The Role of Employees in

Corporate Governance
Margaret M. Blair
Georgetown University Law Center
Third Southeastern Europe Corporate
Governance Roundtable
Wealth Creation: Requires
Capital and Labor
Conventional model -- “shareholder
primacy” -- leaves out role of employees
Growing recognition that human capital is
source of competitive advantage
Variety of ways that employees’ interests
can be represented.
Evidence that employee participation
enhances wealth creation.
The “Shareholder Primacy”
Reform Medicine

Western advisors and reform advocates

have promoted “shareholder capitalism.”
Sole emphasis is on strengthening rights of,
and protections for, financial investors.
Yet corporate leaders in
developed countries increasingly
understand that people and the
knowledge they create are often
the most valuable assets in a
corporation.
How Can These Ideas Be
Reconciled?

Scholars increasingly recognizing:

 Shareholders’ long-run interests are probably
well-served by including employees in
corporate governance.
 Blair, 1995; Blair & Stout, 1999; Roberts and
Van den Steen, 2000
Variety of Ways that Employees’
Interests Protected
Unions.
Co-determination: employee representation
on boards of directors.
Profit-sharing.
Equity-sharing.
“Team production” solution: Boards of
directors must balance competing interests.
Unions
Can help fight for employees’ interests.
Approach is often confrontational rather
than cooperative.
Negotiated agreements between Company
and Labor can reduce flexibility,
responsiveness to changing market
conditions.
Co-determination
Worked well in Germany in Post-WWII decades.
 Labor Peace
 Low unemployment
 Robust economic growth
Has led to economic rigidity, sluggish growth, in
recent decades.
Advantages of Equity-Sharing
Improved employee commitment and buy-in to
management’s goals.
Alignment of interest between employees and
shareholders.
May help make firms more adaptable.
May support the emergence of more transparent
and effective corporate governance.
May foster more social responsibility of firms
Profit-Sharing
Became much more widely used in Europe
in 1990s.
Most profit-sharing plans are broad-based
(all or most employees) rather than for
executives only.
Most likely to be used in firms facing
intense competition, firms with highly-
qualified workforce. (Poutsma, 2002)
Profit-Sharing (Cont.)
Can be done a variety of ways:
 Cash-based sharing of annual profits
 Deferred profit-sharing
Supposed Advantages:
 Encourage employee involvement, improve motivation
 Improve distribution of wealth
 Wage flexibility can improve firm performance
But, more common among large firms – where
incentive effect is weakest (Poutsma, 2002).
Impact on Wealth Creation?
Some evidence that profit-sharing increases
productivity, on the order of 4-5%
(Weitzman & Kruse, 1990)
But, risks are shifted onto workers who are
less able to diversify.
Equity-sharing
Use of share ownership schemes also
increased in Europe in 1990s.
Almost one-third of companies with more
than 200 employees, in 10 Western
European countries, have share ownership
schemes.
About half are broad-based, half focused on
management. (Poutsma, 2002)
Equity-Sharing (Cont.)
Variety of types:
 Employee Share Ownership Plan
 Stock bonus plans
 Stock option plans
 Employee buyout
 Worker Cooperatives
Typically used in larger companies, with highly-
qualified workforce, high level of worker
empowerment. (Poutsma, 2002)
Impact on Wealth Creation?
Major review of literature by Blasi (2002)
finds that, on average, employee share
ownership improves firm’s productivity by
four percentage points.
Total shareholder returns increase by two
percentage points.
Profit levels jump by about 14 percent.
Impact on Wealth Distribution?
These gains are after dilution effect is taken
into account.
Employees typically own about 8% of
shares.
Grants of shares to employees do not come
at expense of wages or benefits.
Caveats
Employee share ownership alone is not
enough – must be accompanied by
increased employee participation in
decision-making.
Employee share plans are not a substitute
for diversified retirement savings.
Enron fiasco reminds us that employees can
lose everything if not diversified.
Nonetheless, the long-run trends
in the US and Europe appear to
be in the direction of increasing
use of compensation and
governance schemes in which
employees participate.
EU Guidelines for Employee
Participation Plans (Poutsma, 2002)
Voluntary participation.
Extend benefits to all employees.
Clarity and transparency.
Predefined formula.
Regularity.
Avoiding unreasonable risk for employees.
Clear distinction between participation schemes
and regular wages and benefits.
Compatibility with worker mobility.