Who is undermining employee involvement in postsocialist supervisory boards? - National, European and international forces in the revision of Hungarian company law*
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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"Who is undermining employee involve..." refers background in this paper
...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....
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"Who is undermining employee involve..." refers background in this paper
...corporatism' theory (Ost 2000) points at the role of trade unions and other representatives of the worker states during the socialist era and their subsequent discreditation at the end of the 1980s, early 1990s....
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...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)....
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