Shareholders Should Welcome Employees as Directors

Abstract

The most influential theory of corporate governance, principal agency theory, does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder interests by making the board more responsible to shareholders, and strengthening the monitoring of top management by independent outside directors. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firm-specific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this conflict: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm making firm-specific knowledge investments.(3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they connect agency theory with the knowledge-based theory of the firm.(243 words)

Boards in microfinance institutions: how do stakeholders matter?

“…Corporate literature argues that employees are good at providing inside information to the board (Osterloh and Frey 2005). In microfinance, employees, particularly credit officers, are cornerstones of MFIs' operations (Mori 2010;Batillana and Dorado 2010).…”

“…Since employees provide inside information, NGOs can benefit from this. It is argued that the cost of having employees on boards is that they are not good monitors since it is difficult to monitor one's bosses (Osterloh and Frey 2005). Having both donors and employees on the boards of NGOs may be beneficial because donors monitor and employees provide information.…”

Evaluierungen, Evaluierungen ? Evaluitis

“…So treiben sie (kurzfristig) die Aktienpreise in die Höhe, wenn ein Teil ihres Gehaltes in der Form von Aktienoptionen ausgerichtet wird (z.B. Osterloh und Frey, 2005, Frey und Osterloh, 2000, 2005).…”

Can Private Learn from Public Governance?

“…A regime of co‐determination can be seen as a formal recognition of ‘corporate citizenship’ or, more broadly, of ‘organisational citizenship’. The literature has recognised that such employee participation is likely to be efficient in firms with considerable firm specific human capital (Furubotn, 1988; Roberts and Van den Steen, 2000; Osterloh and Frey, 2005 b ). Moreover, co‐determination seems, in general, not to damage firm performance (Addison et al.…”