Board‐Level Employee Representation (BLER) and Firms’ Responses to Crisis

• Author: Aleksandra Gregorič,Marc Steffen Rapp
• DOI: http://doi.org/10.1111/irel.12241
• Date: 01 July 2019
• Published date: 01 July 2019

Board-Level Employee Representation (BLER)

and Firms’Responses to Crisis*

ALEKSANDRA GREGORI

C and MARC STEFFEN RAPP

Short: We hypothesize that companies with board-level employee representation

(BLER) experience a lower probability of crisis-induced dismissals than other

firms. Theoretically, we link this effect to the employee directors’ability to

reduce the information asymmetry and moral hazard in employee–employer con-

tracting, thereby facilitating the implementation of labor-cost adjustments that are

an alternative to workforce dismissals. We confirm our hypotheses by analyzing

the behavior of Scandinavian public corporations with/without employee directors

during the Great Recession.

“...[t]he importance of the ability of employers and employees to

tackle shifting economic conditions was amply demonstrated during

the crisis when many employers worked with employees and their rep-

resentatives, in particular at the company level, to help keep compa-

nies afloat, reducing the need for job losses and helping to retain key

skills through, for instance, short-time working.”(CEEMET 2012: 3)

JEL: L00, G3, J53.

*The authors’affiliations are, respectively, Department of Strategy and Innovation, Copenhagen Business

School, Frederiksberg, Denmark. E-mail: ag.si@cbs.dk; and School of Business and Economics, Philipps-

Universit€

at Marburg, Marburg, Germany and HHL Leipzig Graduate School of Management, Leipzig, Ger-

many. E-mail: msr@m-s-rapp.de. The authors would like to thank Ruth Aguilera, Morten Bennedsen, Gab-

riel Burdin, Ruediger Fahlenbrach, Marc Goergen, Takao Kato, Colin Mayer, and the seminar participants at

IZA Workshop on the Economics of Employee Representation: International Perspectives, Universita Auton-

oma de Barcelona, Brunel University, Gothenburg University, Utrecht University, Marburg Research Day,

ASSA meeting (Chicago), IAFEP Conference (Montevideo), and the Midwest Finance Association Meeting

(Chicago) for valuable comments and suggestions on this and earlier drafts of the paper. They are particu-

larly indebted to Evis Sinani for her help on earlier versions of this paper.

INDUSTRIAL RELATIONS, DOI: 10.1111/irel.12241. Vol. 58, No. 3 (July 2019). ©2019 The Regents of the

Universit y of Calif ornia Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA,

and 9600 Garsington Road, Oxford, OX4 2DQ, UK.

376

Introduction

The economic consequences of employee participation in corporate decision

making, particularly in the form of workers’representation on the board of

directors (board-level employee representation [BLER]), have been given quite

some attention in the academic literature (e.g., Addison and Schnabel 2011;

Fauver and Fuerst 2006; Gorton and Schmid 2004; Jones 1987; Svejnar 1981).

More recently, the public and academic debate about this characteristic of the

employee–employer relationship has been gaining new momentum, with anec-

dotal evidence pointing to the relevance of employee–employer cooperation

for swift adjustment to unfavorable economic conditions during the Great

Recession (CEEMET 2012; Glassner, Keune, and Marginson 2011; Svalund

et al. 2013).

1

This paper aims to contribute to this debate by analyzing the

association between BLER and firms’behavior in the event of a negative

demand shock. Specifically, we discuss theoretically, and analyze empirically,

whether employee representatives on the board of directors facilitated coopera-

tive firm-level labor costs’adjustments during the Great Recession.

2

Across Europe, many companies presumably responded to the Great Reces-

sion by undertaking actions to reduce labor costs, from dismissals and early

retirements to more integrative solutions based on employee–employer agree-

ments on internal redeployments, temporary working adjustments, and changes

in pay systems (Glassner, Keune, and Marginson 2011; Svalund et al. 2013).

