The Role of Employees in Corporate Governance

1
The Role of Employees in Corporate Governance

• Margaret M. Blair
• Georgetown University Law Center
• Third Southeastern Europe Corporate Governance
  Roundtable

2
Wealth Creation Requires Capital and Labor

• Conventional model -- shareholder primacy --
  leaves out role of employees
• Growing recognition that human capital is source
  of competitive advantage
• Variety of ways that employees interests can be
  represented.
• Evidence that employee participation enhances
  wealth creation.

3
The Shareholder Primacy Reform Medicine

• Western advisors and reform advocates have
  promoted shareholder capitalism.
• Sole emphasis is on strengthening rights of, and
  protections for, financial investors.

4
Yet corporate leaders in developed countries
increasingly understand that people and the
knowledge they create are often the most valuable
assets in a corporation.
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How Can These Ideas Be Reconciled?

• Scholars increasingly recognizing
• Shareholders long-run interests are probably
  well-served by including employees in corporate
  governance.
• Blair, 1995 Blair Stout, 1999 Roberts and
  Van den Steen, 2000

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Variety of Ways that Employees Interests
Protected

• Unions.
• Co-determination employee representation on
  boards of directors.
• Profit-sharing.
• Equity-sharing.
• Team production solution Boards of directors
  must balance competing interests.

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Unions

• Can help fight for employees interests.
• Approach is often confrontational rather than
  cooperative.
• Negotiated agreements between Company and Labor
  can reduce flexibility, responsiveness to
  changing market conditions.

8
Co-determination

• Worked well in Germany in Post-WWII decades.
• Labor Peace
• Low unemployment
• Robust economic growth
• Has led to economic rigidity, sluggish growth, in
  recent decades.

9
Advantages of Equity-Sharing

• Improved employee commitment and buy-in to
  managements goals.
• Alignment of interest between employees and
  shareholders.
• May help make firms more adaptable.
• May support the emergence of more transparent and
  effective corporate governance.
• May foster more social responsibility of firms

10
Profit-Sharing

• Became much more widely used in Europe in 1990s.
• Most profit-sharing plans are broad-based (all or
  most employees) rather than for executives only.
• Most likely to be used in firms facing intense
  competition, firms with highly-qualified
  workforce. (Poutsma, 2002)

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Profit-Sharing (Cont.)

• Can be done a variety of ways
• Cash-based sharing of annual profits
• Deferred profit-sharing
• Supposed Advantages
• Encourage employee involvement, improve
  motivation
• Improve distribution of wealth
• Wage flexibility can improve firm performance
• But, more common among large firms where
  incentive effect is weakest (Poutsma, 2002).

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Impact on Wealth Creation?

• Some evidence that profit-sharing increases
  productivity, on the order of 4-5 (Weitzman
  Kruse, 1990)
• But, risks are shifted onto workers who are less
  able to diversify.

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Equity-sharing

• Use of share ownership schemes also increased in
  Europe in 1990s.
• Almost one-third of companies with more than 200
  employees, in 10 Western European countries, have
  share ownership schemes.
• About half are broad-based, half focused on
  management. (Poutsma, 2002)

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Equity-Sharing (Cont.)

• Variety of types
• Employee Share Ownership Plan
• Stock bonus plans
• Stock option plans
• Employee buyout
• Worker Cooperatives
• Typically used in larger companies, with
  highly-qualified workforce, high level of worker
  empowerment. (Poutsma, 2002)

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Impact on Wealth Creation?

• Major review of literature by Blasi (2002) finds
  that, on average, employee share ownership
  improves firms productivity by four percentage
  points.
• Total shareholder returns increase by two
  percentage points.
• Profit levels jump by about 14 percent.

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Impact on Wealth Distribution?

• These gains are after dilution effect is taken
  into account.
• Employees typically own about 8 of shares.
• Grants of shares to employees do not come at
  expense of wages or benefits.

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Caveats

• Employee share ownership alone is not enough
  must be accompanied by increased employee
  participation in decision-making.
• Employee share plans are not a substitute for
  diversified retirement savings.
• Enron fiasco reminds us that employees can lose
  everything if not diversified.

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Nonetheless, the long-run trends in the US and
Europe appear to be in the direction of
increasing use of compensation and governance
schemes in which employees participate.
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EU Guidelines for Employee Participation Plans
(Poutsma, 2002)

• Voluntary participation.
• Extend benefits to all employees.
• Clarity and transparency.
• Predefined formula.
• Regularity.
• Avoiding unreasonable risk for employees.
• Clear distinction between participation schemes
  and regular wages and benefits.
• Compatibility with worker mobility.