E. Han Kim is Everett E. Berg Professor of Business Administration at University of Michigan Ross School of Business; Ernst Maug is Professor of Corporate Finance at University of Mannheim Business School; and Christoph Schneider is Assistant Professor of Finance at Tilburg University. This post is based on their recent article, forthcoming in the Review of Finance.
Is labor representation on the board of directors bad? Not necessarily. It can improve risk sharing between employers and employees without hurting shareholders, according to our study on the German experience. Germany requires 50% employee representation on the supervisory board when firms have more than 2,000 employees working in Germany.
We study establishment-level data on employment and wages. (An establishment is any facility having a separate physical address, such as a factory, service station, restaurant, or office building.) Our sample covers the top 100 listed German firms during the period 1990-2008. We compare establishments belonging to firms required to have parity codetermination of 50% employee representation (parity firms, in short) with those belonging to firms not required to have 50% representation (non-parity firms). Employees working for parity firms are paid, on average, 3.3% less than employees of non-parity firms. These lower wages, we argue, represent an insurance premium, because when other firms in the same industry lay off more than 5% of the work force, parity firms do not lay off workers in any significant way. That is, parity firms protect their employees when others in the same industry go through a major restructuring of their work force. As such, we interpret the lower wages as insurance premiums workers pay in return for their employment guarantees.
