATION MIX

ON

THE

CENTRALISATION-

Obviously, the actual degree of (de)centralisation within M.N.E. can only be assessed by empirical evidence. Ideally, adequate research should give us clear-cut answers. Yet, available findings are not as unambiguous as one might wish. First, the actual ways of doing business and of managing complex, internationallyinvolved firms are highly diverse, so that no single pattern emerges. Besides, there is a dearth of adequate information. This can be partially attributed to the complexity and vagueness of the very concept of (de)centralisation itself. According to reliable research few, if any, firms can be labelled either as fully decentralised or as tightly centralised. (2) Actual practice usually lies somewhere in between these two poles. Besides, the control-autonomy mix also often fluctuates somewhat over time, as a result of dissatisfaction with the present pattern and/or of evolving views of top management. The mix appears to be the object of frequent and often inconclusive experimentation. 191

When questioned, top managers at headquarters level profess that, as a matter of principle, they favour a decentralised pattern of decision making. This is largely based on the merits of the "profit-centre" management philosophy, whereby units of an M.N.E. are instructed to strive for maximum profitability and are held accountable for their performance. Decentralisation or delegation of authority to managers of local subsidiaries is primarily predicated on the need to preserve morale and to stimulate ini tia ti ve; in other words, the emphasis lies on the optimum use of human resources and the maximum job satisfaction of the local management. Moreover, in a large organisation, as in a giant M.N.E., tight central management anyhow would provide unwieldy and counterproductive. (3} It logically follows that the parent should not interfere with the operations of subsidiaries. (4) But this decentralisation goal is, in practice, only imperfectly achieved. The various functions, performed in present-day M.N.E., typically display varying degrees of (de)centralisation. Besides, a decentralised set-up is likely to be actually less consistently implemented than is perceived by top management. And, finally, for control purposes, the subsidiaries are requested to report regularly to headquarters. Analysis of actual practices reveals that often managers at headquarters tend to intervene more frequently and more deeply into the affairs of the subsidiary than they themselves perceive. Consequently, managers of the foreign subsidiary resent what they experience as an excessive meddling by headquarters staff in their own affairs, whereas the latter "are likely to think that they delegate more than they do". (5) Advice from upper echelons may contain an amount of pressure and even verge on a mandatory order. One is led to surmise that, contrary to biology where the "function creates the organ", in social dynamics, the organ readily generates its own functions that encroach on those of other organisms. Managers at headquarters look over their shoulders at the affairs of the subsidiaries more than is required for harmonious inter-company relationship and for achieving efficiency. Frequent reporting of actual and of projected performance to headquarters is a widespread and an exacting obligation on foreign subsidiaries. These 192

reporting commitments derive less from planning requirements than from control considerations. Modern computer and telecommunications technology facilitates such substantial reporting. The latter is rationalised by the need for headquarters, (a) to obtain intimate knowledge about the state of affairs in each subsidiary, in order to map adequate overall strategies (b) to ensure that subsidiaries keep within their allotted budget, (in this respect, the annual budget involves an obvious constraint on the autonomy of the subsidiary) and (c) to prepare consolidated accounts, for the M.N.E. as a whole, on the basis of uniform accounting standards, which transcend discrepancies amongst countries in accounting practices. Admittedly, frequent and extensive reporting to headquarters does not, in itself, curtail the operational autonomy of subsidiaries but the flow of information is likely to induce somewhat more follow-up and interference by the parent company than the subsidiary may feel just.ifiable or than objective needs require. Even in an M.N.E., which intends to stick to the decentralisation-cum-profit-centre-philosophy, some paramount decisions will almost certainly remain the preserve of top management at headquarters. It is almost inconceivable that, in successful M.N .Es, subsidiaries would enjoy full autonomy, with respect to major, new investments, even if they were capable of financing those outlays out of their own cash flow or out of borrowings on the local financial markets. As a minimum, such investments will have to be approved by the parent company. Co-ordination is a task which the parent company cannot forego. Thus, the market perimeter of each subsidiary tends to be strictly delineated, otherwise the production of one subsidiary may affect the sales opportunities of another subsidiary. Generally speaking, Research and Development activities tend to be highly centralised: such activities typically occur at or near headquarters. Economies of scale, the intimate link between invention and test runs of new products - and their strategic significance for the growth of the firm largely explain such concentration in the home country. Besides, new products most often tend to be launched first in the home-country market, especially when the market is a large one. (6) To the extent research and development activities 193

occur abroad, they relate rather to applied than to basic research. (7) The finance function also tends to be highly centralised, at least in several important facets. Thus, the monitoring of exchange positions is typically entrusted to central or regional specialised staff. As a simple example will show, such centralised approach to exchange management naturally commends itself. Suppose that subsidiary A has a claim in Brazilian cruzeiros whereas subsidiary B has incurred a debt of equal amount in the same currency. Viewed globally, the M.N.E. has no exposure in cruzeiros whatsoever and would be ill-advised in allowing each subsidiary to take protective action to avoid exchange risks. Outside the field of exchange transactions proper, there are other circumstances in which centralised financial management may be profitable. Thus, by way of pooling liquid funds with one member of the multinational family, somewhat higher interest rates may be negotiated on deposits. Or, subsidiary C, with ample cash resources, may be instructed to channel funds to cash-hungry subsidiary D elsewhere, thus obviating the need for the latter to borrow more expensively in the local financial market. One may surmise that the financial area lends itself rather well to a "systems approach", in which the overall results of the M.N.E. take precedence over the profit performance of individual units. As a matter of fact, money funds are internationally much more mobile than other factors of production, especially in today's highly integrated financial markets. (8) Other business functions, on the other hand tend to be largely left, both in design and implementation, to the local management of foreign subsidiaries. This is the case with marketing activities. Frequently, for sophisticated products, after-sales services must be provided to the customer, in his language and the adaptation to local tastes of consumer goods may be prerequisite for successful market penetration. One must notice, however, the strong, almost world-wide appeal of given trademarks. Two functions are directly relevant to the relationship between M.N.E. and trade-unions: these are the personnel and the production functions, respectively. The personnel_ function or more broadly that of labour relations, so far, has remained embedded in the specific pattern in 194

which such relations have evolved in each country, in the light of the political and trade union constellations or traditions, legal prescriptions and economic circumstances. Even within the E.E.C. area, one notices a rather bewildering variety of situations and attitudes (compare the contrast between basically co-operative and conflictual relationships). According to most observers, international trade unions and enterprise or sector - based international secretariats of trade unions have not yet succeeded in opening the doors of top management at the headquarters of large M.N.E.s, for meaningful negotiations about global labour conditions in a given region of the world. This confirms the basically national profile of wage (and of productivity) levels, of social policies and of patterns of collective bargaining. ( 9) The highly decentralised procedures of personnel and labour policies come as no surprise: labour is the least mobile of all production factors. Finally, we must discuss production itself. M.N.E.s are usually defined as firms which are engaged in production, not only in their homes but also in foreign "host" countries. It follows, almost tautologically, that production is decentralised within the M.N.E. But this production is linked with basic decisions at the parent company level. Thus, the product-portfolio of the subsidiary derives from the innovation policies of M.N.E. and is shaped by research and development activities which, as already mentioned, tend to be highly centralised in the home country. So far, we have focused on the locus of decision making within the M. N. E. , as the distinguishing feature of the (de) centralised pattern of management. This already illustrates that the managerial functions within M.N.E. are typically characterised by varying degrees of centralisation. Hence, the fairly popular claim that management within the M.N.E. is highly centralised needs substantial qualification - not to speak of governmental interferences, such as the imposition of the joint venture format in several developing countries, which naturally tends to weaken the reach of the parent over its foreign affiliates. Besides, although difficult final decisions are often the responsibility of given persons or committees, the decisions process does not correspond to a clear-cut one-way street, from the top downwards. 195

Even a highly centralised and well-managed M.N.E. which cares for the efficiency of its foreign subsidiaries is likely to heed the observations of and to consider proposals submitted by the subsidiary. Conversely, as already noticed, even within a highly decentralised framework, headquarters often exert considerable indirect influence on decisions, which are formally taken at the level of the subsidiaries. Thus, wage negotiations may be constrained by the subsidiary's budget which has to be approved by the parent company. In short, there exists a wide spectrum of channels through which either the subsidiary or (more often) the parent company affects the final decisions which, in principle are entrusted to the other level. Finally, the decentralisation philosophy, if consistently adhered to, requires some monitoring by the parent company, for purposes of overall strategy and co-ordination. It was stressed earlier that the degree of (de)centralisation varies substantially amongst M.N.E. Scientific research, naturally, attempts to identify variables which explain such differences. Apart from those already discussed, the nature of the products sold appears to be relevant: when products must be adapted to circumstances in the various host countries, a decentralised set-up of management is more likely. Also, European M.N.Es tend to grant more autonomy to their subsidiaries than American M.N.Es(lO) 4 - THE USE AND USEFULNESS OF INFORV.tATION Which are the conceivable uses for the information which, according to the Vredeling proposal should, in given circumstances, be forwarded by the present company to representatives of the employees in host-country subsidiaries? An answer to this question affords some "normative" conclusions about usefulness of providing such information. Three possible uses of "Vredeling" information, it seems to me, can be identified, viz. (a) to facilitate fair processes of collective bargaining, (b) to improve the efficiency of operations in the M.N.E. and (c) to increase the (economic) power of the parties involved. Let us start with the latter.

196

A.

Information as a vector of power Power is a rather loose concept. Power elements have been utterly neglected in economic theory, until recently, as if economic agents possessed equivalent endowments and as if they were interested only in seeking economic wealth and not economic power, for its own sake. (11) Yet, most economists, no doubt, could broadly agree with a definition of (economic) power as "the ability to influence the behaviour and position of other economic agents". Appropriate information can be an important ingredient of power, as just defined. When an economic agent maps action, it allows him to take into account the variables which shape the outcomes and, accordingly, to reduce the uncertainties of decision making. By holding back important information to opponents, one strengthens one's own position. Put differently, when information is no longer "internalised" but is diffused to outside agents, such knowledge becomes a "public good", i.e. a good whose "consumption" by one person does not exclude the enjoyment of the same good by other agents; when knowledge has become public (i.e. "publicised"), it loses much of its value to its previously exclusive owner. (12) These insights from the "economics of information" (or "knowledge") can also be applied to the complex relationship between employers and their employees. Firms want to keep "knowledge" (perhaps embodied in means of production) secret, lest the lead which the firm hopes thus to achieve over its competitors, be eroded. This is particularly relevant for oligopolistic markets - a typical configuration for large M.N.Es - in which one competitor must design his moves in the light of the actual or the anticipated actions of his rivals. Protection of confidential information is, in fact, enforced by the laws in most industrial countries. Patent legislation establishes a legal monopoly for new products and processes over several years~ stimulating invention and innovation is then held to prevail over the social welfare losses that are associated with monopoly in product markets. Besides, in many countries, employees are by law committed not to divulge such confidential information. On the other hand, unions and management are also opposed in the contest for the distribution of the firm's value-added. Hence, employees' representatives will seek more relevant 197

information to strengthen their negotiating position. But this already refers to the first conceivable use of information, listed above and to which I turn in a moment. It is conceivable that power is sought for purposes which transcend the issues of labour relations, proper. It may even be solicited for power's own sake, for the self-gratification which "running the show" bestows on those persons who operate at the upper echelons of the political or economic pyramid. Thus, trade unions or employers' organisations, directly or through political lobbying and alliances with political parties, endeavour to enhance their ability to influence political matters. Or labour unions may reject the prevailing socio-economic framework of society and strive for its overthrow. (13) The collection of information, (including "inside insights" into the corridors of power), although only a poor substitute for the occupation of power positions, strengthens the hand of the contestant. KUJAWA views the "generating and sharing (of) industrial relations data among different national/local unions" as the first-stage activity of international labour organisations and of related international trade secretariats, in their response to M.N.Es(14) The collection and diffusion of such information is primarily meant to strengthen the negotiating stance of trade unions; as such , it belongs to item (B), to be discussed next. Thus, precise knowledge about the production interdependencies within given M.N.Es when components of the end-product are being manufactured in various countries - may enhance the chances for "solidarity strikes" in other subsidiaries of the same M.N.E. (15) B.

Facilitating "countervailing" union power At a more general level, international trade unionism, i.e. joint or co-ordinated actions between trade-union representatives of the various subsidiaries, is being advocated as a "counter-weight" to the power of M.N.E. This is the avowed objective of some trade-union movements, as witnessed by the Mexico (1975) Declaration of the International Confederation of Free Trade Unions. In a well-publicised book, "Le contre-pouvoir syndical" (1974), Levinson, Secretary General of the International Federation of Chemical and General Workers' Unions, has mapped the subsequent 198

steps towards establishing such "countervailing power" viz. the "co-ordination of simultaneous collective bargaining in various host countries and ultimately the negotiation of global collective agreements for the M. N. E. as a whole". Public authorities, such as the E.E.C. in its 1973 memorandum on "Multinational Undertakings and Community Regulations", also view "the setting up of a trade union counterweight as essential for a balanced solution (to this problem)". The E.E.C. is willing to "encourage" it. This is not the appropriate place to discuss this complex matter in a detailed fashion. Suffice it to say, prospects for reaching the ultimate stage of overall collective agreements are admittedly very remote, as long as economic and social conditions substantially differ between countries. Even within the E.E.C., the march towards this final destination of E.E.C.-integrated trade unionism will be a very long one. To the extent the search for power extends beyond employment matters proper and verges on the attainment of political power, 'there is not much that economists could contribute to the debate. Choices about the organisation of society would have to be made basically in terms of political ideologies. At best, economists are capable of assessing the comparative drawbacks and merits of al terna ti ve socio-political systems, in terms of implicit standards of efficiency and equity. C.

