Presentation on theme: "Labor Representation in Governance as an Insurance Mechanism E. Han Kim, Ernst Maug and Christoph Schneider Presentation at the Ackerman Conference on."— Presentation transcript:
Labor Representation in Governance as an Insurance Mechanism E. Han Kim, Ernst Maug and Christoph Schneider Presentation at the Ackerman Conference on Corporate Governance Bar-Ilan University,
Motivation Question: What is the impact of labor representation on boards on employment on wages on economic efficiency? Contrasting views Efficient contracting: Labor representation supports efficient insurance contracts Workers receive insurance in exchange for lower wages (e.g., Baily (1974), Harris & Holmstrom (1982), Holmstrom (1983)) Labor representation prevents ex-post expropriation Rent seeking: Labor representation protects rents of workers and managers Jensen & Meckling (1979), Pagano & Volpin (2005), Cronqvist et al. (2009)
Views on Labor Representation “The campaigns for ‘worker participation’ or ‘industrial democracy’ or codetermination on boards of directors appear to be attempts to control the wealth of stockholders' specialized assets … a wealth confiscation scheme.” (Alchian, 1984) The Chicago view: The European view: “Allen and Gale (2002) argue that in incomplete, imperfect markets, a stakeholder system of corporate governance that stresses cooperation between management and employees may allocate resources more efficiently in the long run than a shareholder system.” (Fauver and Fuerst, 2006, p. 674)
World Map of Labor Representation on Boards
Institutional background Codetermination in Germany Up to 500 employees in Germany: no worker representation More than 500 up to 2000 employees in Germany: 1/3 of the board members have to be worker representatives Board size between 3 and 21 can be chosen (multiple of 3) More than 2000 employees in Germany: 1/2 of the board members have to be worker representatives Casting vote of the chairman (shareholder representative) Board size 12, 16 or 20 (cutoff:s 10,000 and 20,000 employees) Exception in the iron, coal, and steel industry: one neutral member in firms with more than 1000 employees (board size: 11, 15, 21)
Codetermination in Germany (since 1976)
Research questions What is the impact of parity codetermination on employment: do parity-codetermined firms provide more insurance to workers against adverse shocks? wages: to the extent that the workers in parity-codetermined firms recieve insurance, do they pay an insurance premium? firm risk: are parity-codetermined firms more risky because they provide insurance to their workers?
Sample 184 large listed German corporations ( ) All DAX and MDAX companies Most publicly available information (governance, stock market, balance sheet, and P&L data) IAB sample of all German businesses ( ) Detailed establishment level data on industry, location, employment, wages, education, age, (nationality) In total approx million establishment-year observations for period 34,000 establishments matched to 142 of our 184 firms Matching on company and subsidiary names and addresses for the year 2006 (2004, 2005)
Research design Compare how negative shocks affect employees and firms with parity codetermination vs. firms with less or no representation on the board Difference-in-difference model: i indexes establishments j indexes firms k indexes state of location l indexes industry t indexes time
Definition of shocks Shock needs to be large enough to have a significant impact frequent enough to permit identification exogenous to the firm We use non-sample firms with establishments in Germany (IAB employment data) Based on >30 million establishment-years Industry defined as 3-digit NACE (subsector), similar to NAICS Shock lt = 1 in industry l if employment in the industry decreases by at least 5% Shock lt = 1 in industry l only if employment growth ≤ 0 in year t+1 (persistence)
Shocks: Examples Shocks can be long-lived: 2-year shocks: Shock lt+1 = 1 if Shock lt = 1 and employment growth ≤ 0 in year t+1 4-year shocks: Shock lt+j = 1 if Shock lt = 1 and employment growth ≤ 0 in year t+j for j=1, 2, 3 baseline case
Distribution of shocks across time
Parity codetermination is a commitment device. With parity codetermination, workers receive full insurance against adverse shocks to employment. Hypothesis 1
Do parity firms protect their employees?
Employment changes after adverse industry shocks All employees
Do parity firms protect their employees? Employment changes after adverse industry shocks All employeesWhite collar
Do parity firms protect their employees? Employment changes after adverse industry shocks All employeesWhite collarBlue collar
Do parity firms protect their employees? Employment changes after adverse industry shocks All employeesWhite collarBlue collar Unskilled blue collar
Firms with parity codetermination pay on average lower wages. Hypothesis 2
Do employees pay an insurance premium?
Difference in median wages - parity vs. non-parity firms Highly qualified employees Skilled employees Unskilled employees
Is there any wage compression?
Parity-codetermined firms suffer larger reductions of profitability after adverse shocks than non-parity firms. Hypothesis 3
Performance of codetermined firms (1)
Performance of codetermined firms (2)
Performance of codetermined firms (3)
Conclusion Employees of parity-codetermined firms receive substantially more employment insurance Only skilled blue-collar and white-collar workers benefit Unskilled workers receive no protection Only highly-qualified employees pay an insurance premium Skilled blue-collar employees enjoy insurance without paying a premium Parity-codetermined firms have significantly larger operating leverage Larger declines in ROA and Tobin‘s q, increase in CAPM beta