The Role of Employees

as Stakeholders in
Corporate Governance

Roustem Davletguildeev
Trade Unions Advisory Committee to the OECD
Third Eurasian Roundtable on Corporate
Governance, 29-30 October, 2003, Bishkek
The Preamble to the OECD
Principles on Corporate
Governance
Employees and other stakeholders
play an important role in contributing to
the long-term success and performance
of the corporation, while governments
establish the overall institutional and
legal framework for corporate
governance.
Essential points for the
presentation
what is the difference between insider and
outsider models of the Corporate Governance
in application to the Eurasian needs
the importance of the Corporate Social
Responsibilitys concept for the present
situation in Europe
which are the essential forms of the
employees participation
conclusions
Main Stakeholders
Shareholders
Employees
Management
Customers
Creditors (i.e. Banks)
Suppliers
Local Communities
Others
Two models of
Corporate Governance

Outsider (shareholders) model

Insider (stakeholders) model

The outsider model
A priority to market regulation
the owners of firms tend to have a transitory
interest in the firm
The absence of close relationships between
shareholders and management
the existence of an active `market for corporate
control - takeovers, particularly hostile ones
the primacy of shareholder rights over those of
other organisational groups
The insider model
The priority to stakeholders control
The owners of firms tend to have an enduring
interest in the company
They often hold positions on the board of
directors or other senior managerial positions
The relationships between management and
shareholders are close and stable
There is little by way of a market for corporate
control
the existence of formal rights for employees to
influence key managerial decisions
Insider model in Eurasian
countries
The mass privatisation with favourable conditions for
employees in Eurasian countries has created
prerequisites for the insider model of corporate
governance
The Russian tendency that the employees shares pass
to other holders is also present in Eurasian countries
but not so sharp
Particularity for some countries is the high
concentration of shares capital at the management
Nevertheless, employees continue to play important
role as shareholders in Armenia, Azerbaijan, Georgia,
Kazakhstan, Kyrgyzstan, Moldova, Ukraine and
Uzbekistan
International private
initiative in CG
The role of employees in corporate governance has an
important place in widespread corporate governance
guidelines and codes of conduct as, for example, in
Corporate Governance Forum Principles (1998), Bosh
Report, General Motors Board Guidelines, Dey Report
and others (Holly J. Gregory, International comparison
of board Best practices in developed markets, 1999 )
As said in Corporate Governance Forum Principles:
Without stable cooperation between employees and
management, shareholders value will never be
maximised
The European Unions
concept of CSR
Green Paper Promoting a European Framework for
Corporate Social Responsibility (2001) defined CSR
as a concept whereby companies integrate social and
environmental concerns in their business operations
and in their interaction with their stakeholders on a
voluntary basis
As indicated in Communication of Commission (2002)
Within a business CSR relates to quality employment,
lifelong learning, information, consultation and
participation of workers, equal opportunities, integration
of people with disabilities anticipation of industrial
change and restructuring. Social dialogue is seen as a
powerful instrument to address employment-related
issues
Corporate Social
Responsibility in Russia
Voluntary initiative for the reporting system on
corporate social responsible conduct within the
Russian managers association (more than 180
companies reports)
Creation by Alfa-group, Interros, Ukos and BP,
Shell, Cisco Systems of the Russia partnership
for action on corporate governance and social
responsibility
Employees involvement in
Corporate Governance
Strengths the system of human resource
management
Increases the labour motivation
Raises legitimacy and authority of the
decision making
Improves the corporate culture
Contributes to economic grow and social
stability
Forms of the Employees
Participation
Collective bargaining
Information and consultation procedures
Financial participation: equity sharing
and profit sharing
Co-determination: employees
representation on boards of directors and
works councils
Collective bargaining
Traditional channel for the social dialogue
Trade union as a main employees
representative
Mainly non-acceptance in the corporate
governance framework in Eurasia
High potential in European Union
Need of advanced level corporate culture in
relationships between management and trade
union
Employees financial
participation
Equity sharing means employee share
ownership:
Employee Share Ownership Plan (ESOP)
Stock bonus plans
Stock option plans
Employee buyout
Worker Cooperatives
Profit sharing is the distribution of share profit
among employees:
Cash-based sharing of annual profits
Deferred profit-sharing
Employee stock options

Motivation and productivity - creation of

entrepreneurial spirit within the firm by aligning the
interests of employees and shareholders.