Ensuring fair bargaining This use of "Vredeling" information, whilst somewhat connected with the general aims already discussed, is logically distinct from it. It is also well known and unquestioned in its basic principles. Effective and fair collective negotiations can only occur if the two parties to the negotiation have at their disposal adequate information about relevant facts. Equal opportunity in access to information, which is needed to conduct the bargaining in "good faith" (the expression coined in American labour law), must be secured. This implies that management provides such data, without which fair negotiations are not achievable. Top management at the parent company possesses some highly important information, which may not have been made available to the managers of the subsidiaries. Major future courses of action are also decided upon at headquarters. 199

As shown in Professor BLANPAIN's paper in this volume, in most countries, at the national level, legislation has been enacted or procedures have evolved to implement such equivalent access to information required for fair collective negotiations. But, our specific concern here is whether extra information should be procured by the parent company. Here again, the principle of "equal access to relevant information" requires the provision of such additional information, which is available only at headquarters and whose lack would put the local unions at a disadvantage in their dealings with the management of the subsidiary. Recognition of this basic principle, however, does not necessarily imply an uncritical attitude vis-a-vis the detailed modalities of legal instruments aimed at improving Job Satisfaction and Performance. Finally, the provision of information to employees aims at 1mproving the productive performance of individual employees, of teams of workers and of firms as a whole. When employees understand better what is expected from them, when they sense how their specific task relates to that of their colleagues, responsibility and self-respect are enhanced. Greater job satisfaction contributes to a more congenial social climate and to higher productivity. Such "job enrichment", through adequate information, has become even more advisable today in Western societies, as the level of education of employees (including blue-collar workers) has been cpnsiderably uplifted in the most recent decades. Hence, employees have raised their aspiration levels and demand psychologically more rewarding jobs; they do not want to be treated as robots but as human beings. How does the issue of greater job satisfaction and higher productivity through more adequate information and "formation" relate to our specific subject-matter? The following considerations appear in order. First, as can be expected a priori and as evidenced by some empirical research, M. N. Es display, so to say, a dialectical process with respect to styles and procedures of management. In many M.N.Es, strong opinions about the excellency of the parent's practices tend to induce the transplantation of such methods to the foreign subsidiaries. Whether such transplanted procedures are always successful in an alien environment is questionable (16); but, as already 200

stressed, patterns of work organisation are still predominantly shaped by local parameters and traditions. The final outcome is likely to blend local and foreign procedures in the field of labour relations. Second, in large firms at the shop-floor level, the rank and file of employees' by and large, are much more concerned about specific patterns of work organisation than about general development in the firm, provided they feel assured that such developments do not threaten their security and their level of remuneration. Data about the overall firm, which may be of a more abstract character (e.g. some financial concepts which, as various enquiries have shown, are badly understood by the general public) are likely to be less solicited by the rank and file than information about their concrete daily tasks and immediate work surroundings. One may regret this apparent lack of interest in the more general aspects of the business. Both the general improvement of educational and training levels and the endeavour of trade union delegates narrow somewhat this gap in understanding. But, realistically, one must accept that most human beings understandably are concerned about those parameters that influence directly their standards and conditions of living. A fortiori, in large M. N. Es one must expect that in normal circumstances shop-floor employees will be considerably more aloof to global developments in the overall M.N.E. and to events in other "sister" subsidiaries, especially if the latter are distant ones. Hence, they will be less eager to obtain detailed information on the global M.N.E. or on other units thereof. Such data, anyhow, are usually more difficult to comprehend than those relating to one's own subsidiary. However, the problem is significantly different for supervisory staff or "cadres". Their very managerial job, of which the essence consists of co-ordination(17), requires a wider perspective on interrelated enterprise functions. They also usually attain a higher level of training and of ability to deal with abstract matters; they are more attuned to international horizons. Hence, one may surmise that the upper-management echelons in subsidiaries are eager to obtain a proper understanding of the overall strategy of the M.N.E. and of the interconnections between headquarter's 201

and subsidiaries' operations. In this respect, it is symptomatic that surveys suggest that, while cadres in M.N.Es typically exercise jobs at higher levels of sophistication, are frequently better paid and enjoy ample opportunities for further management training, the overall job satisfaction tends to be lower than in uninational small and medium-sized firms. In M.N.Es and more particularly in centrally-managed ones, they have less scope for own initiative than in a small, family-type firm. (18) More empirical evidence would be required to ascertain to what extent the lack of proper top-to-bottom information accounts for such job dissatisfaction with managers of local subsidiaries. The Swedish study, referred to earlier in note (5), mentions this element. Other aspects, such as the excessive flow of bottom-to-top reporting and, above all, the constraints on one's initiative aDd managerial autonomy, may well be even more relevant. One must add that cadres are in the ambivalent and rather uncomfortable position of being both employees, subordinated to top management and part of managerial ranks vis-a~vis lower-level employees. If the above analysis is correct, it would follow that this "higher performance" argument in favour of providing "Vredeling information" is less relevant to our analysis, as (a) problems of work scheduling and of job enrichment would normally be treated at the level of each subsidiary; these items, anyhow, usually entail less opposition between management and unions; and (b) unions primarily defend the lower-level employees, which are by far a larger group than that of cadres. 5 - FURTHER COMMENTS Before drawing some conclusions about the appropriateness of the Vredeling proposal, I offer some additional comments on two sensitive items in "the table of contents" of the information flow prescribed by the initial Vredeling proposal. A.

Investment and Disinvestment Decisions Articles 5 (information) and 6 (information and (possibly) consultations) have raised substantial controversy. A major issue, in my opinion, is whether and to what extent unions should be informed about and be in a position to 202

affect decisions about investments and disinvestments {Article 6). Decisions about productive capacity have a major impact on employment. "Capital widening", i.e. the enlargement of production capacities, whilst maintaining the prevailing capital-labour ration, should obviously not create any problem with trade unions in the prospective host country. {19) But the cases of outright closure or bankruptcy of a given production unit and of "capital deepening" (i.e. the adoption of more capital-intensive production methods), which imply a reduction in the number of people, directly employed in that production line are obviously different. Let us, therefore, concentrate on disinvestments and on rationalisations. Incidentally, such decisions apparently loom largest in the considerations advanced by the supporters of the Vredeling proposal. Closure of production units, lay-offs of employees, the transfer of one unit or one line of business to another company are no longer exceptions, especially in the present crisis. Such events in large M.N.Es and in large domestic firms (witness the steel sector) , as well - receive ample publicity and easily mobilise public support for governmental subsidies. Yet, available data indicate that the loss of employment is lower for M.N.Es, viewed as a group, compared to uninational firms. (20) This is not surprising, as, in general, firms tha~ have been able to establish production abroad must be expected to display competitive strength. Such decisions clearly affect the livelihood and the welfare of employees. It is morally unacceptable that employees of a foreign subsidiary would be told, without any form of warning, that their unit will be closed. The basic principle of the (original) Article 6, therefore, cannot be faulted. Employees, through their delegates, should have the right to be duly and timely informed and consulted about such grave decisions. This principle should be applicable not only to M.N.E. but also to uninational firms. The organisational structure of M.N.Es calls for special arrangements. Decisions about investments and disinvestments are typically taken at M.N.E. headquarters; only top-managers have an overall view over the M.N.E. and can assess the advantages and drawbacks of alternative locations and courses of action. To 203

counteract conceivable concealment manoeuvres in M.N.Es, whereby the parent company does not inform the subsidiary about such major decisions or the local management of the subsidiary falsely asserts that it has not been informed, the rule of the (original) Article 6, paragraph 5, whereby union representatives are entitled to "by-pass" local management and to obtain s~cure access to the decision makers at headquarters, is also warranted. (21) According to the (original) Article 6, the employees and the union of the affected subsidiary are entitled to provoke a consultation with the parent company but cannot veto such a decision. This is a wise rule and probably. an inescapable one, indeed. However painfully disinvestments bear on the employees concerned, to go beyond the right to be consulted and to grant to unions the prerogative of having a decisive voice or of exercising a veto would have unfavourable effects on firms and on the economy at large. As a matter of fact, in order to survive and flourish, firms cannot forego the need, at times, to readjust their production functions .to new circumstances. This may involve the abandonment of obsolescent production techniques. Such "creative destruction", in SCHUMPETER's celebrated words(22), usually implies some direct lay-offs in the enterprise concerned. Artificially to keep moribund enterprises alive, by way of budgetary subsidies, minimises social disruption in the short run but at the cost for society often proves unsustainable and does not even ensure the survival of the subsidised firm. The need to preserve flexibility in the allocation of financial and real resources, in fact, transcends the framework of the free-market, "capitalist" economy. Let us assume, for a moment, that all major firms in the E.E.C. were self-managed (by the employees) or co-managed (with them). Considering the seemingly irreversible trend towards multinational involvement by a growing number of firms, we may then hypothetise that most of those large firms would have production units outside their home country. It can safely be predicted that multinational self- or co-managed firms would also occasionally be led to reshuffle the deployment of their resources and to impose lay-offs; such disinvestment decisions would have to be taken by the managing board at the headquarters of that firm. 204

Whilst the basic principle of Article 6 must be upheld, there are none the less some elements in Article 6 which, unless corrected or specified, may create problems. Two are mentioned here. First, such consultation is likely to prove delicate in some respects: thus, communications by top management about unfavourable developments in the firm may when publicised, further jeopardise the chances for redressing the already battered firm. Hence, the secrecy requirements in Artie le 15 of the (original) draft proposal would have to be strictly observed by the local union. Yet, one may remain sceptical of whether, in an understandable climate of anxiety about the likely loss of jobs, confidentiality can really be preserved. (23) Second, the consultation procedures of Article 6, in the initial proposal, may carry the risk of "filibustering". The text does not specify a maximum period after which the views of the employees must have to be submitted. While a reasonably long period should be granted to unions to that purpose, in the uneasy atmosphere surrounding closures and rationalisations, delaying tactics by the unions or by the "base" are conceivable. The basic purpose of Article 6, to use the wording of the O.E.C.D. Code, is to " ••. co-operate with the employee representatives and appropriate governmental authorities so as to mitigate to the maximum extent practically adverse effects". The Vredeling proposal could have been more precise in this respect. If implemented, the proposal will put to a severe test the willingness of unions and management to engage in a sincere and constructive dialogue. Otherwise, the open-ended consultation rights of Article 6 may escalate into an unwarranted invitation to obstruct the decision-making process in the M.N.E. (24) B. Information on the Overall Multinational Enterprise Another comment addresses itself to Article 5 of the initial proposal, which prescribes the provision of information that is apt to "give a clear picture of the activities of the dominant undertaking and its subsidiaries taken as a whole". (25) In a strict and literal interpretation, this implies that data should be submitted on a consolidated basis. One may doubt, however, whether consolidated data are really of much use for the purposes at hand, i.e. to be informed about 205

possibly adverse decisions and to ensure the fairness of collective bargaining at the level of the subsidiary. Consolidation, by definition, does not display but "washes out" the internal transactions, i.e. those amongst members of the same multinational family; in large M.N.Es, the impact of top-level decisions which are directly geared towards subsidiary A may only have a tenuous link with the affairs of subsidiary B. Let us illustrate both points by two hypothetical examples. The statement in the consolidated report of an imaginery major M.N.E. that overall employment has been kept stable at, say, 100,000 employees worldwide does not convey much relevant information for the employees of the subsidiary A in a given E.E.C. country, in which the number of employees is being reduced from say, 1,000 to 500 persons. Admittedly, in an M.N.E., as elsewhere, "all is in all" and decisions about one subsidiary affect indirectly other subsidiaries. Thus, by definition, funds retained by the parent company or borrowed in international capital markets and allocated to investment projects in Brazil are not available for additional investments in, say, Belgium. But, most likely, such extra investment in Belgium anyway would never have been contemplated. In this connection, it is worth recalling that available statistics clearly indicate that direct foreign investments are overwhelmingly geared to the individual national market of the host countries. Especially in M.N.Es, with a highly decentralised pattern of management, the events in one unit are not perceptively connected with other subsidiaries. In a second fictitious example, a major company has, over the years, reported consolidated profits of around $200 million. In subsidiary B, unions are involved in wage bargaining with local management. A persistent loss position in B would rightly evoke the suspicion of the unions. As a matter of fact, in the longer run, a firm would and should not maintain in operation a subsidiary which genuinely and permanently generates losses. Is the outcome of that subsidiary artificially pushed into the red in order to dampen wage claims in subsidiary B? Or do other objective reasons such as the fact that the subsidiary is only a "cost centre" (for example, it involves only research and development activities) and not a "profit centre" explain the loss position? Consolidated statements 206

would not shed any light on the problem at hand: some additional specific information would have to be provided and discussed in frank meetings between local management and the unions. The expression " •.• taken as a whole", in the (original) Article 5 of the Vredeling proposal, is not a paragon of clarity. Some interpret it to mean that the M.N.E. should provide "analytical" details on individual subsidiaries instead of the "synthetic" view, inherent in consolidated statements. This would, no doubt, considerably broaden the flow of information. To impose an obligation to disclose all such facts, however, involves, especially for large M.N.Es, a paper mountain which would only produce a mouse of relevant information to the subsidiary•s unions for the purposes at hand. Again, only rather exceptionally will information about say, the subsidiary in Brazil or even in France, prove to be relevant to the subsidiary in Belgium. The preceding observations should not be interpreted to mean that consolidated statements are of no use whatsoever. Their disclosure is well entrenched in the U.S.A. and is spreading in European countries. (26) They are highly useful in informing the financial investment community; they are also an indispensable management tool for monitoring the overall course of the enterprise. They convey a general profile of the M.N.E., viewed as a whole. If complemented with other data, such as those prescribed in the O.E.C.D. Guidelines (which also contain the expression "enterprise as a whole" but complement that term by way of itemising some of its specific contents), various structural features of large enterprises are revealed. Such information also contributes to pierce the aura of mystery which, in the perception of many, surrounds the M.N.E. In sum, the disclosure obligations of Article 5 about the firm as a whole suffer from two serious defects, as to the contents of the information flow envisaged. They overshoot their target, by unnecessarily requiring an amount of information, the usefulness of which must be seriously questioned. But, at the same time, in those relevant cases in which the behaviour of the M.N.E. may be suspected of abuse, the proposals are not quite appropriate; specific information about relevant aspects, which lie outside the general "consolidated" data or are buried within them, are called for. 207

