Does board-level employee representation impact firms’ value? Evidence from the European countries
| DOI | https://doi.org/10.1108/JFRC-10-2021-0082 |
| Published date | 15 March 2022 |
| Date | 15 March 2022 |
| Pages | 465-488 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Sónia Silva,Armando Silva,Ricardo Bahia Machado |
Does board-level employee
representation impact firms’
value? Evidence from the
European countries
S
onia Silva
School of Economics and Management & NIPE, University of Minho, Braga, Portugal
Armando Silva
ISCAP, Porto Polytechnic Institute & CEFUP, University of Porto,
Porto, Portugal, and
Ricardo Bahia Machado
ISCAP, Porto Polytechnic Institute & UNIAG –Applied Management Research
Unit, Porto, Portugal
Abstract
Purpose –Using, for the first time, a sample of Europeanlisted firms from 30 countries with different legal
regimes of board-levelemployee representation (BLER), the purposeof this paper is to examine the impact of
BLER on firms’value of Europeanpublic companies, where employee representationis voluntary or imposed
by law depending on the countryof origin.
Design/methodology/approach –Using a difference-in-differences approach and a matching
procedure,the authors analyze the impact of BLER on firms’value.
Findings –The results of this paper suggest that BLER adopted voluntarily affects positively firms’value
comparing to a group of firms where employeerepresentation is in some way mandatory. Moreover, the findings of
this paper show that firms from countries where BLER is not imposed by law tend to pay higher dividends.
Nevertheless, the evidence presented in this paper only holds for low levels of employee representation on the board.
Research limitations/implications –This research not only provides some evidence in favor of the
codeterminationon corporate governance but also offers new avenuesfor discussing the conditions necessary
for codeterminationto be effective, especially the level of employees’participationon board.
Practical implications –This study providesto policymakers new insights for themto gain perspective,
analyze and decide if codetermination is a useful tool to improve firms’performance or at least in what
conditionsit should be applied.
Social implications –This study incentivesthe discussion of the proper way to include workers in firms’
boards withexpected benefits on firms’performance, economiesand societies.
©S
onia Silva, Armando Silva and Ricardo Bahia Machado. Published by EmeraldPublishingLimited.
This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may
reproduce, distribute, translate and create derivative works of this article (for both commercial and non-
commercial purposes), subject to full attribution to the original publication and authors. The full terms of
this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
JEL classification –F30, G15, G30, G34, G38
The authors are thankful for the helpful comments of two anonymous referees. This paper is
financed by National Funds of the FCT –Portuguese Foundation for Science and Technology within
the project “UIDB/03182/2020”.
Board-level
employee
representation
465
Received2 October 2021
Revised17 January 2022
Accepted4 February 2022
Journalof Financial Regulation
andCompliance
Vol.30 No. 4, 2022
pp. 465-488
EmeraldPublishing Limited
1358-1988
DOI 10.1108/JFRC-10-2021-0082
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
Originality/value –This paper providesevidence of a positive (but limited) impact on firms’value derived
from voluntarycodetermination.
Keywords Board-level employee representation, European listed firms, Firms’value, Payout policy
Paper type Research paper
1. Introduction
In recent years, there has been a growing debate about how firms should adapt their
corporate governance structures to cope with new challenges posed by sustainability,
economic growth and social inclusion concerns. The necessary adaptation process
grounds on new business dynamics headed for more inclusive labor markets, where
employee ownership and employee participation in business decisions play a major role.
For start, this could be achieved with a set of company policies guided by a long-term
outlook, which includes, among others, the reformulation of shareholder and executive
incentives and compensation plans (OECD, 2018), to moderate short-termism and its
perils for a “sustainable company”outline (Jackson and Petraki, 2010). Even if both
shareholders and managers align their interests on short-term outc omes, precluding any
agency conflict will be made at the expense of long-term prospects, harming employees
and other stakeholders’interests (Dallas, 2012).
As Conchon and Waddington (2011) point out, the main issue emerges from the bulk
of empirical studies on the effectiveness of corporate governance systems: almost all of
them proceed from a shareholder-oriented view. This perspective usually overlooks the
importance of employee representation at the corporate decision-making level, as it does
not fit the foundations of the reigning principal–agent theory (Allen et al., 2015;Gold and
Waddington, 2019). Furthermore, the plethora of legal systems and institutional settings
across European Union (EU) countries do not lead to a clearer picture, making it more
difficult to capture the role of employees’representation on firms’performance.
Even so, the widespread of board-level employee representation (BLER) throughout
European companies is already a reality, and not a singularity (Conchon and Waddington,
2011), though there is no clear-cut evidence on how this corporate governance mechanism
affects firms’value.
Therefore, in face of such a lack of conclusive evidence on the role of BLER on firms’
value, we contribute to the literature discussing the effects of BLER on Europeanlisted
firms. Differently from the majority of prior research (that focuses on single-country
studies or on a small group of countries with the same legal regime), we explore
different legal BLER regimes. Our general goal is to determine the effect of
codetermination on firms’value and firm’s payout ratio on a sample of European public
firms. More specifically, we pretend to test the role of the voluntary codetermination
process on firms’performance expecting that voluntary codetermination has
advantages over imposed BLER processes. Additionally and having in mind the pros
and cons outlined in BLER literature, we also pretend to examine if there is a
recommended level of voluntary employees’participation or at least an interval of
recommended level participation that impacts positively firms’value.
In fact, the assortment of corporate governance systems and company laws in the
EU, despite the efforts for harmonization, has contributed to a European landscape that
can be portrayed by different incidence levels of BLER. Following Conchon and
Waddington (2011),Conchon et al. (2015) or Gold and Waddington (2019),EUMember
States, plus Iceland, Norway and Switzerland, can be classified into three groups (until
2015 [1]):
JFRC
30,4
466
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