Theoretically, when workers care about both wages and employment, as is

likely the case during an industry-wide shock or global crisis, integrative solu-

tions, which allow workers to trade a (temporary) reduction in their earnings

for employment, might be Pareto superior to unilateral employment reductions

(Aoki 1984; McDonald and Solow 1981). Bargaining over integrative (cooper-

ative) agreements is, however, subject to information asymmetries and moral

hazard problems (Aidt and Tzannatos 2002). The negotiation and implementa-

tion of such agreements might be therefore conditional on the existence of

mechanisms that facilitate the exchange of information between the parties,

1

Accordingly, in developed countries we observe a renewed interest in employee participation on the

board of directors. For example, recently the U.S. Senator Elizabeth Warren suggested that employees of

large U.S. firms should be allowed to send representatives to the boardroom. Similarly, during her campaign-

ing, Theresa May, the current British Prime Minister, contemplated providing British workers such an

option. See also Garnero (2018).

2

With the term “cooperative”we refer to integrative solutions that should be preferable for both

employers and employees, thereby either increasing the benefits of both or increasing the benefits of one

party at no expense to the other. Such solutions might involve alternative measures of labor-cost savings in

the interest of preserving employment during a crisis (Aoki 1984; Glassner, Keune, and Marginson 2011;

McDonald and Solow 1981; Svalund et al. 2013). Note that we use the terms cooperative and integrative

interchangeably in this paper.

BLER and Firms’Response to Crisis / 377

provide credibility for the information exchanged, and ensure an ex-post com-

mitment to the negotiated outcome (Freeman and Lazear 1995).

Employee representatives on the board of directors might constitute such a

mechanism (Aoki 1984; Freeman and Lazear 1995; Kochan and Osterman

1994). Given that they are elected by the employees and, as board members,

also accountable to the firm, these directors should be able to credibly transfer

information on the preferences of both employees and employers,

3

thereby

facilitating the information exchange necessary for integrative solutions (Aoki

1984; Freeman and Lazear 1995). Moreover, when employees participate in

the design of the firm’s policy, through their representatives on the board,

they will be less likely to renege on the reached agreements ex post by, for

example, adjusting their effort downward (McCain 1980; Mizrahi 2002).

Upon these arguments, in this paper we propose that companies with

employee representatives on their boards (BLER firms) should be better able

than other firms to negotiate alternative ways of reducing labor costs, such as

temporary furloughs, work sharing, and bonus restructuring, and consequently

less likely to reduce employment in the case of poor performance. We test

this hypothesis using a sample of 365 publicly listed nonfinancial firms from

Denmark, Sweden, and Norway (Scandinavian countries) during the Great

Recession.

The Scandinavian setting is well suited to this study. First, workers in Scan-

dinavian firms employing at least (about) thirty employees have the possibility

but not an obligation to establish BLER. That is, employee directors are today

present only on the boards of companies whose employees or their representa-

tive unions, at some point in the past, exercised their codetermination rights

and demanded the implementation of BLER. Consequently, employee directors

are found in about half of the nonfinancial publicly listed firms in our sample;

the fact that BLER is not implemented in all public corporations allows us to

draw inferences on the differences between the behavior of BLER firms and

comparable public corporations without employee directors. Moreover, the

BLER rights have been in place since the 1970s; accordingly, the BLER sta-

tuses of our sample firms have not changed since before the period of our

analysis, which mitigates reverse-causality concerns in our study. Second, as

did many other European firms (European Commission 2009; Gross and Acidi

2010), Scandinavian companies faced a substantial drop in consumer demand

during the Great Recession. In Sweden and Denmark, for instance, the demand

for manufacturing fell by 20 percent during 2008–2009, on average, demand-

ing substantial and swift reductions in labor costs (Svalund et al. 2013).

3

With the term employers we refer to shareholders or to managers representing the shareholders.

378 / ALEKSANDRA GREGORI

C AND MARC STEFFEN RAPP