6 - SUHHARY AND CONCLUSION The Vredeling proposal has so far stirred an astonishing amount of controversy, probably more than any other E.E.C.-proposed Directive. The two main protagonists in the heated debate, the trade unions and the employer's associations, are not on speaking terms on the matter. In the political arena, the positions are strongly polarised as was the case in the European parliament. To the outside observer, symbols appear to have been substituted somewhat for substance. To trade unions, implementation of the Directive is considered as a must, as if the proposal can make a major contribution to solving Europe's serious problems of low growth and high unemployment. To employers, the proposal is anathema as if it is going to destroy the very foundations of free enterprise. The debate, instead of being based on sound arguments and constructive attitudes, has escalated almost into a political power struggle rarely a solid foundation for rational solutions to a complex problem. It follows that, even if the Vredeling proposal is pushed into binding legal norms to the satisfaction of the "majority", the conviction will linger on with the "minority" that the proposal has been imposed and still contains unacceptable features. Such a prospect does not bode well for the future of regulations, whose successful implementation depends as much in the spirit displayed by the parties involved as on the letter of the law. This paper voices a number of serious criticisms of the Vredeling proposal, as originally submitted; since then, the proposal has been amended, in some respects. But I seriously doubt whether such improvements are capable of turning the proposal into the most effe.ctive vehicle to attain the important, although limited objectives, which the Directive pursues. It would seem, to this writer, that the 1976 Guidelines of the O.E.C.D. contain a less cumbersome and yet a more efficient instrument to the same ends. These various issues are briefly covered in this last section of the paper. The Vredeling proposal essentially deals with two topics. First, the (initial) Article 5 provides for binding rules and machinery, whereby headquarters of the M. N. E. must inform the employees of foreign subsidiaries about the general course of business of the M.N.E. "taken as a 208

in principle, this information must be channelled through the management of the local subsidiary. Besides, when headquarters are contemplating measures which are likely to have a direct effect on the employees• terms of employment and working conditions, according to the (initial) Article 6, not only must the parent's headquarters inform the employees of the subsidiary but it should also engage in consultations with them, when so requested. The very essence of M.N.Es and their ways of functioning create or rather are likely to create some problems in this area. First large M.N.Es are complex entities; they consist of a parent company and a number of affiliates, spread over many jurisdictions. To the common citizen, the structures of such M. N. Es are not sufficiently transparent. Hence, there is a need for adequate disclosure of data and qualitative information about the M.N.E. as a whole. Financial statements, on a consolidated basis, are standard practice in the U.S.A. and are spreading in Western Europe; they cater mainly to shareholders and the financial community and require, for proper interpretation, familiarity with complex accounting rules and other technical matters. Such statements are ex ~st, i.e. they report on past events; hence they are not directly relevant to the Vredeling proposal. Such general disclosure requirements are advocated in the O.E.C.D. Guidelines and in those, under preparation at the United Nations. Provided the requests are not excessive, such disclosure of a general nature must be welcomed. The second, more specific, problem is the one addressed in Article 5 of the Vredeling proposal: the M.N.E. i.e., the parent company, would have to inform the employees in each foreign subsidiary of some size about a number of specified i terns and provide a "clear picture" thereof. Someo of the information has an ex ante character: it must· cover "probable" developments; the initial test also specifically mentioned "investment programmes". Geographical and cultural distances and the sheer inertia of hierarchical structures encourage "communication perturbations" between subsidiaries and headquarters. Obtaining a better understanding of the overall objectives of the company, of its organisational structure and of the interrelations between one subsidiary and the other units can be viewed as a reasonable request by whole"~

209

employees of a given subsidiary. Provision of such information is also in the interest of the H.N.E., as it is likely to contribute to a better social climate and, hence, to higher productivity. An important point, however, is that, as evidenced in various enquiries, the rank-and-file of foreign subsidiaries are only remotely interested in what happens to the enterprise as a whole or in sister subsidiaries but are keenly concerned about the course of affairs in their own plant or subsidiary. It would follovl that there is no need for the avalanche of data which, according to one possible interpretation of the imprecise Article 5 of the (original) draft, would be forthcoming. The last problem and apparently the one that has given the strongest impetus to the Vredeling proposal relates to the information and consultations rights, anticipated in the (initial) Article 6. There exists, no doubt, a serious problem when employees in a subsidiary are informed about a major decision, such as disinvestments and rationalisations that affect them negatively, without proper advance notice and without the right to be consul ted and to air their opinions. Such decisions, in an M.N.E., tend to be taken at headquarters. However painful such decisions may be for the ~ployees concerned, the principle whereby they ultimately remain the preserve of management - and which appears to be upheld in the Vredeling proposal, although this not too clearly spelled out - is incontrovertible. Flexibility and adjustments to new problems and opportunities is a major condition for survival and further expansion of firms. Besides, only top management has an overall and well-informed view over the alternative courses of action. But top executives cannot claim monopoly over wisdom and the views of their employees may in given circumstances be useful and allow to contemplate alternative solutions. Besides and more importantly, the adverse effects on employees of such retrenchment of employment must be mitigated, to the extent possible. These are, it seems to me, the objectives to which one should address oneself and for which the most efficient solution needs to be found. However, in my view, the Vredeling proposal suffers from two major underlying defects- apart from more detailed criticism on the text proper, discussed in Section 1. First, it is apparently not based on an adequate analysis of how M.N.Es function. It implies the view that decisions tend to be 210

predominantly taken at headquarters ("the decision-making centre"). The original Article 2(c) defines the latter as "the place where the management of an undertaking actually performs its functions". But the degree to which decisions about functional activities are exercised at headquarters or, conversely, left to subsidiaries, differs typically amongst such functions. Apart from that, there are wide variations in the degree to which M.N.E. is centralised or allows for decentralised management of its foreign subsidiaries. Amongst the functions, labour relations are typically governed by national rules and habits and occur between the management and the employees (and their unions) of the subsidiary. Obviously, real problems may arise in the field of labour relations within the M.N.E., whenever local management is not allowed by headquarters to take such decisions in the field of labour relations. This, however, will be rather an exception than a general rule; the case of closures of production units comes to mind. One may ask, then, whether the heavy machinery proposed by the Vredeling proposal is proportionate to the problems at hand. The second major criticism relates specifically to the comprehensive,, uniform and legally enforceable charact~r of the Vredeling proposal, that would apply to all M.N.Es with operations within E.E.C. countries. The flow of information, prescribed by the (initial) Article 5, in principle, should be uniform in its contents, despite the tremendous variety in size, sectors of activity and degree of decentralisation among M.N.Es. The rules are meant to be compulsory. It is understandable that, within the E.E.C, in which harmonisation of regulations is being pursued, binding rules are the preferred medium for Community action. But, against that, the Vredeling proposal already runs into the objection of extraterritoriality, when e.g. American parent companies would have to comply. More importantly, it seems to me, enforcement in a rather uniform fashion of the Vredeling rules to a great number of M.N.Es (which, as statistics abundantly show, consist not only of the well-known giants) is likely to impose an unnecessarily rigid framework. The same objectives can be attained much more flexibly, by way of strengthening already existing E. E. C. regulations or by the application of existing guidelines, more particularly the O.E.C.D. ones. 211

As a matter of fact, with respect to collective redundancies, the E.E.C. Council has already issued a Directive on February 17, · 1975, whereby the laws of the Member States should be "approximated" so as to provide for consultation procedures 1n case of collective redundancies. While this Directive does not deal explicitly with such problems in the multinational area, its objectives and mechanisms correspond closely to those of the (initial) Article 6 of the Vredeling proposal. It should be possible to amend the 1975 Directive so as to incorporate the case of the M. N. E. As mentioned earlier in this paper, the O.E.C.D. Declaration on Guidelines for multinational enterprises instructs that reasonable no.tice be given to employees about changes in their operations which would substantially affect the employees and to engage in consultation ("co-operate with the employees' representatives and with governments") to mitigate the adverse effects. Incidentally, one may wonder to what extent the Vredeling proposal, if implemented, would be co-ordinated with other disclosure obligations which already exist, on the national level or those which are likely to be enacted internationally over the next years. Thus, one may mention the Seventh E.E.C. Directive, which calls for consolidated accounts and the disclosure requirements, which will form part of the United Nations Code of Behaviour (about which the obligatory of voluntary nature is still in doubt, with the latter being more likely) • O.E.C.D.-type guidelines present the appreciable advantage of devising "rules by exception", i.e. of tackling cases of abuse of power, instead of imposing new and probably excessive obligations on a large number of companies, thus penalising those which conform to high standards of social responsibility. Besides, they transcend the geographical area of the E.E.C. and hence allow to include also the large number of M.N.Es with headquarters outside the E.E.C. Admittedly, the O.E.C.D. Guidelines are "voluntary" and hence not legally enforceable. But in the words of BLANPAIN, in his commentary on the O.E.C.D. Guidelines, "the voluntary nature of the guidelines does not diminish their impact, if there is a political will between governments for them to have an. impact" and "voluntary does. not mean that M.N.Es are free to choose whether they accept the 212

guidelines or not. The guidelines constitute recommended behaviour". (28) One must not underrate their potential to prevent socially reprehensible behaviour. The public discussion of cases, brought before the competent bodies - in this case, the Committee on International Investment and Multinational Enterprises (I.M.E.) of the O.E.C.D. - in itself exerts a healthy dissuasion effect. It is also noteworthy that the cases, brought before the I.M.E., have almost all been initiated by trade unions and were related to various issues of labour relations, including those connected with closures and reorganisations. This is a field, in which the conflict of interests, the difficult trade-offs between social considerations and longer-term economic requirements do not always allow clear-cut judgement about where the rights and the wrongs are. This again argues in favour of standards of behaviour and, hence, of rules which would originate, so to say, from "case law" rather than from rigid "civil law". In due time, the norms evolved from pronouncements of the cases have the value of legal precedents and constitute a source of law. But, the impact of the I.M.E. type of proceedings could be enhanced, by turning it into a ·quasi-judicial body, whereby it would be empowered to issue pronouncements on the case submitted or to act as an arbitration court.

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REFERENCES (1)

(2)

(3)

(4)

( 5)

(6)

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Opportunities for transfer pricing gimmicks are not as unrestrained as this passage may suggest. More particularly, the tax status of dividends remitted in the home country and the interaction between tax treatment of the home and host countries must be taken into account. See PLASSCHAERT, S., Transfer Pricing in Multinational Enterprises. An Overview of Concepts, Mechanisms and Regulations, E.C.S.O.M. and Saxon House, 1979. For an excellent account of the (de)centralised issue, based on empirical research in depth, see BROOKE, M. and REMMERS, H.L., The Strategy of Multinational Enterprise, second edition, Pitman, 1978, Part 1. This is a major finding, with respect to financial management, of ROBBINS, S. and STOBAUGH, R., in Money in the Multinational Enterprise, Basic Books, 1973, Ch. III. Giant U.S.-based M.N.Es tend to operate by way of a "bible" of guidelines, prescribed to their subsidiaries abroad, not through management from the top. The relevant literature demonstrates that divisiona1ised enterprises, in which the various units act as profit centres, can only operate efficiently if the units have autonomous decision powers, are not held accountable for events beyond their control and pursue objectives that are congruent with those of the parent company. See BROOKE and REMMERS , op. cit. p. 7 6 • See also, with respect to foreign subsidiaries of Swedish M.N.Es, HEDLUND, G., The role of Foreign Subsidiaries in Strategic, Decision-making in Swedish Multinational Corporations, Strategic Management Journal, Vol. I, 1980. This sequence would fit the so-called product-cycle theory about foreign direct investment, propounded by VERNON, R. Organisation patterns are also of relevance in this area: but they are, in turn, largely shaped by strategic consideration and features of the product and factor markets. Thus, whether a large firm adopts a worldwide set-up per product, or acts through an international division may affect the degree of

( 7) (8)

(9)

(10)

( ll)

(12) (13)

{14) (15)

(de)centralisation. A discussion of alternative organisational schemes has not been attempted here. For a detailed analysis, see BEHRMAN, J. and FISCHER, W., Overseas Activities of Transnational Companies, Oelgeschlager, Gunn and Hain, 1980. See ROBBINS and STOBAUGH, op. cit., PLASSCHAERT, S., Emerging Patterns of Financial Management 1n Multinational Companies, Economisch en Sociaal Tijdschrift, 1971 VI and RODRIGUEZ, R., Foreign Exchange Management in u.s. Multinational, Lexington Books, 1980. See, for an excellent analysis, KUJAWA, D., "Collective Bargaining and Labor Relations in Multinational Enterprise: a U.S. Public Policy Perspective", in The Economic Effects of Multinational Corporations, (ed.) HAWKINS, R., Vol.I, Jai Press, 1979, pp.25-50. This is a major finding in FRANKO, L., The European Multinationals, Harper and Row, 1976. FRANKO, however, perceived a shift towards less informal and more centralised styles of management. For a discussion about economic power, see "Power in Economics", ed. ROTS CHILD, K. , Penguin modern economics readings, 1971 and PERROUX, F., Pouvoir et economie, Bordas, 1973. The public good character of knowledge has been emphasised in various works of the late JOHNSON, H. As examples of adversary positions against the prevailing system, one may mention some trade unions in Western Europe, which do reject the capitalist system and which strive towards self-management; and the opposition of "Solidarity" against the power monopoly of the Communist Party in Poland. KUJAWA, op. cit., p.40. The record of such solidarity strikes is rather bleak. See KUJAWA, op. cit., p.43-45. One must notice that such "international division of production" vvithin the same M.N.E. is rather rare and that national unions often have opposite interests, especially in conditions of economic crisis and substantial lay-offs. 215

(16) Articles in the international press point to opposite conclusions. Le Monde, October 13, 1981 mentioned that the "social management" of Sony in Bayonne is well accepted by the employees; similar success stories for Sony and Toshiba in Great Britain are reported in Le Monde, December 22, 1981; whereas, according to Business Week, October 5, 1981, "Labour relations that work in Japan are not easily transplanted" (into the U.S.A.). (17) In this well-known book, The Third Wave, Chapter 5, TOFFLER, A. characterises the task of cadres as essentially one of co-ordination. They are "integrators". (18) According to a survey in the Flemish part of Belgium, as discussed in Intermediair, November 23, 1979, "Motivaties, tevredenhaden en ontevredenhende van de Vlaamse kaderleden". See also the evidence, mentioned in the paper of HELLER, F., "Does formal policy or law, as used in Europe, contribute to improved employee participation", in this volume. (19) HEDLUND, G., "The Role of Foreign Subsidiaries .•• " , op. cit. (20 VAN DEN BULCKE, D., BODDEWYN, J., MARTENS, B. and KLEMMER, P., Politiques d'investissement, reductions ou cessations d'activites de multinationales en Europe, Presses Universitaires de France and C.E.E.I.M., 1979. See especially, the contribution by VAN DEN BULCKE and, by the same author Werkgelegenheid en Multinationale Ondernemingen, S.E.R.U.G., Ghent, 1981, which discusses detailed data for Belgium. (21) In the final proposal of the Commission, this "by-pass" provision, which has been much opposed by business circles, has been substantially altered. Employees' representatives can now "approach" the parent company "only in writing". But the possibility has now been opened to engage in legal action against subsidiaries that fail to comply with the information and consultation obligations prescribed in the Directive. (22) SCHUMPETER, J., Capitalism, Socialism and Democracy, 1942, Chapter VII. (23) In the final proposal of the Commission, Article 7, the issue of confidentiality is treated more extensively than in the initial proposal, Article 15. The management of the M.N.E. is entitled to withhold information 216

which it deems confidential but Member States must institute legal machinery to settle disputes about the secret nature of information. (24) The June, 1983 draft of the Commission's proposal, in Article 4, does not seem to remedy this danger. Its a linea 3, paragraph 3, does not specify a time period within which trade unions should submit their views, whereas its paragraph 4 states that Member States should institute the facilities to appeal against the non-fulfilment of the obligations imposed by the new Article 4 (in case of decision which "have serious consequences for the interests of the employees of the subsidiaries"). As disagreements about what actually amounts to fulfilment of obligations and to confidential data are bound to arise, ample opportunity for delaying tactics would seem to be available unless, on both sides, the willingness for mutually satisfactory arrangements would prevail. (25) For a general discussion of the uses of disclosure see, FOLEY, R. and MAUNDERS, K., Accounting Information Disclosure and Collective Bargaining, London, Macmillan, 1977. ( 26) BLANPAIN, R., The 0. E. C. D. Guidelines for Multinational Enterprises and Labour Relations, 1976-1973, Kluwer, 1979, p.268.

