Labor in the Boardroom

Abstract

We estimate the wage effects of shared governance, or codetermination, in the form of a mandate of one-third of corporate board seats going to worker representatives. We study a reform in Germany that abruptly abolished this mandate for stock corporations incorporated after August 1994, while it locked the mandate for the slightly older cohorts. Our research design compares firm cohorts incorporated before the reform and after; in a robustness check we additionally draw on the analogous difference in unaffected firm types (LLCs). We find no effects of board-level codetermination on wages and the wage structure, even in firms with particularly flexible wages. The degree of rent sharing and the labor share are also unaffected. We reject that disinvestment could have offset wage effects through the canonical hold-up channel, as shared governance, if anything, increases capital formation.

What Does Codetermination Do?

“…In the German context, Jäger, Schoefer, and Heining (2021) estimate that minority boardlevel representation increases composition-adjusted wages by around 1.1%, and are unable to rule out zero effects (the 95% confidence interval extends from -1.8% to 4%). They also find no effect on the degree to which rents are shared with workers.…”

“…The notable exception is Germany: while German firms with between 500 and 2,000 employees must allocate only 33% of board seats to workers, firms with over 2,000 employees are subject to "quasi-parity" representation, meaning that 50% of seats go to workers, but shareholders receive a tie-breaking vote. For historical reasons going back to the introduction of board-level codetermination in the aftermath of World War II, firms with more than 1,000 employees in the mining, coal, and steel sectors are subject to full parity representation, where workers receive 50% of seats and shareholders are not given a casting vote (Jäger, Schoefer, and Heining, 2021). The introduction of parity codetermination in these sectors has its roots in the desire of the post-war occupying powers to limit the influence of Nazi-affiliated industry leaders by imposing strong power-sharing requirements (Paster, 2012;McGaughey, 2016).…”

“…Codetermination laws can be formulated either as a mandate, requiring all covered firms to adopt codetermination, or a right for workers in covered firms to take up codetermination. For example, board-level representation is a mandate in Germany (Jäger, Schoefer, and Heining, 2021) but a right in Finland , and shop-floor representation is a right even in Germany (Addison, 2009). When codetermination laws are formulated as a right, take-up of codetermination among covered firms is usually widespread but not universal.…”

“…We particularly draw on two studies that use "natural experiments" to approximate this ideal design, by exploiting the introduction or repeal of the institution in some firms along with large micro data sets on individual firms and workers. First, Jäger, Schoefer, and Heining (2021) study the 1994 abolition of minority board-level representation requirements in new shareholder corporations in Germany. Second, estimate the impacts of a 1990 introduction of minority board-level representation rights in Finnish firms with 150 or more employees, and a 2008 expansion of shop-floor representation rights to Finnish firms with between 20 and 30 employees.…”

“…The Business Roundtable and World Economic Forum issued statements in 2019 expressing support for stakeholder governance (a system of corporate governance in which firms have an obligation to serve non-shareholder stakeholders, such as workers). Schoefer, and Heining, 2021). Meanwhile, under shop-floor codetermination, workers elect establishment-level representatives who hold information, consultation, and sometimes codecision-making rights with respect to decisions about employment and working conditions (Addison, 2009).…”