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Who is undermining employee involvement in postsocialist supervisory boards? - National, European and international forces in the revision of Hungarian company law*

01 Jul 2009-Journal for East European Management Studies (Rainer Hampp Verlag)-Vol. 14, Iss: 3, pp 265-285

AbstractThis article explores regulatory developments with regard to employee representation in post-socialist corporate governance systems of Central Europe. It sets out to weigh the applicability of different theories on postsocialist industrial relations that focus on domestic, European and international forces. It pays special attention to the Hungarian case and studies regulatory developments in the early 2000s, with a focus on the third postsocialist Company Law of 2006. The article argues that the law reform undermines effective employee representation in postsocialist corporate governance systems. It concludes that these developments can only be adequately understood as the result of the interplay between various social forces at the national, European and international level. Dieser Beitrag erforscht die regulativen Entwicklungen hinsichtlich der Arbeitnehmervertretung im Kontext postsozialistischer Corporate-GovernanceSysteme in Mitteleuropa. Er beginnt mit der Uberprufung der Anwendbarkeit von verschiedenen Theorien, mit Fokus auf inlandische, europaische und internationale Krafte, auf die postsozialistischen industriellen Beziehungen. Es wird speziell der ungarischen Fall untersucht, wobei die regulativen Entwicklungen zu Beginn dieses Jahrzehnts, und besonders das dritte postsozialistische Unternehmensrecht von 2006 im Zentrum der Betrachtung stehen. Es wird argumentiert, dass die Gesetzesreform eine wirksame Arbeitnehmervertretung in postsozialistischen Corporate-GovernanceSystemen unterminiert. Zusammenfassend kann festegestellt werden, dass diese Entwicklungen nur als das Ergebnis des Zusammenspiels zwischen verschiedenen sozialen Kraften auf der nationalen, europaischen und internationalen Ebenen adaquat verstanden werden konnen.

Summary (3 min read)

Introduction

  • This right was institutionalised through the compulsory existence of a two-tier board system, i.e. a system that, besides a managerial board, requires the existence of a 266 JEEMS 3/2009 supervisory board that controls the executive management.
  • While most of the existing studies on the position of labour in postsocialist Europe turn their attention to issues such as wage bargaining and social provisions such as sick pay and safety regulation (Deacon 2000; Kovács 2002), little research has been done on the position of labour in corporate governance and company law issues.
  • At the same time, the added value of this paper lies in the discussion of how institutional changes are actually shaped.
  • First, I will review the existing theories on the industrial relations in the context of postsocialist Europe.

2. Domestic, European and Transnational forces and the stability of the Hungarian two-tier corporate governance system

  • In recent years there has been increasing scholarly attention on the position of labour in postsocialist Europe.
  • Illusionary employee representation would fit in a system where ‘neocorporatist forms are being used to generate neoliberal outcomes’ (Ost 2000:504).
  • Most studies find that the postsocialist institutions resemble those that are already existing in the EU and that this resemblance is the result of ‘both imitation and imposition’ (Vickerstaff/Thirkell 2000:239).
  • In this respect the authors expect that the current EU strategy of marketisation and strengthening the role of shareholders vis-à-vis other stakeholders in the corporation (Van Apeldoorn/Horn 2007) will be reflected in Hungarian policies.
  • The demands of foreign capital will be the driving force behind institutional reforms.

3. Investigating the crime scene: the politics of corporate governance and company law since the early 1990s

  • The first postsocialist company law was mostly inspired by the Hungarian presocialist legal tradition and was supplemented by provisions that were taken over from the German legal system.
  • According to the preamble of the 1997 revision, it had explicitly neglected the rights of creditors in order to facilitate the aims of the Hungarian government to let off the state enterprises.
  • This included the implementation of some of the EU Company Law Directives that stressed the importance of adequate institutional provision for the various stakeholders.
  • This institutional feature reflects both the heavy competition for the attraction of foreign direct investments and the lingering threat of company relocation further eastwards, as well as the fact that transnational corporations that have invested strongly in the region have developed a vested interest in keeping workers fairly satisfied.