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C\ Taylor & Francis �-

Taylor & Francis Group

http://tayl o ra ndfra nci s.com

Chapter 8 AUTONOMY OF DECISION MAKING MULTINATIONAL ENTERPRISES

BY

SUBSIDIARIES

OF

Professor Daniel VAN DEN BULCKE

1 - THE PROPOSED VREDELING DIRECTIVE AND AUTONOMY OF DECISION MAKING: INTRODUCTORY REMARKS (1) The proposal for a Directive on procedures for informing and consulting the employees of multinational undertakings has generally been associated with the name of Henk VREDELING, the Dutch member of the previous E.E.C. Commission (headed by Roy JENKINS) . The proposal he initiated was introduced to the Council of the European Community on October 24, 1980 (hereafter called Vredeling I). After nearly three years of pitched battle between mainly trade union organisations and employers' representatives about the necessity of its adoption by the Council and a great number of amendments by the members of the European Parliament, a new draft was presented by Vredeling's British successor, Ivor RICHARD, on June 15, 1983. As the proposed Directive is still associated with its original proponent, the new version will be called Vredeling II. (1) (2) One of the major objections directed towards Vredeling I by the representatives of the employers was that it "misinterprets the responsibilities of company directors, will undermine the authority of local management and will disrupt existing industrial relations". (2) This conclusion was based on the formulation of Article 6 of Vredeling I where it was stated that whenever the parent company "proposes to take a decision concerning the whole or major part of the dominant undertaking or of one of its subsidiaries which is liable to have a substantial effect on the interests of its employees, it shall be required to forward precise information to the management of each of its subsidiaries in the Community" 219

(Paragraph 1) . The text goes on by stipulating that the management of the subsidiary shall be required to communicate without delay to its employees 1 representatives and to ask for their opinion" (Paragraph 3). Local management is also required to hold consultations with the employees "on a view to reaching agreement on the measures planned in respect of them" (Paragraph 4) when the proposed Directive is likely to have a direct effect on the employees 1 terms of reference or working conditions. The representatives of the employers were extremely upset by Paragraph 5 of Article 6, which came to be called the "by-pass" regulation and authorised the employees' representatives to open consultations with the management of the parent company, when the management of the subsidiaries did not communicate the required information or did not arrange the necessary consultations (Paragraph 4). Although the original formulation has been much toned down in Vredeling II and the "by-pass" has been cut short to a one-way direct written request for information by the employees' representatives to the parent company, which will be answered by way of the management of the local subsidiary, the Vredeling proposal implicitly starts from the assumption that the subsidiary is largely dependent upon the decision-making authority of the parent company. Trade union representatives considered the "by-pass" provision as essential as it allowed the employees in the local subsidiary to have the necessary access to tJ:;le "real decision makers". (3) Spokesmen for business opposed this view and maintained that the local management of subsidiaries of multinational enterprises (M.N.E.) were fully autonomous for the decision making in the field of industrial relations and employment. As one manager of a European M.N.E. put it, "local management knows all the management data, plans, expectations and environment factors and is, therefore, the only one able to carry out this function concerning information and consultation of employees. (4) That Vredeling himself assumed that a centralised decision-making structure was typical for M.N.Es can be determined from an interview in which he was quoted as saying that to avoid any difficulties with the proposed Directive, M.N.Es should allow their local subsidiaries to be sufficiently strong. He looked upon his proposal

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as a way to oblige central headquarters to decentralise their decision making. (5) (3) The proposed kinds of decisions, about which the parent company has first to explain the grounds, the legal, economic and social consequences and the measures planned in respect of the employees of the subsidiary and secondly to hold consultations in order to find an agreement through the intermediary of the local management, which are mentioned explicitly in Vredeling II (Paragraph 2 of Article 4) are: (a) the closure or transfer of an establishment or major parts thereof; (b) restrictions or substantial modifications to the activities of the undertaking; (c) major modifications with regard to organisation, working practices or production methods, including modifications resulting from the introduction of new technologies; (d) the introduction of long-term co-operation with other undertakings or the cessation of such co-operation; (e) measures relating to workers' health and to industrial safety. These provisions of Vredeling II are more extensive than in Vredeling I, where only i terns (a), (b) and (d) were listed. Whereas item (e) was added to the list of the original draft, the contents of item (c) were quite expanded as the first version only mentioned major modifications with regard to organisation. (4) Paragraph 2 of Article 2 (Vredeling II) stipulates that "when the decision-making centre of an undertaking is located in a non-Member country, its management may be represented in the Community by an agent authorised to fulfil the requirements regarding information and consultation laid down by the Directive. In the absence of such an agent the management of each subsidiary concerned in the Community shall be held responsible for the obligations arising from Articles 3 and 4". The formulation of this paragraph goes less far than the original text, where it was provided that when the M.N.E. did not ensure the presence within the Community of at least one person able to fulfil the requirements, the management of the subsidiary that employs the largest number of employees within the Community shall be responsible. It would seem that American M.N.Es have been given sufficient reassurance that they will not be pursued by legal action in their home 221

countries. This possibility of an extraterritorial application of the Vredeling proposal has been severely rejected in U.S. business circles and even resulted in threats of countermeasures by members of the U.S. Congress. (6) (5) One can only agree with GOEHLE who wrote that: "In the process of developing appropriate legislation, governments will need information about how multinationals control their subsidiaries, including the degree of centralisation of authority exercised in formulating corporate policy as well as in making operational decisions. At the present time, there is a very limited empirical data base upon which these countries can draw in framing public policy designed to effect some balance between corporate and national interests". (7) It is not known to what extent the E.C. Commission systematically surveyed the available information about the relationship between headquarters and subsidiaries before launching its proposal. The initiators of the proposal were apparently much influenced by a number of notorious disinvestment cases by M.N.Es, where it would seem that the employees in the closed down subsidiaries were neither warned nor consulted beforehand. The E.C. Commission referred e.g. to the closure by Citroen of its Brussels plant in December, 1980, to the sale of the paper "The Observer" by Atlantic Richfield to Lonrho in February, 1981 and to the merger and rationalisation of I.C.I's plastics and petrochemical divisions in March, 1981 without reference to their internally-developed consul tat ion machinery. ( 8) In a much longer list of recent disputes in which employees' representatives "were insufficiently informed and usually only after the event and virtually never consulted" the European Trade Union Confederation presented its point of view on the case of Citroen-Brussels (Belgium), Ford-Amsterdam (Netherlands), Enka-Kassel (A.K.Z.O.) (Germany), G.T.E.-Sylvania-Tirlemont (Belgium), Philips-Caen (France) and Massey-Ferguson-Aprilia (Italy) • (9) 2- GENERAL RESULTS OF STUDIES ABOUT DECISION-MAKING AUTHORITY OF HULTINATIONAL SUBSIDIARIES (1) It has been observed that while increasing numbers of academicians have selected various aspects of multinational business organisations as areas of study, relatively few have focused their 222

efforts on examining the nature of the relationship between headquarter and subsidiary. (10) It is generally thought that subsidiaries which are allowed a large extent of independent decision making are more receptive for the specific situations in the host countries. Although a number of authors have provided certain indications about the headquarter influence on decision making in subsidiaries, there was originally little interest in the determinants of this interference. In one of the first major studies (1958) about American investment in a European country, DUNNING concluded that about one third of the u.s. manufacturing subsidiaries in Britain were "strongly controlled" by the parent company. Another 40 per cent were considered "partly controlled" as top management intervened less directly, while 28 per cent of the studied 150 U.S. subsidiaries were judged to be quite independent from the parent company. (11) JOHNSTONE concluded from his study of American companies in France that in one out of four subsidiaries "local management enjoyed little autonomy on many issues of vital concern to France". (12) SAFARIAN found that one fifth of foreign subsidiaries in Canada were autonomous, while another one fifth were subject to central decision-making from the parent company and three fifths could be considered partly controlled as headquarters only intervened for the most important decisions. (13) DEANE indicated that among 145 foreign subsidiarieq in New Zealand, 28 per cent were strongly and 4 7 per cent partly controlled, leaving about one out of four subsidiaries with little or no control from headquarters. (14) The results from ALSEGG's thorough qualitative study showed that two fifths of U.S. subsidiaries in Western Europe were strongly and another two fifths relatively little controlled. The remaining one fifth were situated between these two extremes and could be considered as being partly subject to headquarter's decisions. (15) VAN DEN BULCKE labelled 37 per cent of the foreign subsidiaries located in Belgium in 1968 as strongly controlled, as compared with about half that were exposed to only a limited degree of interference from the parent company. (16) (2) As control has many different dimensions, the specific functional aspects of decision making were rightly thought to be more relevant than the presentation of some general index of centralisation. (17) Although in all of the earlier studies (with the exception of ALSEGG) decision223

making authority was only a side issue, it was apparent that financial decisions and research and product policy were carried out much more centrally than marketing decisions and personnel and industrial relations issues. These results were confirmed by practically all the later studies which concentrated on the issue of decision making in multinational subsidiaries. Table 1 presents the sample characteristics and methodology of eight of these studies. Most of the enquiries were held at the level of the headquarter; some of them were complemented by direct contacts with subsidiary managers, however. Only the reports by GARNIER and HALSBERGHE-VAN DEN BULCKE approached local management in the host countries and surveyed more than 200 subsidiaries. While these latter studies have a high representativity, they are based on a more limited type of interview than some of the other studies. The different set-ups of the eight reports are presented in Table 1 to allow for sufficient background information to judge the results which will be used in Part 3. GOEHLE derived a 'centralisation index' from the responses from U.S. headquarters on a scale from 1 to 5 from low to high autonomy for local management. The results which were obtained were: finance 3. 33, research and development 3.10, personnel 2. 92, production 2. 79, purchasing 2. 43 and marketing 2.39 (overall index 2.79). (18) When the values given for 290 decisions (29 decisions x 10 M.N.Es) across functional areas for sample firms and their subsidiaries were tallied, 35 per cent were categorised as decision process four to five, indicating a locus of decision making primarily at headquarters with almost no participation by subsidiary managers. Shared decisions by top and subsidiary management accounted for 18 per cent, as compared to 47 per cent for decisions made primarily at the subsidiary level with little or no headquarters participation. In one out of five cases did headquarters impose a decision without consulting their headquarter superiors. (19) While taking the point of view of the subsidiary and calculating an 'index of subsidiary autonomy' also on a scale from 1 to 5, HEDLUND found that Swedish subsidiaries abroad averaged 2.38 for finance, 3.82 for marketing, 3.96 for production and 4.45 for personnel decisions.(20) Using a 7-point scale SCBUIT etc. confirmed that Dutch M.N.Es also interfere much more for financial 224

than marketing and personnel decisions. An interesting aspect of this latter study was that this ranking showed consistently as well at the level of the preparation of the decision, the decision process as the decision making itself. (21) Bringing together data of the so-called Berlin-study group on headquarter-subsidiary relations, WELGE drew the conclusion that multinational subsidiaries enjoy more autonomy than generally believed. Production and financial decisions were again more strongly controlled than personnel and marketing policy. (22) (3) Although one should be careful in using the index approach because the decisions that are used can differ widely for each individual function, the fact that practically all the studies point in the same direction is reassuring as to the general conclusion. However, within each functional area, some decisions are more centralised than others. Also a number of decisions are more vital to the employees in the subsidiaries. Investment and disinvestment decisions are crucial as they determine future growth and the continued existence of subsidiaries within the multinational group. Organisation and planning of production and other aspects of product policy may also have an important influence in the quantitative and qualitative level of employment in the subsidiaries and are, therefore, of a serious concern to the employees. Out of 39 decisions which were analysed in the Belgian study, those seven that are directly or indirectly mentioned in the E. C. -proposed directive are presented in Table 2. (23) It shows that even for major decisions there occurs a certain amount of consultation from parent company to subsidiary or the other way around. Practically two thirds of the parent companies have the final word on the choice of investment projects and the creation of a new division, while more than half reserve themselves the right to decide unilaterally or after having taken into account the advice from local management, for the sale of fixed assets (disinvestment) and the introduction of new products. Together with the choice of the methods of financing (56 per cent) and the determination of the research programme (53 per cent), the above-mentioned decisions were the most centralised of all. More than three quarters of the studied subsidiaries had a decisive influence because they 225

decided autonomously or after having consulted with headquarters about the organisation and planning of production and the determination of productivity norms. For organisational changes, the determining impact of local management reached 60 per cent. The Dutch study also presents some interesting insights in aspects of decision making with relevance to the Vredeling proposal, even though its sample is small and limited to the food processing sector (Table 3). New investment projects, replacement investments and disinvestments are almost entirely decided upon by the parent company, at least as far as product and finance policy is concerned. For personnel policy, half or more of the subsidiaries are subjected to a low degree of control, although some firms exercise a high degree of influence. Disinvestment decisions are relatively more centralised than investment decisions in their production, financial and personnel aspects. 3 - SPECIFIC ASSUMPTIONS ABOUT DECISION MAKING OF MULTINATIONAL ENTERPRISES IN THE PROPOSED VREDELING DIRECTIVE 1.

