Giving a Voice to Employees and Firm Behavior During Crises

Abstract

Listen

Translate article

We provide novel evidence on how the inclusion of employees in corporate decision making (i.e. codetermination) affects companies’ behavior and their responses to the 2008-2009 financial crisis. We study a model of Scandinavian codetermination where — differently from the well-known German model — employees of large and medium-sized firms have the right but not an obligation to elect a minority share of the supervisory board’s members from among the firm’s workers. We find that, apart for larger firms, the likelihood of observing employee directors is higher in firms operating outside the capital region, in more research-intensive and less capital-intensive firms. Comparing these firms with a matched group of companies without codetermination, we next observe that the former are more reluctant to large reductions in workforce, are less risky, and have somewhat slower employment growth. They are however no different from other firms in terms of investments, salary growth, and equity values. Although firms with employee directors showed stronger employment concerns during the 2008-2009 crisis, they did not experience a stronger fall in equity values. We show that this could be due to wage adjustments being made in these firms during the crisis, and their less risky pre-crisis behavior that probably rendered them less exposed to the shock. Finally, we find no association between dismissals during the crisis and the dual class ownership, as a proxy for long-term oriented owners, or gender board diversity. This suggests that the employment security ensured through codetermination cannot be entirely replicated by other governance mechanisms.