4. The 2006 company law: International and European arguments translated into the Hungarian context

  • The developments discussed in the previous section set the stage for the discussions on the 2006 revision of the Hungarian Company Law.
  • The process of drawing up the 2006 Hungarian Company Code displays important similarities with the way in which the previous postsocialist Company Codes had been introduced.
  • The preparations started in 2004 when this Committee published a strategy paper, which outlined the kinds of revisions that this group considered to be appropriate.
  • The adopted code does not make board representation completely voluntary, but it provides a starting point for further deregulation opening the door for a onetier system and undermining of mandatory board-level representation (Neumann 2006).
  • In the second paragraph it regulates that in the latter cases, an alternative kind employee control on the ‘company's management shall be laid down in agreement between the board of directors and the works council.’.

The national policy-making process

  • Let us first turn to the national policy discussions.
  • The initial strategy paper of March 2004 questions the usefulness of employee representation in supervisory boards (Neumann 2006) and proposes the possibility of a one-tier board system.
  • Frege (2001) has argued that Hungarian trade unions are co-opted by the management not because of their strengths, but rather because of their weaknesses and their inability to pose serious threats to managerial strategies.
  • Second, the introduction of the third postsocialist company law coincided with the announcement of the introduction of a far broader institutional reform program that the Hungarian government, consisting of social-democrats and liberals, was proposing in 2005 and which would effectively get underway after the 2006 elections.
  • To answer this question the authors need move beyond the purely national debates in order to capture some of the underlying causes of the 2006 revision.

The European context

  • The two other perspectives can provide additional insights into the driving forces behind this shift in the Hungarian company law.
  • When the authors look at Hungarian company law debates in the early 2000s, they often find references to the process of European integration.
  • The Commission therefore proposes that this 276 JEEMS 3/2009 recommendation from the High Level Group should be followed up in the medium term’ (EC 2003:15-16).
  • It is however important to stress that there are no concrete Directives that would make the 2006 changes obligatory.

International competitiveness

  • This brings us to the third theoretical perspective that might help us understand the driving forces behind the company law revisions of 2006.
  • As a result of the importance of foreign capital to the Hungarian economy, foreign investors play a crucial role in the development of the Hungarian corporate governance culture (Galgoczi 2003:32), where practices that were introduced by foreign corporations to their subsidiaries subsequently spread amongst the national policy scene (Vliegenthart/Overbeek 2007).
  • In an attempt to enter the competition for foreign investments in the best shape possible, governments in the region were willing to follow the ideas introduced by (local subsidiaries of) transnational investors (Grabbe 2003:248).
  • In the Hungarian context, the Budapest Stock Exchange issued Corporate Governance Recommendations that it had developed with the help of the British Know-How Fund and Ernst and Young in 2002, following the example of other countries in the region (Collier/Zaman 2005:767-768; Hermes et al. 2007).
  • It helps transnational corporations to restructure local subsidiaries in order to work better according to their needs (Meyer 2004; Marinov/Heiman 1998), but it also reduces the costs of dealing with strict regulation unknown to the host economy.

5. Who is undermining employee representation in postsocialist supervisory boards?

  • During the political debate on the topic, the changes that would effectuate this were backed up with references to European developments and demands from the world economy that would create the necessity to do away with over-rigid regulation in the field of the organisational set-up of corporations.
  • The reasons for this are to be sought in their weak position in the national political landscape and the fact that they have been engaged in multiple social struggles at the same time.
  • While the 2006 changes have been brought to the floor as mere technical adjustments to meet the criteria of the European Union and the global economy, they have enjoyed a high level of support amongst the Hungarian political scene.
  • First, European Union agencies, especially the European Commission, have continuously pushed Central European states towards a model that would favour foreign investments as a crucial part of the economic restructuring process (Vliegenthart/Horn 2007).