Personnel recruitment and retention - usually stock

options cannot be exercised for several years after
grant and become void if an employee leaves the
company. Thus the options tie employees to their
employers which is important for companies that invest
in human capital.

Capital and liquidity-related reasons - a possibility

for the company to remunerate employees without an
immediate drain on liquid assets
Employee stock options
(Cont.)

Measures to promote employee stock options

will be most beneficial if they are part of
consistent national approaches to employee
participation
The case of the USA
employee stock options have become a regular and
widely used instrument for the compensation of
employees, in particular the higher management
Over 80% of the 500 biggest quoted companies have
introduced employee stock option plans
In the late 1990s between 7 and 10 million employees
annually received stock options, several times more
than in the early 1990s when the number of recipients
of options was estimated at around a million.
86% of employers offer stock options to employees and
that in 2000, 19% of all employees were eligible for
stock options compared to only 12% in 1998 (Watson
Wyatt Worldwide, 2000).
The case of the EU
In Belgium since 1999 between 70,000 and 75,000
employees have received stock options. Today almost
all of the 20 largest Belgian companies (BEL20)
operate stock option plans.
In Germany in 1997 ten employee stock option
programmes were introduced in German companies,
today over two-thirds of companies included in the
German stock index (DAX) run such plans.
In France approximately 50% of all quoted companies
and 95% of the quoted companies have introduced
stock option plans.
(PricewaterhouseCoopers (2002). )
The case of Eurasian
countries
Big proportion of employees as shareholders
within joint stock companies created by the
mass privatisation usually doesn't mean their
involvement in corporate governance

Employee financial participation exists mainly

for high managers in multinational companies
Information and
Consultation
Employees representatives have the right to be
informed before the decision on issues such as the
restructuring of the workforce, the relocation of plants,
reduced working hours, vocational training schemes,
systems of organizing and monitoring work, time
studies, the setting of bonuses and pay incentives, job
evaluation, or a change in the legal status of the
enterprise which would affect staffing levels
They have the right to be consulted before decisions
are actually taken on matters of collective relevance
( transfers, major changes in conditions, cases of
suspension of the contract of employment or collective
dismissal/redundancy).
Co-determination
In a majority of EU countries, there is a
statutory system for some form of
employee representation on the board of
directors or supervisory boards of some
types of company.
Statutory works councils systems based
on legislation or widely applicable
collective agreements exist in 12 EU
members (primary is the German model
of the betriebsrat)
 EU Directives on employees
participation
The European Works Councils (EWCs) Directive (94/45/EC ) has
introduced pan-European structures for the information and consultation
of employees and their representatives on a range of business and
employment issues in multinational companies over a certain size
operating in the EU;
The recent Directive (2002/14/EC) establishing a general framework
for informing and consulting employees will require all undertakings
with at least 50 employees (or establishments with at least 20 employees)
to provide employee representatives with information and/or consultation
on a range of business, employment and work organisation issues.
Directives (2001/86/EC and 2003/72/EC), adopted in October 2001 and
in July 2003, provide for employee involvement (through both information
and consultation structures or procedures and board-level participation) in
'European Company' (Socit Europenne) and in European Cooperative
Society the new optional form of Europe-wide company set up under
the European Company Statute; and
various Directives have guaranteed information and/or consultation on
specific issues, notably collective redundancies , business transfers and
health and safety
The case of Eurasian
countries
The Soviet Labour Law has contained detailed
provisions on workers participation in the
governance of the socialistic enterprise
Actually only Kyrgyz Labour Code 1997
remains the notion labour collective and
provides the creation of works councils
(chapter 3)
All Eurasian countries have the possibility to
obtain the employees participation in dialogue
with trade unions
What should be doing
Provide inclusion into the labour legislation of
the norms on employees participation taking
into account the particularity of the mentality
Obtain the coordination between norms of
commercial, civil and labour law concerning
corporate governance
Give the possibility de-jure and de-facto to
trade unions present employees in CG
Promote the voluntary initiative on CSR