The Role of Employees as Stakeholders in Corporate Governance

1
The Role of Employees as Stakeholders in
Corporate Governance

• Roustem Davletguildeev
• Trade Unions Advisory Committee to the OECD
• Third Eurasian Roundtable on Corporate
  Governance, 29-30 October, 2003, Bishkek

2
The Preamble to the OECD Principles on Corporate
Governance

• Employees and other stakeholders play an
  important role in contributing to the long-term
  success and performance of the corporation, while
  governments establish the overall institutional
  and legal framework for corporate governance.

3
Essential points for the presentation

• what is the difference between insider and
  outsider models of the Corporate Governance in
  application to the Eurasian needs
• the importance of the Corporate Social
  Responsibilitys concept for the present
  situation in Europe
• which are the essential forms of the employees
  participation
• conclusions

4
Main Stakeholders

• Shareholders
• Employees
• Management
• Customers
• Creditors (i.e. Banks)
• Suppliers
• Local Communities
• Others

5
Two models of Corporate Governance

• Outsider (shareholders) model
• Insider (stakeholders) model

6
The outsider model

• A priority to market regulation
• the owners of firms tend to have a transitory
  interest in the firm
• The absence of close relationships between
  shareholders and management
• the existence of an active market for corporate
  control - takeovers, particularly hostile ones
• the primacy of shareholder rights over those of
  other organisational groups

7
The insider model

• The priority to stakeholders control
• The owners of firms tend to have an enduring
  interest in the company
• They often hold positions on the board of
  directors or other senior managerial positions
• The relationships between management and
  shareholders are close and stable
• There is little by way of a market for corporate
  control
• the existence of formal rights for employees to
  influence key managerial decisions

8
Insider model in Eurasian countries

• The mass privatisation with favourable conditions
  for employees in Eurasian countries has created
  prerequisites for the insider model of corporate
  governance
• The Russian tendency that the employees shares
  pass to other holders is also present in Eurasian
  countries but not so sharp
• Particularity for some countries is the high
  concentration of shares capital at the
  management
• Nevertheless, employees continue to play
  important role as shareholders in Armenia,
  Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan,
  Moldova, Ukraine and Uzbekistan

9
International private initiative in CG

• The role of employees in corporate governance has
  an important place in widespread corporate
  governance guidelines and codes of conduct as,
  for example, in Corporate Governance Forum
  Principles (1998), Bosh Report, General Motors
  Board Guidelines, Dey Report and others (Holly J.
  Gregory, International comparison of board Best
  practices in developed markets, 1999 )
• As said in Corporate Governance Forum Principles
  Without stable cooperation between employees
  and management, shareholders value will never be
  maximised

10
The European Unions concept of CSR

• Green Paper Promoting a European Framework for
  Corporate Social Responsibility (2001) defined
  CSR as a concept whereby companies integrate
  social and environmental concerns in their
  business operations and in their interaction with
  their stakeholders on a voluntary basis
• As indicated in Communication of Commission
  (2002) Within a business CSR relates to quality
  employment, lifelong learning, information,
  consultation and participation of workers, equal
  opportunities, integration of people with
  disabilities anticipation of industrial change
  and restructuring. Social dialogue is seen as a
  powerful instrument to address employment-related
  issues

11
Corporate Social Responsibility in Russia

• Voluntary initiative for the reporting system on
  corporate social responsible conduct within the
  Russian managers association (more than 180
  companies reports)
• Creation by Alfa-group, Interros, Ukos and BP,
  Shell, Cisco Systems of the Russia partnership
  for action on corporate governance and social
  responsibility

12
Employees involvement in Corporate Governance

• Strengths the system of human resource
  management
• Increases the labour motivation
• Raises legitimacy and authority of the decision
  making
• Improves the corporate culture
• Contributes to economic grow and social stability

13
Forms of the Employees Participation

• Collective bargaining
• Information and consultation procedures
• Financial participation equity sharing and
  profit sharing
• Co-determination employees representation on
  boards of directors and works councils

14
Collective bargaining

• Traditional channel for the social dialogue
• Trade union as a main employees representative
• Mainly non-acceptance in the corporate governance
  framework in Eurasia
• High potential in European Union
• Need of advanced level corporate culture in
  relationships between management and trade union

15
Employees financial participation

• Equity sharing means employee share ownership
• Employee Share Ownership Plan (ESOP)
• Stock bonus plans
• Stock option plans
• Employee buyout
• Worker Cooperatives
• Profit sharing is the distribution of share
  profit among employees
• Cash-based sharing of annual profits
• Deferred profit-sharing

