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necessary to be able to oversee management’s compliance with the law, with the collective labour agreement and with other regulations concerning safety, health and well-being. Moreover, the law entitles the works council to be consulted on all important, well-defined managerial decisions. This includes decisions about large investments and loans, and expansion or reduction of business
activities. Management is obliged to ask for the council’s advice in time, so that the works council can influence the decision process. Finally, and most importantly, the works council has the right of consent (codetermination) with respect to all social arrangements within the organizations,Works councils have the potential to exert great influence on company policies, if they exploit their legal rights optimally. Freeman and Lazear (1995) contend that each of the works councils’ rights can be to the benefit of the entire organisation, leading to an increase of the ‘joint surplus’. Firstly, exchange of information can ensure that parties trust each other more, which in turn may improve efficiency. Secondly, advisory rights may allow workers to come up with suggestions and solutions to problems that have an excess value. And thirdly, codetermination rights give the employees more control over their own working conditions and work security, which prompts them to take a longer-run view of the prospects of the firm.The firm at large also benefits from this extra check, because opportunistic managers may engage in rent-seeking behaviour, and their non-observance of (explicit as well as implicit) agreements can be noticed by the works council. The organisation runs the risk that a powerful workforce will only try to enlarge the pie in favour of themselves, claiming wage rises and preservation of jobs in an irresponsible manner that may lead to lower profits. The danger of rent-seeking activities by the works council is their main theoretical argument against participation rights. Another negative impactof works councils on firm performance could be their lack of know-how and a delaying effect on decision-making processes.