The different assumptions Both the original version and the rewritten draft of the Vredeling proposal start from certain assumptions about the influence of the parent company on the decision-making authority of the subsidiary management. Vredeling II limits the application of the directive in information and consultation of employees of multinational subsidiaries to M.N.Es employing at least 1,000 people within the European . Community. Vredeling I was \).irected towards all M.N.E. operating within the E.C. and did not specify any size limitations. This major change in the text resulted from the extensive discussions in the European Parliament. The E.C. Commission admitted that these provisions will do away ·with the Vredeling rules for 70 per cent of all M. N. Es. The reasoning behind this change in mind of the E.C. Commission seems to be based on the assumption that smaller M.N.Es have a more straightforward decision-making structure which allows workers to obtain more easily a correct picture of the affairs of the enterprise as a whole. As there are different degrees of mul tinationali ty, of which size is a major component, it will be checked if subsidiaries 226

extensive international of M.N.E. with less networks more or less decision-making enjoy authority. Vredeling II makes no restrictions with relation to the size of the subsidiary, whereas Vredeling I confined its applications to subsidiaries with at least 100 employees. The E.C. Commission had based its original proposal on the fact that in particular Member States, bodies representing employees with rights as regards disclosure of information and consultation, only had to be established until the workforce reaches a level of one hundred. It was again as a result of the insistence of the European Parliament that this provision was changed. It should, therefore, be tested if the implicit assumption of no important differences in decision-making authority between larger and smaller subsidiaries is correct. Vredeling I addressed itself to situations where dominant undertaking either held the majority of the voting shares of the other company (subsidiary) or had the power to designate at least half the members of the other undertaking's administrative management or supervisory bodies. Vredeling II goes even further by referring to Article 1 of the recently accepted 7th Directive on company law about consolidated accounts. The question of whether differences in the degree of ownership have any consequences on the control exercised by the parent company on the subsidiary should subsequently be dealt with. Both Vredeling I and II are explicitly applicable to M.N.E. of which the parent company is located within as well as outside the European Community. The E.C. Commission does not subscribe to the view that geographically distant headquarters (e.g. in the U.S.A. or Japan) automatically grant sufficient decision-making authority to the faraway subsidiary in order to allow it to take independent decisions. Although the possible extra-territorial effects of the E.C. Directive have upset American M.N.Es tremendously, the only relevant aspect is the eventual existence of differences in autonomy between U.S. and non-u.s. subsidiaries. By including in Vredeling I and II the obligation to inform and consult with employees a.o. with regard to "major modifications with regard to organisation", the proposed directives implicitly assume that changes in organisational structure have an impact on the decision-making 227

authority of subsidiaries. As information could be collected about the different forms of organisational structure, it should be possible to analyse their effect on the autonomy of local management. In this context, it should also be interesting to find out about the role and function of regional headquarters. In their objection to the view of centralised decision making by the E.C. Commission, the employers' representatives claimed that although decentralisation is the rule, a strong control of the subsidiaries' operations would be applied if the subsidiary had not been able to conform to the expectations of the parent company. (24) It can be implied from this reasoning that the only loss-making operations abroad of subsidiaries which do not conform to the productivity level or other targets of the parent company shall be narrowly controlled. Although the Vredeling proposal itself does not mention this point, it may be worthwhile to check it out. Figure l shows the links between the Vredeling proposal and the headquarter-subsidiary relationship within multinational groups. For each of these assumed relationships the available evidence will be discussed in the next paragraphs. 2. Size of parent company and degree of multinationality. In his major study on control relationships between headquarters and subsidiaries ALSEGG wrote: "The parent company's size, age and growth have little influence in its control relationship with European subsidiaries". ( 25) However,, SCHUIT e. a. concluded from their study about Dutch M.N.Es that decision making was more centralised in smaller (less than 2, 000 employees) than larger companies (more than 2,000 employees). (26) Most of the other studies which tested the autonomy of subsidiaries were limited to large M.N.Es with locations in a great number of countries and realising a sizeable proportion of their total sales volume in foreign markets. And yet, the size and spread of M. N. Es can be quite varied. Some .t·1.N.Es are relatively small and only have production units in two or .three countries and can be called "emerging multinational enterprises" (E.M.E.). Others ranking among the largest corporations on the Fortune list, produced in at least six countries in North America, European and developing countries, realise at least 25 per cent 228

of their activity abroad and could be called "global multinational enterprises"(G.M.E.). Between these two extremes is a group of companies which have become firmly established in a certain number of countries but have not yet developed a global planning strategy that straddles the world. They could be named "multinational oriented enterprises"(M.O.E.). An analysis of a large sample of foreign subsidiaries in Belgium according to these so-called degrees of multinationality showed no consistent relationship between centralisation and increasing multinational maturity, however. (27) The E.M.E. reined in their subsidiaries most closely while the multinational-oriented companies were giving relatively more leeway to their affiliates abroad. The difference among the E.M.E. and the other two groups is more pronounced for personnel than financial matters. It should be stressed that there is a difference between American and Non-American M.N.Es. For M.N.Es with an American parent company centralisation increases with a growing degree of mul tinationali ty. While only half of the smaller American E.M.Es are strongly controlled for investment decisions, this proportion increases to two thirds for M.O.Es and three quarters for G.M.Es. Subsidiaries which are part of a European multinational company show a different pattern as the intervention from headquarters is most pronounced in E.M.Es. While in eight out of ten European M. N. Es investment decisions were determined by the parent company, this occurred for only six out of the ten of the larger G.M.Es. 3.

Size of subsidiary The relationship between the degree of autonomy of the subsidiary and its size have been studied more often than the size of the parent company. According to ALSEGG the most significant factor influencing the degree of autonomy granted by American M.N.Es to local management is the size and importance of the subsidiary and its market. He added that they usually but not always correspond. He implied that both small and large subsidiaries could be less or more strictly controlled, depending on the corporate policies and practices such as the form of organisation. (28) Although AYLMER's work was limited to the field of marketing, it had often been accepted as an indication that American subsidiaries are allowed 229

to participate more actively in decision making with an increase in size. (29) GOEHLE who, like those other authors, only contacted American multinationals, concluded that the subsidiary manager of a large operation had more formal authority than the manager of a smaller one. However, a local manager of a large subsidiary abroad had somehow less real power and influence than his colleagues in a smaller outfit because his operation was large and visible and the consequences of his decision were more important to overall corporate performance. (30) WELGE, in his study on German M. N. Es, mentioned a rather multiple and contra-intuitive pattern between size of the subsidiary and his criterion of 'co-ordination intensity'. Not only was co-ordination in large subsidiaries more highly bureaucratised than in smaller ones but also the extent of personalised co-ordination devices, such as visits and transfer of expatriates, increased with the size of the subsidiary. (31) While studying Swedish M.N.Es, HEDLUND first stated that large subsidiaries are not more autonomous than the medium-sized ones. He then agrees that subsidiary autonomy, after having increased with a growing size, will come down again for subsidiaries which are very large in relation to the parent company. (32) Contrary to the previous company samples, which were exclusively based on the M.N.E. of a particular parent country, HAI,SBERGHE and VAN DEN BULCKE studied foreign subsidiaries of different nationalities in one particular host country. (33) They did not find a clear relationship between the relative size of the subsidiary and the centralisation of financial and personnel deicions. Their study showed, however, that for a great number of decisions those subsidiaries which reached ten per cent or more of the group were most strongly controlled. The middle group with a relative size from one to five per cent enjoyed somewhat more autonomy. (33) This result to some extent confirms HEDLUND's conclusion, although it should be added that a high relative. subsidiary size is typical for European Emerging Multinational Enterprises and a small relative size occurs more frequently in global M.N.Es.

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4.

Degree of ownership Contrary to the generally accepted hypothesis that wholly owned subsidiaries are preferred forms of ownership because they allow close and complete control from headquarters, a few recent studies showed that it does not matter all that much - for the control relationship if a subsidiary is wholly owned or a joint venture. HEDLUND found practically no differences in the control relationship between wholly owned subsidiaries and minority joint ventures of Swedish M.N.Es located in developed or developing countries. (34) OTTERBECK added that the small difference that could be observed showed a slightly higher autonomy for joint ventures than for wholly owned subsidiaries and a higher spread for joint ventures, however. (35) WELGE concluded from his study about German M.N.Es that although the relationship between ownership and his criterion of co-ordination intensity was positive, the low correlations only indicate a weak relationship. (36) The Belgian study also established a small positive relationship between control and ownership for financial decisions. Even for fifty-fifty and minority joint ventures, the decisions by the parent company are clearly decisive for investment policy. For personnel decisions practically no relationship existed. The link between ownership and centralised decision making is more evident for American than European N.N.Es. Especially for European emerging M.N.Es does a low degree of participation in the equity capital of the subsidiary go together with strong interventions from top management in the parent company. (37) A high degree of ownership should be regarded more as an indication of a high potential influence from headquarters than an actually realised interference. Although a wholly owned subsidiary guarantees that the final decision belongs to the parent company, this right of the sole shareholder has not to be a daily exercise. On the other hand, parent companies will try to realise the highest degree of co-ordination intensity possible, independent of the relevant ownership patterns. This can be achieved rather easily whenever the capital of the subsidiary is widely spread among local shareholders or when the multinational parent company, as is most often the case, dominates its local partner in terms of technological, organisational and managerial capabilities. 231

5. Geographical distance from headquarters and nationality of parent company In some of the early authoritive studies on the subject, it was mentioned that M.N.Es give more autonomy to subsidiaries far from headquarters than those close to the home office or to the regional headquarters. (38) Quite often not so much the distance but the political, economic and cultural environment and its business climate are more influential, however. Respondents to GOEHLE's enquiry thought that distance did not influence the authority of subsidiary managers, although they admitted that some remote subsidiaries might be exposed to less monitoring of their activities. (39) The results of the Belgian study indicate that American M.N.E. do not control their subsidiaries more strictly that European companies. As a matter of fact, parent companies located in countries adjacent to Belgium, i.e. the Netherlands and the Federal Republic of Germany, have a more decisive influence on subsidiary management than American M.N.E. This conclusion applies to both financial and employment decision making. On the other hand, French and British subsidiaries were generally more autonomous than American firms established in Belgium. (40) GARNIER found that, in general, the French affiliates in Belgium of U.S. multinational corporations were more tightly controlled than their Mexican counterparts. ( 41) Yet, WELGE established that American M. N. Es grant less autonomy than Japanese and German parent companies.(42) However, this conclusion is based on an indirect comparison between decision-making authority as seen by parent companies on the one hand and subsidiaries on the other hand. Moreover, while most of the l-1. N. E. incorporated in his research project could probably be classified as global M. N. Es, the Belgian sample is much more diversified. At least for 'industrial host countries, there is no reason to conclude that geographical distance of the parent companies has a determining influence on subsidiary decision making. Besides, many M.N.Es have included in their organisational structure a regional headquarter to bring top management closer to local operations. 6.

Organistional structure As the organisational design sets the formal structure for decision making, one can expect that changes from one basic type of organisation to 232

another would not remain without consequences for the subsidiary's autonomy. (43) The different basic forms of organisational set-up of f-1. N. Es normally taken into account are: - holding company: the (mostly European) parent company is not engaged in manufacturing, is mainly preoccupied with financial issues and does not involve itself in the daily management of the subsidiaries; - direct management from the parent company: subsidiary management depends directly from top managers in the parent company. This form of organisation is often chosen by emerging M.N.E.; - international division: a separate division is responsible for all activities abroad. The other divisions are only in charge of domestic operations. This structure is quite typical for American M.N.Es which are at the beginning stages of multinationalisation; - global division: the distinction between domestic and foreign operations is eliminated and different forms of global divisions are distinguished: - functional divisions (e.g. finance, marketing, production, research) which are responsible for domestic and foreign subsidiaries; - regional divisions (e.g. Europe, South America ... ) where the top managers in charge cover one particular area for different products; - worldwide product divisions (e.g. chemicals, pharmaceuticals, plastics, .•. ) with a vicepresident being responsible for a particular product or product group wherever the country of origin. - mixed structure: a mixture of the basic types of organisation (e.g. a worldwide product structure and a regional set-up); - grid or matrix structure: functional-, productand regional responsibilities are placed at the same level. A number of global M.N.E. have experimented with this concept of collective responsibility which is intended to improve the co-ordination and integration of the different activities. An analysis on the basis of information about the organisational structure of M. N. E. with subsidiaries in Belgium confirmed that holding companies leave their subsidiaries very independent. American M.N.Es with an international 233

division also leave a lot of decision-making authority with local management, at least as far as personnel policy is concerned. Subsidiaries which are under direct control of headquarters management are roost strictly controlled. Many Dutch and German M.N.Es which opted for this form of organisation take roost of the decisions out of the hands of Belgian subsidiary management. The differences among the M. N. Es \vi th an international division, a global division or a mixed and grid structure are not too large, although the number of subsidiaries in each of the sub-groups of the global divisions grant somewhat more autonomy to local management than worldwide product and functional ones. A special adaptation of the organisational structure consists of the establishment of a regional centre or headquarters to co-ordinate and control the activities within a given geographic area (e.g. European Community or Europe). M. BROOKE and L. RE~mERS and other authors have suggest.ed that the creation of a regional centre may either increase or decrease the autonomy which is granted to local management. (44) This view was more or less confirmed for American l1.N.Es with a manufacturing plant in Belgium and a regional headquarter somewhere in Europe. (45) Although financial decision making was more strongly controlled when a regional headquarter acted in an intermediary function and personnel policy was not all that much affected, for some particular decisions a regional headquarters goes together with more autonomy for the local subsidiary. (46) Our separate study of regional headquarters of American M.N.E. in Belgiuro(47) indicated that four different types of regional offices should be distinguished: (1) regional headquarters in the narrow sense, which mostly belong to global multinational enterprises, in the manufacturing and services, have a large functional responsibility and are located in one of the major European cities; (2) regional headquarters, located at the site of a subsidiary, which are typical for smaller M.N.Es at the first stage of roultinationalisation and mainly co-ordinate the production and sales of other subsidiaries in Europe; (3) subsidiaries which perform a liroi ted regional co-ordinating activity, in roost cases of the sales offices of the other subsidiaries in Europe; 234

( 4) commercial or service bureaus, which to some extent co-ordinate the sales efforts or service activities of their offices located in Europe. The first two categories of regional offices and possibly the third group could most certainly function as a representative office of the parent company in Europe and look after the procedures prescribed by the Vredeling proposal. About one third of all American M.N.Es with a manufacturing subsidiary in Belgium had offices in this country which functioned as an administrative headquarters. The function of acquiring and generating information for the benefit of the parent company is evidently their most important activity. Sixty per cent of the 64 regional offices surveyed also acquired and generated information on behalf of the subsidiaries. In the two top categories of regional offices this latter function was carried out by more than 80 per cent. All headquarters which belonged to the first two groups were engaged in the co-ordination of the activities of local subsidiaries. About one out of four regional offices reckoned that the provision of general information to subsidiaries was a most important function. Fourteen per cent of the regional offices explicitly mentioned that they acquired and generated information for the subsidiaries in the field of finance and investment. Forty per cent of the regional offices actually co-ordinate personnel and financial activities and about 30 per cent personnel and industrial relations. To the extent that co-ordination implies information and consultation of employees, one might consider the Vredeling proposal to be already operational. What it certainly does show is that a regional headquarters can play a useful role in keeping in touch with subsidiary management about the global policy of the group. 7.

