Does Good Corporate Governance Include Employee Representation? Evidence from German Corporate Boards

Fauver, Larry; Fuerst, Michael E.

doi:10.2139/ssrn.534422

Cited by 136 publications

(213 citation statements)

References 35 publications

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“…Germany's system is described and analyzed in Furubotn and Wiggins (1984), Levine and Tyson (1990), Freeman and Lazear (1995), and Allen and Gale (2002), while Fauver and Fuerst (2006) show that the system of Mitbestimmungrecht (right of codetermination) requires that workers receive one-half of all seats on the supervisory board (Aufsichgtrat) of German Aktiengesellschaft (AG), or publicly traded companies. A separate law mandates that workers receive onethird of board seats in companies with between 500 and 2000 workers, and various supplemental regulations have narrowed the scope for German companies to escape these codetermination strictures.…”

Section: Empirical Evidence On the Net Value Of Employee Participatiomentioning

confidence: 99%

Employee ownership, board representation, and corporate financial policies

Ginglinger

Megginson

Waxin

2011

Journal of Corporate Finance

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French law mandates that employees of publicly listed companies can elect two types of directors to represent employees. Privatized companies must reserve board seats for directors elected by employees by right of employment, while employee-shareholders can elect a director whenever they hold at least 3% of outstanding shares. Using a comprehensive sample of firms in the Société des Bourses Françaises (SBF) 120 Index from 1998 to 2008, we examine the impact of employee-directors on corporate valuation, payout policy, and internal board organization and performance. We find that directors elected by employee shareholders increase firm valuation and profitability, but do not significantly impact corporate payout policy. Directors elected by employees by right significantly reduce payout ratios, but do not impact firm value or profitability. Employee representation on corporate boards thus appears to be at least value-neutral, and perhaps value-enhancing in the case of directors elected by employee shareholders. _______________________________________ IntroductionShould employees be allocated control rights in the companies for which they work? This question has long been debated, but has picked up impetus recently as societies have struggled to balance worker rights with effective corporate governance. While the collapse of communism has removed the most extreme examples of employee ownership, Germany and other countries mandate that workers be represented on corporate boards, and most western democracies encourage employee share ownership through tax, compensation, and pension policies. However, it is still unclear whether employee ownership or representation on the corporate board of directors increases firm value or productivity. This study exploits a natural experiment in mandated employee representation conducted in France--a major western country with both a market economy and a long tradition of robust worker employment protection-to determine whether giving workers control rights without cost to them creates value, and whether directors elected by employees who are also shareholders have a differential impact on firm value than do directors elected by workers as a right of employment.Employing a sample of French companies provides a unique institutional setting for empirical analysis. French law mandates that employees of large publicly listed companies be allowed to elect directors for two reasons. First, privatized companies must reserve two or three (depending on board size) board seats for directors elected by employees by right of employment. Since privatized firms are easily the largest and most valuable companies in France, this requirement induces significant representation on the boards of an important and highly visible group of companies by directors elected by workers who are not also shareholders. Second, employee-shareholders in any publicly listed firm have the legal right to elect one director whenever they hold at least 3% of outstanding shares. Additionally, French law allows but...

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Section: Empirical Evidence On the Net Value Of Employee Participatiomentioning

confidence: 99%

Employee ownership, board representation, and corporate financial policies

Ginglinger

Megginson

Waxin

2011

Journal of Corporate Finance

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“…German law mandates that the supervisory board be made up of representatives of the employees and unions, while the other half of the board consists of representatives of the major shareholders. Interestingly, recent empirical evidence from Germany suggests that employee representation on supervisory boards increases firm efficiency and market value(Fauver and Fuerst, 2006).…”

mentioning

confidence: 99%

Socially responsible investments: Institutional aspects, performance, and investor behavior

Renneboog

Horst

Zhang

2008

Journal of Banking & Finance

1,311

836

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“…First, rent-seeking by employees may reduce the share of surplus available to the other team members (Renaud 2007); second, adding employees to the board may increase transaction costs by increasing the negotiation costs on the board (Renaud 2007) and/or by sending a negative signal to the capital markets (Dilger 2002). Third, an adverse selection problem may arise if one firm unilaterally changes its board structure to include employees: the firm may lose quality management (Fauver and Fuerst 2006). Consequently, both managers and shareholders would oppose such a change in corporate governance.…”

Section: Implications For Corporate Governance Systemsmentioning

confidence: 99%

“…However, the debate continues as to whether the shareholder agency model is descriptive of the US legal environment and a good basis for normative governance prescriptions (Bebchuk 2005;Blair and Stout 1999;Stout 2012). In addition, the empirical evidence in support of the shareholder agency model of governance is inconclusive (Adams, et al 2010;Bhagat and Black 1999;Fauver and Fuerst 2006;Ginglinger et al 2011;Hermalin and Weisbach 2003).…”

Section: Introductionmentioning

confidence: 99%

Corporate Governance Systems Diversity: A Coasian Perspective on Stakeholder Rights

2016

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We examine corporate governance diversity within a Coasian framework of stakeholder rights, where the central role of governance is to ensure that necessary firm-specific investments are made. This Coasian perspective on stakeholder theory offers a unifying framework towards a global theory of comparative corporate governance, bridging the gap between economic theories of the firm and stakeholder theory, also offering an economicsbased alternative to agency theory that explicitly accounts for stakeholder rights. The Coasian perspective encompasses a diversity of corporate governance systems, but does not imply a unique global corporate governance benchmark. We posit that governance is firm dependent and endogenous conditional on the constraints imposed by a national governance system; consequently, there should be no systematic relationship between governance and firm performance once the national constraints are controlled for. However, the same national corporate governance system constraints confer comparative advantages to firms whose efficient levels of firm-specific investments are favored.

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Does Good Corporate Governance Include Employee Representation? Evidence from German Corporate Boards

Cited by 136 publications

References 35 publications

Employee ownership, board representation, and corporate financial policies

Employee ownership, board representation, and corporate financial policies

Socially responsible investments: Institutional aspects, performance, and investor behavior

Corporate Governance Systems Diversity: A Coasian Perspective on Stakeholder Rights

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