Implications and research perspectives

  • These findings are important to their understanding of the development of industrial relations in postsocialist Europe.
  • Company law development in postsocialist Europe is genuinely transnational in the sense that the analysis of national forces and developments alone cannot adequately capture the process of law-making.
  • This paper points out that this process is not restricted to actions directly involving FDI, such as the promotion of investment agencies, special economic zones and strategic incentives (Meyer/Jensen 2005), but extends itself to policy fields that set the broader field in which transnational corporations operate.
  • Perhaps needless to say, a study that focuses on the regulation of supervisory boards does not capture the practices of supervisory boards and the corporate governance system in which they function.
  • In the past, especially domestically owned firms and state enterprises have often sought to ‘navigate through a maze of new policies in which contradictory regulations and inconsistent enforcement produced ambiguity about which rules and which games were operating’ (Stark/Vedres 2006:1371), reflecting a deeper segmentation of the Hungarian economic landscape (Martin 2008).

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Vliegenthart, Arjan
Article
Who is undermining employee involvement in postsocialist
supervisory boards? National, European and international forces in
the revision of Hungarian company law
Journal for East European Management Studies
Provided in Cooperation with:
Rainer Hampp Verlag
Suggested Citation: Vliegenthart, Arjan (2009) : Who is undermining employee involvement in
postsocialist supervisory boards? National, European and international forces in the revision of
Hungarian company law, Journal for East European Management Studies, ISSN 0949-6181,
Rainer Hampp Verlag, Mering, Vol. 14, Iss. 3, pp. 265-285
This Version is available at:
http://hdl.handle.net/10419/84009
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licence.

Arjan Vliegenthart
Who is undermining employee involvement in postsocialist
supervisory boards? – National, European and
international forces in the revision of Hungarian company
law*
Arjan Vliegenthart**
This article explores regulatory developments with regard to employee
representation in post-socialist corporate governance systems of Central
Europe. It sets out to weigh the applicability of different theories on
postsocialist industrial relations that focus on domestic, European and
international forces. It pays special attention to the Hungarian case and
studies regulatory developments in the early 2000s, with a focus on the third
postsocialist Company Law of 2006. The article argues that the law reform
undermines effective employee representation in postsocialist corporate
governance systems. It concludes that these developments can only be
adequately understood as the result of the interplay between various social
forces at the national, European and international level.
Dieser Beitrag erforscht die regulativen Entwicklungen hinsichtlich der
Arbeitnehmervertretung im Kontext postsozialistischer Corporate-Governance-
Systeme in Mitteleuropa. Er beginnt mit der Überprüfung der Anwendbarkeit
von verschiedenen Theorien, mit Fokus auf inländische, europäische und
internationale Kräfte, auf die postsozialistischen industriellen Beziehungen. Es
wird speziell der ungarischen Fall untersucht, wobei die regulativen
Entwicklungen zu Beginn dieses Jahrzehnts, und besonders das dritte
postsozialistische Unternehmensrecht von 2006 im Zentrum der Betrachtung
stehen. Es wird argumentiert, dass die Gesetzesreform eine wirksame
Arbeitnehmervertretung in postsozialistischen Corporate-Governance-
Systemen unterminiert. Zusammenfassend kann festegestellt werden, dass diese
Entwicklungen nur als das Ergebnis des Zusammenspiels zwischen
verschiedenen sozialen Kräften auf der nationalen, europäischen und
internationalen Ebenen adäquat verstanden werden können.
Key words: Corporate governance, supervisory boards, company law,
Hungary, postsocialism, transnationalism
* Manuscript received: 22.12.08, accepted: 09.06.09 (2 revisions)
** Arjan Vliegenthart, Lecturer, Faculty of Social Sciences, Vrije University Amsterdam,
Holland. Main research areas: Political economy of corporate governance, regulation in
Central and Eastern Europe. Corresponding address: a. vliegenthart@fsw.vu.nl.
JEEMS 3/2009 265