Performance of subsidiary "A very old and common reason for diminishing the local manager's authority and putting him under tighter control is unsatisfactory performance or failure to conform with company policies". (48) The key criterion used by American M.N.Es in GOEHLE's sample to evaluate the performance of M.N.Es was profitability. Her analysis indicated that the formal authority of the local manager is not reduced by a poor record, although in some cases these managers did no longer get permission to take particular decisions. For the most part, 235

inadequate performance only increases headquarters' monitoring of the unit's activities and decisions. There were no extreme variations in the amount of decision-making authority held by managers with good, as compared to average records, as substandard performance does not radically shift the locus of decision making at all. However, if performance falls to a certain point, the subsidiary manager is likely to be replaced. (49) Having difficulties in obtaining valid and reliable profit figures for all subsidiaries, HEDLUND used as a measure for subsidiary performance the view of top managers in the Swedish parent company. Even after controlling for a number of other variables, a weak relationship showed in the expected direction. If results are only moderately bad not much seems to be done from headquarters. Performance did have to drop to a critically low level before top management intervened drastically. Also, if performance is exceptionally good it may even attract the attention from headquarters and result in more interference. (50) HALSBERGHE and VAN DEN BULCKE used several criteria to measure the performance of the subsidiary. (51) On the basis of profitability it was found that headquarter intervention was highest in .non-profitable subsidiaries. However, subsidiaries with a very high rate of profit were also strongly controlled. In certain aspects of personnel policy the percentage of strictly controlled subsidiaries was even higher in very profitable than in loss-making operations. In general, the middle group of affiliates is given most leeway by the parent company. The same tendency becomes apparent when productivity is measured. Subsidiaries with the lowest and highest productivity are steered more closely from headquarters than the middle group. While the above-mentioned profitability and productivity criteria applied to the subsidiaries as such, information was also obtained about the cost price in the subsidiary as compared to the parent company. The assumption that the more efficient subsidiaries would be less subject to centralised decision making from headquarters was confirmed. The subsidiaries with a higher average cost of production than the parent company did not get more severe treatment than those with similar production costs. Another criterion consists of a comparison between cost of production (ex-factory) 236

of the subsidiary and the import price from the parent company including transport costs, customs duties and normal rate of profit. Those subsidiaries for which the import price would be higher than the ex-factory price, enjoyed relatively more autonomy than the other categories. As GOEHLE rightly points out, the ability of subsidiaries to respond to unique configurations in the local environment requires a certain degree of decentralised decision making, at least for some functions and it is this ability that may enable them to obtain higher levels of performance. (52) WELGE confirmed that such a reverse link exists and showed that decentralisation of headquartersubsidiary relations is more likely to generate an above-average return on investment than high co-ordination activity, i.e. high profitability may be a function of the degree of autonomy granted to local managers. (53) 4 - MAJOR FINDINGS AND CONCLUSIONS The proposed Vredeling Directive of the E. C. Commission to oblige M.N.Es to inform and consult with employees of subsidiaries about a number of important decisions implicitly assumes that subsidiary management has little or no authority in decision making. Although the picture about decision-making autonomy is not as bleak as trade union representatives have claimed, the employers' representatives over-stated their case by suggesting that decentralised decisions are rather exceptional. A number of studies about the decision-making role of subsidiaries covering a period of almost 20 years (from DUNNING in 1958 to GOEHLE in 1977) have shown that at least one out of four and sometimes one out of two were quite autonomous in their decision making. On the other hand about one third of the multinational subsidiaries were labelled as strongly controlled by the parent company. In between was a group of subsidiaries which are situated between these two groups and are moderately or partly controlled. Even within the group of strongly controlled companies, subsidiaries were often able to consult with headquarters before final decisions were made. Although so-called centralisation or autonomy indexes present a number of methodological shortcomings, these studies show that autonomous subsidiaries are a reality, even if one takes into 237

account that local management tends to overestimate its degree of actual freedom, (54) The splitting up of decision-making authority in functional areas and specific decisions showed that finance and investment are most strongly controlled, even though the parent company also intervened in a number of employment decisions. Yet even for the crucial investment and disinvestment decisions which fall under the Vredeling procedures there is a certain amount of two-way consultation between top management at headquarters and the local subsidiary management. The Belgian study showed that in about half of all foreign subsidiaries either the parent company or the subsisdiary decided, after having asked for the advice of the other party. To this should be added that another 30 to 40 per cent of these decisions could be made by the subsidiaries themselves. For the more strategic decisions in relation to expansion and disinvestment, the parent company decided in about 40 per cent of all subsidiaries after having asked for their advice. For matters of internal organisation, about the same proportion of subsidiaries were allowed to have the last word after having consulted with headquarters. The findings of the more detailed analysis do not necessarily concur with the assumptions about decision making in multinational groups made either directly or indirectly in the proposed Vredeling Directive. Firstly, it appears from the exclusion of M.N.Es with less that 1,000 employees within the European Community that the Vredeling Directive will not be applicable to small M.N.Es, which are at the beginning stages of the multinationalisation process. Especially the emerging I1.N.E.s of European origin exercise a strong direct control on the activities of their subsidiaries. While the degree of centralisation is lower in those companies which are not yet completely globally oriented, control tends to increase again in the truly multinational firms which scan the world horizon before making strategic decisions. Secondly, that the limitation of Vredeling I to subsidiaries with more than 100 employees was left out of Vredeling I I probably makes sense as absolute size did not have a determining influence in decision authority. There are some indications, however, that subsidiaries which are relatively large as compared to the parent company are more 238

strictly controlled probably because of their impact on the group's overall performance. Thirdly, the more extensive definition of a subsidiary under Vredeling II responds to the fact that wholly owned subsidiaries and majority owned joint ventures are not necessarily more strictly controlled than minority participations by the multinational group. This is because M.N.Es generally dominate local partners in the host country in terms of technology and management and other more delicate integrative devices are being used. · Fourthly, because the Directive has been much opposed by M.N.E. headquarters outside the European Community and especially by American parent companies, the question was raised about any possible differences according to the geographical distance of parent company or nationality. Although the evidence that could be gathered is rather mixed, there are sufficient indications that geographical distance and nationality are not decisive factors in the autonomy that is granted to local subsidiaries. To the extent that M.N.Es gradually become more global in their decision making, they will also be more similar to each other, irrespective of the nationality of their major shareholders. Fifthly, the organisational structure of a M. N. E. being the formal way in which relations between top management at headquarters and subsidiary management are be.ing dealt with, it follows that changes in the organisational chain of command could affect decision-making authority of subsidiaries abroad. Apart from the strictly controlled subsidiaries of European M.N.Es functioning under the direct responsibility of top managers at headquarters on the one hand and the very decentralised holding companies on the other hand, the differences in degree of centralisation, among the basic types of organisation, are not very pronounced. M. N. Es, which built a European regional office within their organisational structure, actually perform a number of functions which are comparable to the general purpose of the Vredeling proposal. As M. N. Es from outside the European Community will be obliged to be permanently represented, this might lead to more headquarters opting for some form of a regional office within the Community, having established a base some might grow into larger co-ordinating 239

centres encompassing several functional areas of decision making. Sixthly, although inadequate performace generally leads to a restriction in decision-making authority of subsidiary management, the highly profitable and productive ventures are often as much controlled by the parent company as the former category. Before concluding it should be mentioned that this analysis concentrated on the relationship between headquarters and subsidiary management and neglected the participation of the employees as such~ A second limitation is that the focal point of the decisionof this study was the restriction making authority of the subsidiaries. As a matter of fact subsidiaries benefit greatly from their being part of a multinational group as it allows them to acquire technological and mangerial knowhow which improve their competitive position in the host countries. (55) The third limitation, i.e. the absence of any comparison with national multiplant companies, has to do with the fact that relatively few large European multiplant companies are only active on their national territory. A fourth shortcoming of this study is the neglect of the indirect integrative devices such as reporting, mutual visits, transfer of managers, etc ..• , al though some of these aspects were taken into which were referred account in a few of the studies to. (56) A fifth objection might be that the concepts of control, autonomy, centralisation, decentralisation, integration, etc ••• have not been clearly defined beforehand. As this study was intended as a survey of the different studies of decision making relevant to the Vredeling Directive and limited to the issue of the locus of decision making, a detailed conceptual discussion could be left out. (57) The E.C. Commission wrote in an internal document that, "Once they have recovered from their apparent shock of the (Vredeling) proposal, it is to be hoped that, while maintaining their basic reservations if necessary, they will also participate in the task of developing a workable system". (58) It has been shown that many subsidiaries are already involved in strategic decision making of M.N.E. On the other hand, there are ways to bring about or improve subsidiary involvement by increasing the dialogue between local management and parent company. In this context HEDLUND suggested a.o. that regional, 240

divisional or corporate-wide conferences should be given strategic content; that the subsidiary should have a personal channel into headquarters; that personnel with strategic functions should be rotated between headquarters and subsidiary; that managing directors of subsidiaries should be allowed to be members of the boards of directors of other subsidiaries. (59) PRAHALAD and DOZ rightly pointed out that "the process of strategic control in a 'non-dependent' headquarters-subsidiary relationship must be predicted upon a 'shared concern' for change". The first task to a,chieve this consists in ensuring that headquarters and subsidiaries share a common information base and agree on a common approach to competition. (60)

241

not specified

qualitative

29

6

5-point scale

Indepth interviews. at headquarters

120

44

manufacturing & trading houses

countries

7

industrial

Japan Germany

u.s.

&

48

5-point scale

15

4

7-point scale

18

4

Indepth interviews at headquarters

15

6

chemical industry

u.s.

India,

France,

see Sources,

access to documents

Indepth interviews at headquarters

24

6

10

7-point scale

10

4

Questionnaire & interviews

112

15

food processing

all countries

3 & 7-point scale

38

4

Questionnaire & interview

203

manufacturing & services

France.

Mexico

U,S,

Netherlands

Germany

Sweden

countries

(1975-7)

GARNIER

(1980)

SCHUIT etc,

(1976-9)

WELGE

(1976-9)

&

HEDLUND

For year of publication,

headquarter level

naires

(a) year or period of data collection.

Index of decision making

N° of management not decisions studied spcified

N of functional areas studied

at headquarter & subsidiary level

interviews

interviews & question-

questionnaire & personal

Research method

30

153

10

at

different industrial

sectors

5

127

sectors

Brazil

Frances U,K,,

u.s.

(1976-9)

(1977)

N° of subsidiaries

all

countries

E,C,

u.s.

(1968) (a)

NEGHANDI BALIGA

GOEHLE

N° of parent companies

Sectors

Host countries

Countries of origin

BULCKE

CHARACTERISTICSALSEGG

scale

5-point

39

4

Questionnaire & interview

245

manufacturing

Belgium

All major industrial countries

(1976)

HALSBERGHE, VANDEN

Table 1: CHARACTERISTICS OF SAMPLESAND METHODOLOGY OF SPECIFIC STUDIES ABOUTTHE DECISION-MAKING AUTHORITYOF MULTINATIONAL SUBSIDIARIES

TABLE 1: CHARACTERISTICS OF SAMPLES AND METHODOLOGY OF SPECIFIC STUDIES ABOUT THE DECISION-MAKING AUTHORITY OF MULTINATIONAL SUBSIDIARIES SOURCES

R. ALSEGG, Control Relationships between American Corporations and their European Subsidiaries, American Management Association, Washington, 1971, 220 pp. D. GOEHLE, Decision Making in Multinational Corporations, U.M.I.-Research, Ann Arber, 1980, 226 pp. A. NEGHANDI, and B. BALIGA, Internal Functioning of American, German and Japanese Multinational Corporations, pp. 107-120 in L. OTTERBECK (ed.), The Management of HeadquartersSubsidiary Relationships, Gower, London, 1981, 343 pp. G. HEDLUND, Autonomy of Subsidiaries and Formalisation of HeadquartersSubsidiary Relationships in Swedish M.N.C.s, pp. 25-78 in L. OTTERBECK (ed.), op. cit. M. WELGE, The Effective Design of HeadquarterSubsidiary Relationships in German M.N.C.s, pp. 79-106 in L. OTTERBECK (ed.), op. cit. J. SCHUIT, e.a., Centralisatie versus decentralisatie in internationale ondernemingen; een multifunctionele benadering, Erasmus Universiteit, Rotterdam, 1981, 89 pp. G. GERNIER, The Dimensions of Autonomy in Parent Company - Foreign Affiliates Relationships within Multinational Corporations, Stockholm School of Economics, Stockholm, 1980, 46 pp. E. HALSEBERGHE and D. VAN DEN BULCKE, Beleidsautonomie van buitenlandse dochterondernemingen in. BelgH~, Insti tuut van de Onderneming, Brussels, 1982, 86 pp.

24

10

4

5

18

22

17

p.c.

Parent company

27

28

14

10

39

41

49

p.c.

Parent company after consultation of subsidiary

34

38

30

29

27

24

28

p.c.

Subsidiary

SOURCE: HALSBERGHE, E. and VANDENBULCKE,D. op. cit.,

product

Introduction of new

Organisational changes

norms

Determination of productivity

Organisation & planning of production

assets

Sale of fixed

Creation of new division

projects

investment

Choice of

Decisions on behalf of suhsidiary

-centre

Decision

pp. 6-9.

12

22

48

52

13

10

3

p.c.

company

Subsidiary after consultation with parent

3

3

4

4

3

3

3

p.c.

company

Subsidiary together with parent

232

240

238

241

234

241

242

N

TOTAL (N=lOO)

SUBSIDIARIESIN BELGIUMWHICHARE RELEVANT TO THE TABLE2: DECISION MAKINGIN MULTINATIONAL PROPOSED VREDELING DIRECTIVE

Table 3: DEGREE OF HEADQUARTER'S CONTROL IN THE FINAL DECISION MAKING OF 12 DUTCH MULTINATIONAL ENTERPRISES IN THE FOOD SECTOR

Functional area

High

control

Production - expansion - conservation - disinvestment

8

Personnel - expansion - conservation - disinvestment

3 2 3

control

Average score

No

(a)

answer

2.36 2.36 2.27

3

11

10

J.

control

11

Finance - expansion - conservation - disinvestment

SOURCE:

Number of firms Moderate Low

2. 27 2.50 2.00

11

9

SCHUIT etc.,

3 2 6

6 7 3

4.50 4.90 4.08

Centralisation-Decentralisation?

changing international environment, Erasmus Business Economics, Rotterdam, 1981, p. 26

University,

(a) Average of decisions on ?-point scale ( l=very low, autonomy).

How to

Centre

for

react

to a

Research

in

?=very high subsidiary

Figure 1: HEADQUARTER-SUBSIDIARY RELATIONSHIPS IN MULTINATIONAL ENTERPRISES AND THE PROPOSED DIRECTIVE OF THE E.C. COMMISSION (VREDELING)

Proposed Directive E.C. Commission on procedures information and conslutation

in M.N.E.(Vredeling)

Multinational Parent Company

Subsidiary in E. C.

- Size ----------- Degree of multinationality - Nationality - Organisation

Autonomy of decision making of multinational subsidiary in E.C.

