Employee participation in the governance of their companies is increasingly being seen as a way to include precious employee perspective and involvement in effective decision-making, but approaches differ according to cultures. Academics and practitioners provide us with the picture to the participation puzzle.
Contributors: Alain Champigneux, Employee Elected Board Member, Renault; Dr. Werner Brandt, former CFO, SAP AG; Thierry Peugeot, former Chairman, Supervisory Board, Peugeot SA; Prof. Christoph Schneider, University of Mannheim, Business School; Prof. Katsunori Mikuniya, University of Tokyo; former Commissioner, Financial Services Agency of Japan.
Voluntary and mandatory: old sparring partners in the world of industrial relations
While few would challenge the importance of employees as stakeholders whose perspective can help companies to make sound long-term decisions, there are two differing views about their representation on a corporate board. Professor Christoph Schneider of the University of Mannheim, Business School summarizes them as Voluntary Representation, in which a board’s representation is not mandated but should be determined by the owners of the firm’s assets, and Mandatory Representation, involving laws that require employee representation on the board.
Countries have adopted different models and laws regarding employee representation. For example, in Germany there is no requirement for representation if a firm has fewer than 500 employees, but that large companies such as SAP provide 50% of their board seats to employee representatives. In contrast, in France, representation is required if employees own more than 3% of the stock, and in the case of Peugeot, two employees participate in board meetings, but they do not have voting rights. Lastly, in Japan, it is rare that employees are represented at board level, but employees have a high degree of protection under the law.
So what are the ingredients for successful employee representation?
Starting with the individual, Alain Champigneux underlines the importance of the representative’s background, position, and independence of mind to be credible and taken seriously by other directors and the management. “Employee representation provides a valuable perspective, creates peace between a company and trade unions and helps explain decisions externally along with mitigating risks,” states Alain Champigneux.
He argues that the individual should be representative of a large part of employees and be connected to them to ensure a good “bottom-up” as well as “top-down” circulation of information and relay between employees and directors, the best way of ensuring this being to have employee-elected directors stemming from the different trade unions. “Boards benefit from having a diversity of perspectives. Participants on the PSA supervisory board come from multiple geographies and have diverse experiences,” explains Thierry Peugeot.
Among other benefits of employee representation is their deep attachment to a firm’s stability and success, as firm health ensures future employment. And as members of society, employees tend to care how a firm impacts society. Alain Champigneux sees no risk to having employee representation, though he recommends that employee representatives should be irreverent and not simply agree to everything, as employees often have important information about a firm and their voice offers an important perspective. He also believes that, unless removed for other reasons, 10 years is long enough for an employee representative to stay on a board before losing contact with employees and needing to pass the torch. “Boards should be ‘dream teams’ that include different points of view. A diversity of perspectives helps a board to make the best possible decisions,” Alain Champigneux.
All very nice, but…
The possible down sides can include cultural conflicts on boards caused by employee representatives, leading to a contentious boardroom. Alain Champigneux also acknowledges that employees may focus on their own self-interest, as opposed to the interests of the firm, and may collude with management to make decisions that are not in the interests of other stakeholders, such as avoiding a takeover.
FOOD FOR THOUGHT…
- What are the benefits of mandatory employee representation on boards compared to voluntary representation by companies?
- Alain Champigneux stressed the possible drawbacks of employee influence on Corporate Governance (self-interested focus, collusion with management). How then, to benefit from the unique position of employees while limiting the downside consequences?
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