Who is undermining employee involvement in postsocialist supervisory boards?
Introduction
In his seminal article Round up the Usual Suspects!: Globalization, Domestic
Politics and Welfare State Change, Herman Schwartz (2001) explores the
driving forces behind the assumed welfare state retrenchment in Western
Europe. Plotted as a whodunit, Schwartz’s article discusses different
explanations in the literature behind the decline in ‘covert provision of social
protection for both capital and labour through service sector regulation’
(Schwartz 2001:43). Schwartz proposes an elegant way of discussing rival
hypotheses. He juxtaposes well-known theoretical lenses on welfare
retrenchment to find out how far each of these approaches travel in the light of
concrete empirical evidence.
This paper adopts the same approach to the field of labour representation in
postsocialist supervisory boards. It seeks to explore how and to what extent
existing theories on postsocialist industrial relations can help us to understand
this under-explored field. Whereas the literature on postsocialist industrial
relations is rather united in its view that organised labour is amongst the losers
of the economic restructuring process, there are three contradicting explanations
for this phenomenon. First, there are those who relate the weakening position of
organised labour to primarily domestic circumstances (Ost 2000; Crowley 2004;
Crowley/Ost 2001; Avadevic 2005). Second, there are accounts that stress the
importance of the European Union on postsocialist industrial relations. They
argue that the European Union has had considerable leverage, both through
formal and informal influence, on the emerging postsocialist institutions
(Vickerstaff/Thirkell 2000; Meardi 2002). Third, there are analyses that stress
the importance of transnational corporations in the formation of postsocialist
social relations (Bohle/Greskovits 2006/2007). In comparison to Western
Europe, labour in Central Europe is in a weak position as the comparative
advantages of the region rest upon the ability to compete with other economies
on wage levels, and because of the fact the Central European states are highly
dependent on foreign capital for industrial upgrading and development.
Concretely, this study turns its attention to the process of deregulation of
important aspects of Hungarian company law, which further undermines the
position of labour in corporate decision-making (Neumann 2006; Meardi 2007).
Since the collapse of state socialism, employees in Hungary –and elsewhere in
Central Europe- have had a say in the corporate decision-making process
because of their representation in the corporation’s supervisory boardap.
Whereas this kind of representation has never been as strong as in Western
European countries such as Germany and Austria, it constituted an additional
channel of workers’ representation in strategic corporate choices and comprised
a ‘stable component of national ”economic culture”’ (Kluge/Wilke 2007:9). This
right was institutionalised through the compulsory existence of a two-tier board
system, i.e. a system that, besides a managerial board, requires the existence of a
266 JEEMS 3/2009