- Size -------- Olmership --degree - Performance -

-

REFERENCES (1)

(2) (3)

(4)

(5) (6)

(7) (8)

(9)

The original draft of the 'Proposal for a Council directive on procedures for informing and consulting the employees of undertakings with complex structures, in particular transnational undertakings' (presented to the Council by the Commission on October 24, 1980) is published in the Bulletin of the European Communities, Supplement 3, 1980, 19 pp. The revised text is published in Industrial Relations-Europe, July, 1983, pp. 2-3. U.N.I.C.E., Position Paper, February 19, Brussels, 1981, p. 4. G. DEBUNNE, Le point de vue de la Conf€d€ration Europ€enne des Syndicats et de la F.G.T.B., p. 19 in L'information et la consultation des travailleurs au sein des entreprises multinationales: La proposition Vredeling, Actes du Col1oque du Centre Europeen Fernand Dehousse, Hay 28, Brussels, 1982. Translated statement from W. TIEDEMANN, Het standpunt van het bedrijfsleven (The point of view of the employers), p. 33 in K. TUDYKA (ed.) , Inlichting en raadpleging van werknemers van Europese concerns. Een discussie over de Vredeling-Davignon ontwerprichtlijn van de E.G. Commissie, Nijmeegse Studies, 1982, Nr. 1. H. VREDELING, Richtlijn kan nog gered worden, Europa van Morgen, October 20, 1982, p. 579. Cfr. R. KIRKLAND, Bad News Brewing in Brussels, Fortune, December 14, 1981, Business Week, Common Market: A call for multinational to tell labor their plans, January 12, 1981, p. 29 and A U.S. play to head off an 'attack on business', November 23, 1981, pp. 34-35. D. GOEHLE, Decision Making in Multinational Corporations, UHI-Research, Ann Arbor, 1980, p. 4. E.C. Commission, The European Community and the large multinational firm: the effective management of change, internal document III/D/222, Brussels, 1981, p. 5. European Trade Union Confederation, Survey and Documentation on Disputes in European Subsidiaries of Multinational Groups of Companies, Brussels, 1982, 80 pp. In the same survey 12 other cases are documented less extensively. 247

(10) D. GOEHLE, op. cit., p. 8. (11) J. DUNNING, American Investment in British Manufacturing Industry, Allen and Unwin, London, 1958, pp. 107-111. (12) A. JOHNSTONE, United States Direct Investment in France: An Investigation of the French Charges, Cambridge, Mass., 1965, p. 72. (13) A. SAFARIAN, Foreign ownership of Canadian Industry, Toronto, 1966, pp. 78-88. (14) R. DEANE, Foreign Investment in New Zealand Manufacturing, Wellington, 1970, pp. 155-157. (15) R. ALSEGG, Control Relationships between American Corporations and their European Subsidiaries, American Hanagement Association, Washington, 1971, p. 118. (16) D. VAN DEN BULCKE, De Multinationale Onderneming: Een typologische benadering, Serug, Ghent, 1975, pp. 265-268. (17) M. STEUER e.a., The Impact of Foreign Direct Investment on the United Kingdom, H.M.S.O., London, 1973, p. 138. (18) D. GOEHLE, op. cit., p. 146. (19) Ibidem, pp. 83-84 (20) G. HEDLUND, Autonomy of Subsidiaries and Formalisation of Headquarters-Subsidiary Relationships in Swedish M.N.Cs in: L. OTTERBECK (ed.), The Management of Headquarters-Subsidiary Relationships in Multinational Corporations, Gower, London, p. 36. (21) J. SCHUlT e.a., Centralisatie en decentralisatie in internationale ondernemingen: een multifunctionele benadering, Erasmus Universitei t, Rotterdam, 19 81 ' pp . 4 7- 4 8 • (22) M. WELGE e.a., Entscheidungsprozesse in komplexen, international tatigen Unternehlen, paper, Fernuniversitat Hagen, p. 7. ( 2 3) E. HALSBERGHE and D. VAN DEN BULCKE, Beleidsautonomie van buitenlandse dochterondernemingen in Belgie, Insti tut van de Onderneming, Brussels, 1982, pp. 6-10. (24) W. TIEDEMANN, op. cit., p. 37. (25) R.ALSEGG, op. cit., p.6. (26) J. SCHUlT e.a., op. dit., p. 49. (27) E. HALSBERGHE and D. VAN DEN BULCKE, op. cit., pp. 35-37. For a more detailed analysis see D. VAN DEN BULCKE and E. HALSBERGHE, Degree of Multinationality and Foreign Headquarter-Subsidiary Relationship in a Belgian Context, Stockholm School of 248

(28) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38)

(39) (40) (41) (42) (43) (44) (45) (46) (47)

(48) (49) (50) (51) (52)

Economics, Working Paper, Institute of International Business, March, 1981, 61 pp. R. ALSEGG, op. cit., p. 99. R. AYLMER, Who makes Marketing Decisions in the Multinational Firm?, Journal of Marketing, October, 1970, pp. 25-30. D. GOEHLE, op. cit., pp. 69-70. M. WELGE, The Effective Design of Headquarter-Subsidiary Relationships in German M.N.Cs, in L. OTTERBECK, op. cit., pp. 93-94. G. HEDLUND, op. cit., pp. 53-55. E. HALSBERGHE and D. VAN DEN BULCKE, op. cit., pp. 4 7-48. G. HEDLUND, op. cit., pp. 46 and 48. L. OTTERBECK, The Management of Joint Ventures, in L. OTTERBECK, op. cit., pp. 278-279. M. WELGE, op. cit., p. 95. E. HALSBERGHE and D. VAN DEN BULCKE, op. cit., pp. 44-46. R. ALSEGG, op. cit., pp. 101-102, J. STOPFORD and L. WELLS, Managing the Multinational Enterprises: Organisation of the Firm and Ownership of the Subsidiaries, Basic Books, New York, 1972, p. 56. D. GOEHLE, op. cit., p. 39 E. HALSBERGHE and D. VAN DEN BULCKE, op. cit., pp. 37-39. G. GARNIER, op. cit., p. 27. M. WELGE, Entscheidungsprozesse ... , op. cit., p. 9 and 28. J. STOPFORD and L. WELLS, op. cit. M. BROOKE and L. REMMERS, The Strategy of Multinational Enterprise: Organisation and Finance, Longman, London, 1970. E. HALSBERGHE and D. VAN DEN BULCKE, op. cit., p. 44. Ibidem. D. VAN DEN BULCKE, Regional Headquarters of American Multinational Companies in Belgium: A preliminary analysis in D. RONHAM-YEAMAN (ed.), Developing Global Corporate Strategy, Florida International University, pp. 515-522, 527-532 and 543-549. R. ALSEGG, op. cit., p. 112. D. GOEHLE, op. cit., pp. 96-97. G. HEDLUND, op. cit., pp. 56-57. E. HALSBERGHE and D. VAN DEN BULCKE, op. cit., pp. 67-68, 62-64 and 51-53. D. GOEHLE, op. cit., pp. 33 and 99. 249

(53) M. WELGE, in L. OTTERBECK, op. cit., pp. 98-99. (54) Cfr. D. GOEHLE, op. cit., pp. 80-82, G. HEDLUND, op. cit., p. 27, L. OTTERBECK, op. cit., pp. 337-338. (55) D. VAN DEN BULCKE, Belgian Industrial Policy and Foreign M.N.Cs in W. GOLDBERG (ed.), Governments and Multinationals, The Policy of Control versus Autonomy, Oelgeschlager, Gunn and Hain, Cambridge, Mass., 1983, p. 240. (56) Cfr. G. HEDLUND, op. cit., M. WELGE, op. cit., and E. HALSBERGHE and D. VAN DEN BULCKE , op. cit. (57) Cfr. GOEHLE, op. cit., pp. 11-50, G. GARNIER, op. cit., pp. 1-13, M. WELGE, Management in deutschen multinationalen Unternehmen, C.A. Poeschel, Stuttgart~ 1980, pp. 125-174, M. GHERTHAN, Decision Making within Multinationals, I.R.M., Paper presented at the European Parliament in Strasbourg, July, 1982, 28 pp., and M. BROOKE and L. REMMERS, op. cit. (58) E.C. Commission, Document III/D/222, op. cit., p. 5.

(59) G. HEDLUND, The Role of Foreign Subsidiaries in Strategic Decision Making in Swedish Multinational Corporations, Strategic Management Journal, 1980, pp. 33-34. ( 60) C. PRAHALAD and Y. DOZ, Strategic Control The Dilemma in Headquarters-Subsidiary Relationship, in L. OTTERBECK, op. cit., p. 195.

250

Commentary THE INFORMATION AND CONSULTATION OF EMPLOYEES. THE POINT OF VIEW OF THE EUROPEAN TRADE UNION CONFEDERATION Ernst PIEHL

As Professor VANDAMME underlined in his introduction, the proposed "Vredeling-Richard" directive has been the event in European social politics for the past four years. Functionaries working at the European Commission over the past twenty-five years cannot recall a similar level of interest in any of the many other proposals which regularly emerge from the Community "machine". Sometimes, during the various debates and votes on the matter, the halls of the Economic and Social Committee and the European Parliament seemed insufficiently large to accommodate the very many interested visitors from both sides of the Atlantic. U.N. I. C. E. has used much ink in attempting to justify its own rather contradictory position; ."information for workers - in principle, "yes", in practice, "no!" Researchers in many countries have produced numerous studies on the theme, that of Professor VANDAMME undoubtedly being one of the more interesting. For its own part, the European Trade Union Confederation E.T.U.C. (Confederation europeenne des syndicats - C.E.S.) has had to give over a large portion of its budget and its time in order to respond to the demands of managements, trade unions and journalists - parties by habit little interested in such 'European' topics. What is the Vredeling Directive? The proposed Directive would facilitate the information and consultation of workers in larger enterprises within the E.C., notably multinational companies. In a nutshell, the Directive seeks to give employees in such multinational companies the sort of rights their counterparts have long enjoyed at the national level. 251

Information The Directive stipulates that the management of the controlling company is obliged, at least once every six months, to give to those daughter companies functioning within the E.C. certain information about the activities of the whole enterprises. Consultation Within the terms of the proposed directive, 'consultation' refers to foreseeable decisions concerning either the ·enterprise, or an important part of it, which are likely to have a considerable effect on workers'/employees' interests. The E.T.U.C. is guided by two lines of reasoning. On the one hand, a Community directive should not lead to a deterioration of the legal arrangements currently pertaining in the Member St.ates - most of which have a highly developed acquis social. On the other hand, any such measure must constitute an improvement for those in a less fortunate position. Thus, given these considerations and the interplay of political forces, the amended proposed directive must be regarded as an. important stage in the process of improving and enlarging employees' rights specifically in multinational groups and companies. Besides, the negative aspects of the proposed amended directive, the E.T.U.C. would emphasise the following points: worker representation in the daughter companies of large enterprises must be recognised, conforming to the practice custom or law - currently in vigour in the Member States; worker representation in multinational groups and companies could be expressly created by convention between the various "social partners"; the obligation to inform employees must be honoured "before the decision" and not "before the execution of the decision". Why an E.E.C. Directive? The original proposed directive was very favourably received among the trade unions affiliated to the E.T.U.C. Nevertheless, amendments for improving the text were submitted to the European Commission. The E.T.U.C. and its members see no contradiction between the proposed directive and the codes of conduct of the O.E.C.D. and declaration of principle by the I.L.O. (International Labour Office) on multinational 252

groups. The essential difference and the advantage of the Directive over the voluntary arrangements just mentioned is that the Directive would involve legal obligations. Indeed, the E.E.C. is the only institution whicp, through its supranational judicial framework can create and impose obligatory and directly applicable rules. Whilst the 'internationalisation' of the activities of enterprises has naturally given birth to new structures of information, the information rights of workers employed in such multinational enterprises have always been governed by the legal arrangements pertaining to a particular country. Within the Member States of E.C., employees have at their command varying juridicial systems in the area of social law and work but their scope has always been limited to a single country and a single enterprise within it. A Veritable Marathon through the Community Institutions! On several occasions during the 1970s {most notably in its "democratisation of the economy" programme, adopted by the E.T.U.C. London Conference in 19 7 6) the E. T. U. C. irisi sted on the necessity of workers' rights to information and consultation, together with representation through 'European Shop Steward Committees' (Comites europeens d'enterprises or Europaischer Betriebstrat). There followed a multitude of other proposals from the academic and political worlds, as well as several 'avant-projets' from the European Commission. The official version - 23 October, 1980 - of the proposed Vredeling Directive responded only partially to the needs of employees and the desires of their unions. The idea of 'European Shop Steward Committees', for example, was not even mentioned. This came as no surprise to the E.T.U.C., since the official proposal was signed by Viscount Etienne DAVIGNON, the (then) Commissioner for Industrial Affairs - a fact all too frequently forgotten. In fact, the original version of the Vredeling Directive was more or less a compromise between the interests of employers and employees within the E. C. It should, however, be hastily added, this was a valuable compromise, since it constituted an important step towards equalising laws within enterprises. After the positive reaction of the Economic and Social Committee (January, 1982) and 253

notwithstanding the amendments and improvements made by the Social and Economic Committees of the European Parliament, in Autumn 1982, the centre-right majority of the Plenary Assembly of the Parliament rejected the essential elements of the Commission's proposed directive. It should be pointed out that the persistent campaign launched by representatives of multinationals on both sides of the Atlantic had not a little to do with this considerable 'dilution' of the Parliament's position. In November 1982, the (then) competent Commissioner, Mr. Ivor RICHARD, made an effort to salvage the main essentials of the Directive, coming under pressure from the capitalist milieux on numerous points. On the whole, the impression given was that concessions were largely motivated by the desire to leap over the "Parliamentary barrier" with the Directive which had been debated for so long. The more recent shift to the political right, which has seen governments of the right installed in a majority of the E.C.'s Member States, has also had a direct effect on the evolution of the negotiations on the Vredeling Directive. Clearly, this turn in political events has facilitated the ability of multinational groups to extend pressure and, equally, has made the tasks of trade unions and their allies that much more difficult. It is against this background that the 'modified proposal', decided by the Commission in July 1983, should be considered. Hence, it is seen both as a defensive action in the face of the pressure exercised by multinational groups through the European Parliament and as an offensive action to obtain from the Member States (bearing in mind the need for a majority in the Council) their agreement on at least some of the more fundamental elements. Which vital improvements should be brought about? The binding nature of any Community directive and the multinational scope of the Vredeling/Richard Directive must be maintained. A non-binding E.E.C. 'recommendation' and a 'code of conduct' for enterprises within the Community are not necessary, since all the Member States of the E.E.C. are members of the O.E.C.D. and adhere to B.I.T. or other such types of voluntary practice. Any measure taken should be an instrument commensurate with the Community's judicial structure and political mission. Even if 254