16
Employee stock options

• Motivation and productivity - creation of
  entrepreneurial spirit within the firm by
  aligning the interests of employees and
  shareholders.
• Personnel recruitment and retention - usually
  stock options cannot be exercised for several
  years after grant and become void if an employee
  leaves the company. Thus the options tie
  employees to their employers which is important
  for companies that invest in human capital.
• Capital and liquidity-related reasons - a
  possibility for the company to remunerate
  employees without an immediate drain on liquid
  assets

17
Employee stock options (Cont.)

• Measures to promote employee stock options will
  be most beneficial if they are part of consistent
  national approaches to employee participation

18
The case of the USA

• employee stock options have become a regular and
  widely used instrument for the compensation of
  employees, in particular the higher management
• Over 80 of the 500 biggest quoted companies have
  introduced employee stock option plans
• In the late 1990s between 7 and 10 million
  employees annually received stock options,
  several times more than in the early 1990s when
  the number of recipients of options was estimated
  at around a million.
• 86 of employers offer stock options to employees
  and that in 2000, 19 of all employees were
  eligible for stock options compared to only 12
  in 1998 (Watson Wyatt Worldwide, 2000).

19
The case of the EU

• In Belgium since 1999 between 70,000 and 75,000
  employees have received stock options. Today
  almost all of the 20 largest Belgian companies
  (BEL20) operate stock option plans.
• In Germany in 1997 ten employee stock option
  programmes were introduced in German companies,
  today over two-thirds of companies included in
  the German stock index (DAX) run such plans.
• In France approximately 50 of all quoted
  companies and 95 of the quoted companies have
  introduced stock option plans.
• (PricewaterhouseCoopers (2002). )

20
The case of Eurasian countries

• Big proportion of employees as shareholders
  within joint stock companies created by the mass
  privatisation usually doesn't mean their
  involvement in corporate governance
• Employee financial participation exists mainly
  for high managers in multinational companies

21
Information and Consultation

• Employees representatives have the right to be
  informed before the decision on issues such as
  the restructuring of the workforce, the
  relocation of plants, reduced working hours,
  vocational training schemes, systems of
  organizing and monitoring work, time studies, the
  setting of bonuses and pay incentives, job
  evaluation, or a change in the legal status of
  the enterprise which would affect staffing levels
  
• They have the right to be consulted before
  decisions are actually taken on matters of
  collective relevance ( transfers, major changes
  in conditions, cases of suspension of the
  contract of employment or collective
  dismissal/redundancy).

22
Co-determination

• In a majority of EU countries, there is a
  statutory system for some form of employee
  representation on the board of directors or
  supervisory boards of some types of company.
• Statutory works councils systems based on
  legislation or widely applicable collective
  agreements exist in 12 EU members (primary is the
  German model of the betriebsrat)

23
EU Directives on employees participation

• The European Works Councils (EWCs) Directive
  (94/45/EC) has introduced pan-European structures
  for the information and consultation of employees
  and their representatives on a range of business
  and employment issues in multinational companies
  over a certain size operating in the EU
• The recent Directive (2002/14/EC) establishing a
  general framework for informing and consulting
  employees will require all undertakings with at
  least 50 employees (or establishments with at
  least 20 employees) to provide employee
  representatives with information and/or
  consultation on a range of business, employment
  and work organisation issues.
• Directives (2001/86/EC and 2003/72/EC), adopted
  in October 2001 and in July 2003, provide for
  employee involvement (through both information
  and consultation structures or procedures and
  board-level participation) in 'European Company'
  (Société Européenne) and in European Cooperative
  Society the new optional form of Europe-wide
  company set up under the European Company
  Statute and
• various Directives have guaranteed information
  and/or consultation on specific issues, notably
  collective redundancies , business transfers and
  health and safety

24
The case of Eurasian countries

• The Soviet Labour Law has contained detailed
  provisions on workers participation in the
  governance of the socialistic enterprise
• Actually only Kyrgyz Labour Code 1997 remains the
  notion labour collective and provides the
  creation of works councils (chapter 3)
• All Eurasian countries have the possibility to
  obtain the employees participation in dialogue
  with trade unions

25
What should be doing

• Provide inclusion into the labour legislation of
  the norms on employees participation taking into
  account the particularity of the mentality
• Obtain the coordination between norms of
  commercial, civil and labour law concerning
  corporate governance
• Give the possibility de-jure and de-facto to
  trade unions present employees in CG
• Promote the voluntary initiative on CSR