Employee empowerment Primary aim: Look into advantages and disadvantages of corporate governance systems that give voting and control rights to the employees.

Various arrangements of corporate control Ownership: Cash- flow rights Ownership: Control rights“ Modern CorporationShareholders PartnershipEmployeesEmployees “ New Enterprise (integration problem) Depend on type of complementarity German Codetermination ShareholderEmployees Venture CapitalDepend on contract between capitalist and entrepreneur University ResearchResearchersUniversity

Ways by which employees exert influence: There are a number of Seats on the board of directors, allowing workers to affect decisions of the firm directly They may have explicit consultations rights through workers’ council In unionized firms the workers are represented by the trade union

The German system for codetermination Initiated for the coal and steel industry in 1951 and gave the workers, who are represented by the trade union, a substantial parity on the board of directors The highly centralized structure of the German trade unions yields a common policy for the worker representatives vis-à-vis the investor representatives (low costs of collective decision making) Extended in 1952 and in 1976: a) the unions have not been given the same role with regard to the selection of representatives for the boards b) labour lacks full parity on the board (deadlock between worker and shareholder representatives, a tie-breaking vote is guaranteed the shareholder representatives) 3) a dual board structure (the board on which the worker representatives sit is distant from the board where decisions about policy and strategies are made) The real worker influence takes place at the lower work-council level

In sum: worker participation increases the value of the firm and thus should be favourable for the shareholders implies that non-investing parties are better represented in corporate governance costs of collective decision-making

Lazear’s model of worker participation: The employees prefer an amount of power that maximize their share of total surplus The shareholders/managers are prepared to allocate power to the workers council that maximize shareholders/managers share of total surplus The outcome of bargaining usually not maximizes the total value of the firm. x: the amount of power given to the workers R : the rents of the organization R0 : rents when no power is given to the workers τ : the share of total rents that goes to the workers