Mrs. THATCHER and her friends in other countries do not seem to recognise such preliminary notions of the 'European Community' these elements are crucial for the Vredeling/Richard Directive. At least three aspects of the latest proposal must be improved: (1) The management of enterprises should not be the only ones to have the full powers to refuse or withhold information on the grounds that it is 'secret'. The new first sentence of Paragraph 1, ·Article 7, which authorises the management of an enterprise "to refrain from communicating any information of a secret nature", empties the whole Directive of any substance since, in effect, it would allow the withholding of precisely that information which might be of most relevance and importance to employees. Furthermore, it would guarantee management the right to determine which information should be withheld as being 'secret'. The attempted definition of this term in the second sentence is too vague and would allow the most arbitrary and all-embracing of interpretations. If the E.E.C. truly wishes to adopt a binding Directive for the information and consultation of employees and not an optional code of conduct, then it must drop para. 1, Article 7; the corresponding elements of Article 3, paragraph 4 and Article 4, paragraph 3 would then become redundant. In return, the notion of confidentiality, introduced in paragraph 2, Article 7, which would apply to certain information, is accepted by the trade unions of the Member States. Such an obligation, which would appear inevitably in a society based on free competition, figured in Article 15 of the original project, would be fully supported by the E.T.U.C. Paragraphs 3 and 4 of Article 7 reproduce more or less faithfully the corresponding paragraphs of Article 15 of the original version but it would nevertheless be desirable for these to be examined by the legal experts of the Council of Ministers. In this regard, full account should be taken of the fact that workers' representatives would be assuming a great deal of responsibility in releasing information within the company, since they would risk losing their jobs. It should also 255

(2)

(3)

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be pointed out that they could have little interest in damaging their own company's interests. Workers' representatives should have the power to address themselves directly and personally to the parent enterprise. In the modified version of the proposal, representatives may only make contact by writing. This would represent a considerable reduction of the raison d'etre for a European directive enlarging employees' rights and for this reason the E.T.U.C. demands that the original formulation should be reinstated. Responses to written questions from parent enterprises addressed only to daughter companies must reach workers' representatives simultaneously. If not, there is a danger of a clumsy mechanism developing whereby workers' representatives would shuffle between one management and another. The sanctions envisaged for non-respect, left to the discretion of the Member States, should not only concern enterprises installed in those particular Member States. The E.T.U.C. demands (and is here supported, exceptionally, by the conservative majority of the European Parliament) that the Member States should furnish workers' representatives with the right to compel the release of information on the management of the controlling enterprise, whichever its country of origin. The obligation to inform should apply to such important activities as "investment and production programmes" or "the introduction of new technologies", which are of obvious interest to employees. The actual formulation - more precisely, paragraph 2 Article 3 - is far too vague. Enterprises should not just give indications of "foreseeable developments concerning investment" but should also give information on such matters as, for example, "investment and production programmes" (see the original version). Also, the obligation to inform about "rationalisation projects" and "working methods" (points (f) and (g) , paragraph 2, of the old Article 5) should be included in the new Articles 3 and 4. Lastly, the "general clause" (last point, (h), of the original proposal) should not simply be left out, since the domains of information, due to

unforeseeable evolution, can never be completely enumerated. Closing remarks Here, then, have been some of the more important improvements suggested, among others, by the executive committee of the E.T.U.C. in October 1983. Since then, the E.T.U.C. and its member organisations have directed their efforts towards the progress of the Council's final decision. In particular, they have sought to preserve positive elements and to strengthen or replace the important weaknesses listed above. Closed negotiations are currently under way in the competent organs of the Council of Ministers; on the one hand, at the level of a 'working group on social affairs' of the Committee of Perma:pent Representatives (C.O.R.E.P.E.R.), and on the other hand at the level of the Ministers of Social Affairs. In fact, not withstanding the opposition of the British representative, the latter decided by a large majority (under the Greek presidency) on 8 December last to enter the political discussion of the Vredeling Directive into the order of the day for the next formal meeting of the Ministers (on 7 June in Paris). This was done in a 'constructive spirit'. Meanwhile, miracles should not be expected of our French friends and nor should the strength of the opposition be underestimated. Indeed, such opposition, although so far covert, is becoming more and more apparent among the so-called 'liberal' ministers of the German Government. Bearing in mind the extent of this opposition to an extension of employees' rights, the E.T.U.C. is not very optimistic about the outcome of the current deliberations. It is highly probable that we will see many more studies like this one before the day when a definitive proposal is actually signed and sealed.

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COMMENTARY Bernard SASSEN

Much has been written over the past few years about the subject of employee information and consultation within enterprises particularly multinational enterprises. The debate was first taken up at the time of the United Nation's work concerning the establishment of a code of conduct for transnationals, in the guiding principles of the O.E.C.D. for multinational enterprises, in the tripartite declaration of pr!nciple by the International Labour Office on multinational enterprises and social policies and, of course, the work within the European Community on the proposed directive known as the 'Vredeling Proposal' which has provoked an extremely lively series of discussions. Those who have followed the whole of the discussion and who are actively involved in defending the position of European employees with regard to the 'Vredeling Proposal' will doubtless take great interest in the present study, published by the Institute of Research on Multinationals, which, according to the introduction of Professor J. Vandanwe, has as its principle objective the aim "to situate the problem of the information of employees within multinational enterprises in a global perspective". Employer organisations following the various international initiatives were always conscious of the linkage between them. Nevertheless, different initiatives provoked very different reactions; as far as the plans of the U.N., O.E.C.D. and I.L.O. were concerned, they co-operated in a most constructive manner but they were thoroughly opposed to the European Commission's proposed Vredeling proposal. This opposition was voiced by U.N.I.C.E.'s spokesman on Community industries, by 259

the U.S. Industry Co-ordinating Group on behalf of the various American industries and by Keidanren on behalf of Japanese industry. How can this difference in approach be explained? To begin with, there is a difference in the nature of the legal instruments envisaged. The principles promulgated in the O.E.C.D. and I.L.O. initiatives are not legally binding but a directive adopted by the E.C. Council of Ministers would oblige Member States to bring their legislation into line in such a way that it. would be equally binding on all enterprises. However, this fundamental difference between the initiatives is an insufficient explanation of the differing approaches of employer organisations towards them since, in effect, the O.E.C.D. and I.L.O. instruments exercise equally binding constraints on enterprises; enterprises could not hope to ignore the principles they espouse without jeopardising their reputations and prejudicing the social climate in which they function. Essentially, the difference in approach can be explained by the difference in content. The instruments of both the O.E.C.D. and the I.L.O. espouse principles which are common to systems of industrial relations in the countries concerned and otherwise refer to national legislation and practice. Adoption of the Vredeling directive, on the other hand, would introduce specific legislation for a particular category of enterprise. In so doing, it would disrupt industrial relations by the imposition of rigid rules and regulations where flexibility is most necessary and would thus go directly against the current general trend towards deregulation. In this sense, the proposal is inopportune. However, the opposition of employers' organisations to the Vredeling proposal does not mean that they oppose the principles of employee information and consultation which figure so strongly in it. Such an· impression is belied by their positive co-operation in the formulation of the O.E.C.D. and I.L.O. instruments, which were the results of a concensus between all the parties concerned. A better proof is the everyday information and consultation of employees practised by enterprises throughout Europe within the framework of current legislation, collective conventions and national custom. Employers contest the appropriateness of a Vredeling-type Community initiative which, although 260

it is presented as a harmonising measure, would hardly lead to the harmonisation of industrial relations, since it would apply identical rules and regulations to incomparable national arrangements. For example, the desire to accord the same rights to British shop stewards (trade union representatives) and to German Betriebsrate (representing all employees in an enterprise) fails to take into account the differing judicial and socio-economic environments in which they function and hence it is extremely doubtful whether they would contribute anything to an amelioration of industrial relations. The proposed Directive gives no consideration to the subtle equilibria which already exist between the rights and duties of employers and employees within the various national systems. Furthermore, the absence of any such consideration indicates that, were it ever to be adopted, it would provoke bitter argument and require a great deal of co-operation. Employers have judged the Vredeling proposal in the context of the Community's priorities; improving productivity, creating employment, encouraging new investment and increasing competitiveness. Judged in this light, the proposed directive - or its modified version - is, at worst, contrary to these aforementioned objectives and, at best, inadequate for facing the major problems of the Community. National custom and law in the area of employee information and consultation are not entirely deficient when applied to "complex-structured enterprises, particularly transnationals" (as the Vredeling proposal describes its scope of application). To this category is applied the same set of rules and principles as for other enterprises, without posing great problems. Where a decision is strongly influenced by considerations appropriate to the strategy of the whole group, the local management of a company is normally perfectly prepared to inform and consult its employees according to national law and practice. Where management is insufficiently informed by the management of the parent enterprise then this is an exceptional case of unfulfilled obligations. Such cases of unfulfilled obligations - even if they are ordained by legislation - constitute a regrettable fact and are generally redressed by the public debate they invariably provoke - a Community directive would 261

change nothing in this regard. Besides, it should be underlined that such cases are extremely rare. In the document published in 1982 by the European Confederation of Trades Unions (E.T.U.C.) under the title "Cases of Conflict in the European Branches of Multinational Groups", the authors are unable to report any cases (with one exception) where the enterprises concerned did not respect the relevant national laws or follow the principles and guidelines figuring in the international instruments of the O.E.C.D. and the I.L.O. By implication, the document confirms that the managements of enterprises follow, by and large, relevant national legislation and the guidelines of the O.E.C.D. and I.L.O's international instruments. Furthermore, the E.T.U.C. document throws into sharp relief the fact that the objective it is pursuing in supporting the Vredeling proposal is not harmonisation of employee information and consultation practices but the realisation of a much longer-term union aim; namely, the right of access to the management of parent companies. In considering a Community directive in the area of employee information and consultation, it is important to remember that the Commission has the duty to seek to bring together the various instruments of the Member States which have a direct incidence on the functioning of the Common Market. Some supporters of the proposed directive have made much of the argument that the tendency for enterprises to concentrate in those countries providing the least protection for their employees must be avoided but this argument doesn't stand up to an examination of the facts. There is no such visible tendency in the Community and if there were, the German Federal Republic would have to be one of the first victims of the fact that its legislation in this area is undoubtedly among the most advanced. Suffice it to observe that the German Federal Republic is one of the more preferred countries within the Community for external investment. It should also be pointed out that regulations which would hinder enterprises engaged in restructuring their organisations in terms of personnel could effectively influence an enterprise's choice of country for new investment. This much more important problem, which is intimately linked to the questions tackled in the 262

Vredeling proposal, does not seem to have bothered the Commission at all. Some important reservations about content should be added to these general considerations. Both the original and the modified proposal seek to establish rigid rules which do not take into consideration the complexity of the structures of enterprises nor the enormous variety of decisions which have to be taken. The list of subjects where consul tat ion is appropriate is ill-defined and far from comprehensive, hence leading to uncertainty and the risk of litigation. Furthermore, the scope of the rights conferred by the proposal includes a potential for a delay in executing decisions which could prove to be extremely damaging, since economic exigences frequently require rapid decision-making and execution. Considering all of these factors, employers believe that the directive would have a harmful effect on the competitiveness of Community industry. The proposed directive could have further perverse effects owing to the fact that confidential information would not enjoy adequate protection. In effect, such information could be divulged to third parties who might have nothing to do with the affairs under discussion but could also furnish it to the profit of employees in rival enterprises. Furthermore, under the stipulations of the directive, decisions could be the object of examinations before the courts. Such a possibility is completely unacceptable, since it would mean that decisions could be delayed by bodies deprived of sufficient knowledge of the enterprise's activities and free of all responsibility for its success. Employers do not unconditionally adhere to the idea of secrecy for secrecy's sake but they feel it is necessary to take into account that it is in the interest of the Community as a whole that the confidentiality of certain information should be safeguarded. The expose des motifs of the proposed directive states that its objective "is not to change the systems of work relations already in place throughout the Community" but the proposal itself is a long way from conforming with this declaration of intention, since it would imply major modifications to these systems. In particular, the directive would give rise to arguments about the rights and scope of consultation and the confidentiality of 263

information. These could only reinforce the risk of potential conflict which I have mentioned. Taking into account the actual position of employers with regard to employee consultation and information and the everyday practices of European managements in this field, there is reason to consider what Professor J. VAND~ll~E has written, in the introduction to the present publication, about the "forgotten elements" i:n the debate about the Vredeling proposal - namely, the social dimension of European integration and a ne~ type of enterprise, barely defined but one whose characteristics would appear to be "the organisation of a concertation to safeguard or promote employment, for example, in the cadre of European collective conventions". To deduce from the opposition to the Vredeling proposal the non-acceptance of the social dimension of the Community would seem to me to·be completely unjustified; by its constructive co-operation in other initiatives concerning the social dimension, U.N.I.C.E. has sufficiently demonstrated its consciousness of that area of the Community. However, U.N.I.C.E. should not thereby lose its right to oppose a particular piece of Community legislation in the field of industrial relations. As for the observations relative to a new type of enterprise, it should be pointed out that employers have by no means forgotten that dialogue with employees is an important element in management. However, they have arrived at the conclusion that, because of the fundamental objections listed above, the Vredeling proposal will contribute nothing to improving industrial relations. This does not mean that management does not try to develop employee consultation and information within the framework of the national structures which already exist but it is not necessary to have legislation in order to do this, even if it already exists in several Member States. A report published recently by the Confederation of British Industry ("British Employee Involvement Today", London, December 1983), based on a survey of a large number of British firms, also arrives at the conclusion that in these countries legislation would not only be superfluous but could be positively harmful for established working procedures, where the key words are 'evolution' and 'flexibility'. Today there is general acceptance of the fact that companies do better when they benefit from the 264

points of view and the ideas of their employees. Managements have, as a consequence, every interest in developing adequate schemes for employee consultation and information where these do not already exist. These schemes differ greatly. They do not flow from uniform conceptions imposed without recognition of the idiosyncracies of enterprises. It must be recognised that certain binding forms of consultation procedures could be used by employee representatives in order to delay or even to foil the execution of decisions vi tal for a company. Employers have always underlined that the management of enterprises depends on the competence of their directions and that they, therefore, could not accept consultation systems which, in practice, constitute an erosion of that competence. That several contributions to this study have tended to minimise the import of the Vredeling Proposal with regard to the aspects I have outlined is a pity. This attitude, which I deplore, could result in misunderstanding about current practice and hence a prejuge favorable on the proposal. It is in these areas that this study, which is undeniably of interest, should be further pursued.

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