Arjan Vliegenthart
supervisory board that controls the executive management. This system is
undermined by the adoption of a new company law that paves the way for the
existence of a one-tier system, i.e. a system in which the managerial board is
directly responsible to the annual shareholders’ meeting and which does not
allow for employee control over managerial decisions. This paper seeks to find
out what the causes of this development are, or to put in Schwartz’ terms: who is
killing employee representation in postsocialist supervisory boards? Is it
domestic actors, European forces or pressure from the world economy,
conveyed by foreign investors?
This study explores the political debates surrounding the 2006 revision of
Hungarian company law. It digs into the policy-making process surrounding this
law and traces the different forces that have impacted upon this revision.
Moreover, it discusses the interplay between these various forces, allowing for
an in-depth scrutiny of the three ‘suspects’ discussed above. Whereas the
empirical analysis is restricted to the Hungarian case, its findings contribute to
two bodies of literature. First, it enriches our knowledge of the position of
(organised) labour in postsocialist Europe, both empirically and theoretically.
Empirically, it adds a new policy field to the debate. While most of the existing
studies on the position of labour in postsocialist Europe turn their attention to
issues such as wage bargaining and social provisions such as sick pay and safety
regulation (Deacon 2000; Kovács 2002), little research has been done on the
position of labour in corporate governance and company law issues. This is
surprising because these latter issues involve pressing socio-economic questions,
i.e. the ability of labour to influence strategic long-term decision-making in a
firm (Jackson 2005), and constitute a policy field that is closely connected to
‘pure’ industrial relations (Höpner 2005). Therefore this paper theoretically adds
to our understanding of the dynamics of postsocialist decision-making, in the
sense that it enhances our knowledge of how far the existing research paradigms
travel in explaining an empirically neglected area of employee involvement in
socio-economic decision-making.
Second, the paper also contributes to the field of comparative capitalisms
(Jackson/Deeg 2008). The last years we have seen an increased application of a
comparative capitalism or a Varieties of Capitalism approach to postsocialist
socio-economic institutions (Drahokoupil 2009 for an overview of some of the
most relevant contributions to this field). Central to this strand of literature is the
idea that institutional complementarities between the different socio-economic
institutions give certain countries their own comparative advantage
(Hall/Soskice 2001). Moreover, coherent institutional set-ups lead to national
business systems that can remain remarkably different from each other even in
times when forces of globalisation are widely considered to lead to institutional
convergence (Whitley 1999). This paper captures the changing nature of two
crucial socio-economic institutions and provides us with insights into the type of
JEEMS 3/2009 267

Who is undermining employee involvement in postsocialist supervisory boards?
postsocialist capitalism. It highlights the interactions between the fields of
corporate governance and industrial relations. These two policy areas are vital in
any socio-economic system because of their important repercussions for the
division of power amongst the various social actors within society. At the same
time, the added value of this paper lies in the discussion of how institutional
changes are actually shaped. It complements the more static institutionalist
accounts of postsocialist capitalism with a historical dimension while stressing
the fact that they continue to be modified incrementally in order to capture the
dynamics of postsocialist development.
The remainder of this paper is structured as follows. First, I will review the
existing theories on the industrial relations in the context of postsocialist
Europe. Based on this review I will derive the kind of developments these
theories would expect with regard to company law (section 2). Subsequently, I
will deal with the evolution of postsocialist company law in Hungary (section
3), before turning to the emergence of the third postsocialist Company Code in
2006 (section 4). In the final section, I will then discuss the extent to which
these theories hold with regard to these developments and how we could
enhance our theoretical understanding of the postsocialist socio-economic
development.
2. Domestic, European and Transnational forces and the stability
of the Hungarian two-tier corporate governance system
In recent years there has been increasing scholarly attention on the position of
(organised) labour in postsocialist Europe. The majority of studies have pointed
out that the position of labour in postsocialist Europe is weak, especially
compared to the position of labour in Western Europe.
1
But whereas the
majority of studies point to an overall weakness of organised labour in the
region, the reasons for this weakness tend to vary from study to study. Broadly,
we can discern three kinds of accounts: domestic, European and transnational
accounts. In this section, I will discuss these three theories and give hypotheses
of what they have to say about the sustainability of the two-tier corporate
governance model in Hungary and the stability of employee representation in
Hungarian supervisory boards.
The first theoretical perspective focuses on the domestic reasons for the weak
position of labour in postsocialist Europe. The so-called ‘illusionary
1 There is a limited number of studies that argue that a substantial form of postsocialist
corporatism has emerged in the 1990s (Iankova 1998). The most ‘widespread view,
however, was that tripartite institutions are far from being vehicles for corporatist policy
making, and that they have been used by governments mostly to legitimize their already-
decided policy choices rooted in neoliberal economic principles’ (Avdagic 2005:28).
268 JEEMS 3/2009

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Frequently Asked Questions (1)
Q1. What are the contributions mentioned in the paper "Who is undermining employee involvement in postsocialist supervisory boards? national, european and international forces in the revision of hungarian company law" ?

In this paper, the authors explored the political debates surrounding the 2006 revision of Hungarian company law and traces the different forces that have impacted upon this revision.