The Role of Employees in Corporate Governance Margaret M. Blair Georgetown University Law Center Third Southeastern Europe Corporate Governance Roundtable 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. 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. Yet corporate leaders in developed countries increasingly understand that people and the knowledge they create are often the most valuable assets in a corporation. 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 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. 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. 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. Advantages of Equity-Sharing Improved employee commitment and buy-in to management’s 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 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) 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). 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. 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) 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) Impact on Wealth Creation? Major review of literature by Blasi (2002) finds that, on average, employee share ownership improves firm’s productivity by four percentage points. Total shareholder returns increase by two percentage points. Profit levels jump by about 14 percent. 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. 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. 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. 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.
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