President of the International Association for the Economics of Participation (IAFEP); Associate Professor at the Center for Corporate Governance, Department of International Economics and Management at Copenhagen Business School.
Workers’ participation realizes through various forms and levels, from employee ownership to workers’ involvement through the works councils and boards of directors. Overall, what are the main empirical findings with regards to the economic effects of the different participatory forms?
The extant scholarly research provides support to the proposition that participatory practices promoting employee involvement in the firms (i.e. representation through works councils, board of directors, etc.) and employee financial participation (e.g. direct employee ownership, profit sharing, broad-based share ownership schemes, etc.) produce significant economic benefits.
Employee financial participation and their involvement in decision-making are found to positively affect labour productivity, workers’ loyalty, satisfaction and trust at the workplace, to reduce worker turnover and encourage the formation of firm-specific human capital. If I am to name just a few more recent studies, Kato and co-authors (2016)[1] find that an increase in the strength of the employee stock ownership in Japanese publicly listed firms leads to significant gains in term of productivity, profitability and firm market value. Similarly, Jones and co-authors (2017)[2], confirm a positive association between the breath of financial participation and enterprise productivity for white-collar employees in Finnish firms; they also show that the effects of financial participation strengthen when financial participation is combined with employee involvement in decision making. With regards to the latter, Burdin and Perotin (2016)[3] recently demonstrated that granting information, consultation and representation rights to employees on a range of business, employment and work issues leads to higher organizational flexibility, which should be beneficial for both employees and employers.
The benefits of employee participation got further supported in the event of the Great Recession. In fact, it has been pointed out that it is due to workers’ representation on the board of directors that German companies were better able to deal with the shock of the Great Recession, and are enjoying lower unemployment and higher wage levels after the crisis, compared to other countries. This claim is theoretically founded (e.g. Freeman and Lazear, 1995[4]) and finds support in the empirical literature. For example, with my co-authors we studied the behaviour of Scandinavian companies during the Great Recession[5]. Our analysis involved Scandinavian non-financial publicly listed firms during 2001-2013, and showed that the companies with employee directors were less likely to significantly reduce employment during the Great Recession, compared to other firms. These higher employment levels were, at least in part, ensured by downward adjustments in the earnings per employee. These, so-called, cooperative responses to crisis were primarily observed in R&D intensive firms; these firms also experienced a lower decline in market value during the crisis, compared to other firms. Along the same lines, Kurtulus and Kruse (2017) recently showed that companies with broad-based employee ownership were also less likely to cut jobs during the two U.S. recessions (i.e. from 2001-03 and 2009-11)[6].
Workers have the right to participate in the corporate decision making (board codetermination rights) in a number of countries, from Netherlands, Germany, Austria, to Scandinavian countries. What are the main differences in the regulation of employee board representation across these countries?
Workers hold the most extensive codetermination rights in the large German firms, where they elect half of the members to the supervisory board, which is the main governance body in the firm. Workers are given some rights to elect their representatives to company boards in a number of other European firms; the regulations vary with regards to the intensity of representation (i.e. below half of the board in Slovenia, one-third in Austria, Scandinavian countries), the mandate through which workers elect their representatives on board (i.e. representation is mandatory for all firms of specific size in Germany, Slovenia, Austria, but voluntary and only established upon the workers’ initiative in Scandinavia), and the type of firms covered by codetermination rights (e.g. state-owned companies, all companies of specific size, etc.). I am not aware of a study that has tested whether one system works better than the other; such a test is quite a challenging one, as countries vary along several other dimensions that might correlate with the differences in the type of employee representation. A study from Germany (Fauver and Fuerst, 2006[7]) provides some evidence on the (superior) benefits of voluntary representation. The authors also suggests that prudent (i.e. from one-third to below parity) levels of employee representation might be preferred to quasi-parity representation, and that employee board representation might work better in the industries requiring more intense coordination and information-sharing activities. However, I believe that further empirical evidence is necessarily to ascertain the benefits/costs of the different models of employee involvement in corporate boards and strategic decision-making in general.
What is in your opinion the future of employee participation in the international context?
The experience of the Great Recession definitely calls for a reconsideration of the shareholder-oriented corporate governance, and this (in my view) opens new opportunities for various types of employee participation. This is more so if we consider the current income/wealth inequality in the world but also the increasing relevance of innovation and firm-specific human capital for companies’ competitiveness and long-term success. I believe that financial participation and stronger workers’ involvement in corporate decision making could successfully contribute to both, i.e. mitigate inequality and stimulate workers’ investments in firm-specific skills and, consequently, innovation. Workers’ participation in firms’ governance might also mitigate some other problems, such as excessive risk-taking and other forms of managerial opportunism that has—in part—contributed to the last crisis. Accordingly, debates about employee involvement in firms’ decision making have been emerging even in the countries without prior experience with this practice, such as the UK. The literature also documents a growing importance of the various forms of workers’ participation in the countries, which have introduced such systems in the past. For example, for Finland, Jones et al. (2017) report an increasing incidence of financial participation schemes that link workers’ compensation to firm performance on a broader scale. In Denmark, Gregorič and Poulsen (2017)[8] report a modest increase in the incidence of employee board representation during the last years. At the same time, the scholarly interests for these topics have in my view also increased. This reflects also in an increasing number of scholars joining the International Association for the Economics of Participation over the last years – a trend that (I hope) will continue also in the future.
[1] Kato, T., Miyajima, H. And Owan, H. (2016) Does Employee Stock Ownership Work? Evidence from Publicly-Traded Firms in Japan, RIETI Discussoin Paper Series, Research Institute of Economy, Trade and Industry (RIETI), 37 p.
[2] Jones, D. C., Kalmi, P., Kato, T. and Makinen, M. (2017), Complementarities between employee involvement and financial participation: Do institutional context, differing measures and empirical methods matter?, ILE Review, 70(2):395-418.
[3] Burdín, Gabriel, and Virginie Pérotin (2016), Employee Representation and Flexible Working Time, Burdín, IZA Discussion Paper No. 10437, 38p. available at SSRN: https://ssrn.com/abstract=2889683
[4] Freeman, R. B. and Lazear, E. P. (1995), ‘An Economic Analysis of Works Councils’ in Works Councils:Consultation, Representation and Cooperation in Industrial Relations, edited by Rogers, J. And Streeck, W., Chicago, IL, University of Chicago Press:27-52.
[5] Gregorič, A., Rapp M. S. and Sinani, E. (2017), ‘ Employee Board Representation and Firms’ Responses to Crisis’, Manuscript, 34p.
[6] Kurtulus, F. A., and Kruse, D.L. (2017), ‘How Did Employee Ownership Firms Weather the Last Two Recessions?: Employee Ownership, Employment Stability, and Firm Survival: 1999-2011’, WE Upjohn Institute, 2017.
[7] Fauver, L., and Fuerst, M. E. (2006), ‘Does good corporate governance include employee representation? Evidence from German corporate boards.’, Journal of Financial Economics 82(3): 673-710.
[8] Gregoric, A. and Poulsen, T. (2017), Representative workplace democracy in shareholder-controlled firms: Is there a scope for below-parity employee representation on corporate boards?, Manuscript, 33 p.
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