Laurent Germain and Clément Lyon-Caen of Toulouse University have a new paper out on the titular topic:
We develop a model of corporate board including employee representatives in addition to shareholders and top executives. In line with the empirical literature, our model shows that low levels of employee representation may increase the shareholder value, even in the presence of a conflict of interest between employee representatives and other directors because employees hold specific valuable private information. We also show that a minority employee representation may cause the board to switch from a short-term to a long-term strategy. Such a strategy switch is always in the employees’ interest and can be beneficial or detrimental to shareholders as well as top executives. Thus, employee representation can be beneficial to shareholders as well as other stakeholders. However, employee representation may be harmful for firms whose shareholder base has a short time horizon such as venture capitalists.
Germain, Laurent and Lyon-Caen, Clément, Do We Need Employee Representation on the Board of Directors? (February 9, 2016). Available at SSRN: http://ssrn.com/abstract=2729708
Not being a mathematician but a mere lawyer, I won't try to critique their equations. Suffice it to say that if nothing has change in the 15 years since I last looked at this topic, I don't buy it. Back than, at least, neither the empirical evidence nor (narrative) economic theory supported board representation by employees, as I argued in Privately Ordered Participatory Management: An Organizational Failures Analysis (September 1997). Available at SSRN: http://ssrn.com/abstract=38600
American industrial enterprises long organized their production processes in rigid hierarchies in which production-level employees had little discretion or decision making authority. Recently, however, many firms have adopted participatory management programs purporting to give workers a substantially greater degree of input into corporate decisions. Quality circles, self-directed work teams, and employee representation on the board of directors are probably the best-known examples of this phenomenon.
These forms of workplace organization have garnered considerable attention from labor lawyers and economists, but relatively little from corporate law academics. This is unfortunate, both because the tools routinely used by corporate law academics have considerable application to the problem and because employee participation is ultimately a question of corporate governance.
According to conventional academic wisdom, perceptions of procedural justice are important to corporate efficiency. Employee voice promotes a sense of justice, increasing trust and commitment within the enterprise and thus productivity. Workers having a voice in decisions view their tasks as being part of a collaborative effort, rather than as just a job. In turn, this leads to enhanced job satisfaction, which, along with the more flexible work rules often associated with work teams, results in a greater intensity of effort from the firms workers and thus leads to a more efficient firm.
Although this view of participatory management has become nearly hegemonic, the academic literature nevertheless remains somewhat vague when it comes to explaining just why employee involvement should have these beneficial results. In contrast, my article presents a clear explanation of why some firms find employee involvement enhances productivity and, perhaps even more important, why it fails to do so in some firms. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchial structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchial structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking.
