labor representation in governance as an insurance mechanism e. han kim, ernst maug and christoph...

Labor Representation in Governance as an Insurance MechanismE. Han Kim, Ernst Maug and Christoph SchneiderPresentation at the Ackerman Conference on Corporate GovernanceBar-Ilan University, 17.12.2012

Motivation

Question: What is the impact of labor representation on boards on employment on wages on economic efficiency?

Contrasting views Efficient contracting: Labor representation supports efficient insurance contracts

Workers receive insurance in exchange for lower wages (e.g., Baily (1974), Harris & Holmstrom (1982) , Holmstrom (1983))

Labor representation prevents ex-post expropriation

Rent seeking: Labor representation protects rents of workers and managers Jensen & Meckling (1979), Pagano & Volpin (2005), Cronqvist et al. (2009)

Views on Labor Representation

“The campaigns for ‘worker participation’ or ‘industrial democracy’ or codetermination on boards of directors appear to be attempts to control the wealth of stockholders' specialized assets … a wealth confiscation scheme.” (Alchian, 1984)

The Chicago view:

The European view:

“Allen and Gale (2002) argue that in incomplete, imperfect markets, a stakeholder system of corporate governance that stresses cooperation between management and employees may allocate resources more efficiently in the long run than a shareholder system.” (Fauver and Fuerst, 2006, p. 674)

World Map of Labor Representation on Boards

Institutional background Codetermination in Germany

Up to 500 employees in Germany: no worker representation

More than 500 up to 2000 employees in Germany: 1/3 of the board members have to be worker representatives Board size between 3 and 21 can be chosen (multiple of 3)

More than 2000 employees in Germany: 1/2 of the board members have to be worker representatives Casting vote of the chairman (shareholder representative) Board size 12, 16 or 20 (cutoff:s 10,000 and 20,000 employees) Exception in the iron, coal, and steel industry: one neutral member in firms with more than

1000 employees (board size: 11, 15, 21)

Research questions

What is the impact of parity codetermination on

employment: do parity-codetermined firms provide more insurance to workers against adverse shocks?

wages: to the extent that the workers in parity-codetermined firms recieve insurance, do they pay an insurance premium?

firm risk: are parity-codetermined firms more risky because they provide insurance to their workers?

Sample

184 large listed German corporations (1990-2009) All DAX and MDAX companies Most publicly available information (governance, stock market, balance sheet, and P&L

data)

IAB sample of all German businesses (1975-2008) Detailed establishment level data on industry, location, employment, wages, education,

age, (nationality) In total approx. 33.4 million establishment-year observations for period 1990-2008

34,000 establishments matched to 142 of our 184 firms Matching on company and subsidiary names and addresses for the year 2006 (2004,

2005)

Research design

Compare how negative shocks affect employees and firms with parity codetermination vs. firms with less or no representation on the board

Difference-in-difference model:

i indexes establishments j indexes firms k indexes state of location l indexes industry t indexes time

ijklt i t k jt lt jt lt ijt ijklty Parity Shock Parity Shock Xa a a d q b g e= + + + + + ´ + +

Definition of shocks

Shock needs to be large enough to have a significant impact frequent enough to permit identification exogenous to the firm

We use non-sample firms with establishments in Germany (IAB employment data) Based on >30 million establishment-years Industry defined as 3-digit NACE (subsector), similar to NAICS Shocklt = 1 in industry l if employment in the industry decreases by at least 5%

Shocklt = 1 in industry l only if employment growth ≤ 0 in year t+1 (persistence)

Shocks: Examples

Shocks can be long-lived: 2-year shocks: Shocklt+1 = 1 if Shocklt = 1 and employment growth ≤ 0 in year t+1

4-year shocks: Shocklt+j = 1 if Shocklt = 1 and employment growth ≤ 0 in year t+j

for j=1, 2, 3 baseline case

t 1 2 3 4 5

Case A Employment growth -6% -2% 0% 2% -1%

Shock (4-year interval) 1 1 1 0 0

Case B Employment growth -10% 2% 0% 2% -1%


Case C Employment growth -10% -2% 0% -2% -1%


Case D Employment growth -10% -2% 0% -5% -1%


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

2 years up to 4 years

Distribution of shocks across time

Parity codetermination is a commitment device. With parity

codetermination, workers receive full insurance against

adverse shocks to employment.

Hypothesis 1

Do parity firms protect their employees?

Dependent variable: log number of employees (1) (2) (3) (4) (5) (6) (7)

Shock × Parity 0.2000 0.1900 0.1700 0.1630 0.1470 0.1340 0.1380(3.00) (3.03) (3.09) (2.17) (2.37) (1.82) (2.20)

Shock -0.1860 -0.1760 -0.1390 -0.1760 -0.1370 -0.1460 -0.1270(-3.16) (-3.07) (-2.85) (-2.62) (-2.54) (-2.34) (-2.51)

Parity -0.1780 -0.0180 -0.0400 -0.1030 -0.1070 -0.1000 -0.1030(-1.48) (-0.21) (-0.56) (-0.88) (-1.08) (-0.91) (-1.12)

LogPlantAge 0.0100 0.1200 0.0080 0.1010 0.0220 0.1020(0.40) (4.17) (0.33) (4.05) (0.86) (4.13)

LogSales -0.0450 0.1040 -0.1170 0.0110 0.4310 0.1090(-1.02) (2.31) (-2.65) (0.29) (1.47) (0.34)

Leverage -0.1000 -0.1740 -0.0310 -0.0710 0.0000 -0.0670(-1.21) (-2.36) (-0.46) (-1.08) (0.00) (-0.79)

LogEmployees 0.4450 0.4080 0.5890 0.6490(3.74) (3.93) (1.31) (1.48)

LogSales² -0.0120 -0.0020(-1.70) (-0.29)

LogEmployees² -0.0080 -0.0130(-0.30) (-0.49)

adj. R² 0.908 0.913 0.916 0.917 0.919 0.917 0.92Observations 52,756 51,188 51,188 51,188 51,188 51,188 51,188

F-Test: Shock × Parity+Shock=00.675 0.829 0.244 0.729 0.729 0.737 0.714

Year F.E. No No Yes No Yes No YesEstablishment F.E. Yes Yes Yes Yes Yes Yes YesState F.E. No Yes Yes Yes Yes Yes Yes


Employment changes after adverse industry shocks

-15%

-10%

-5%

0%

5%

Non-parityParity

All employees

-15%

-10%

-5%

0%

5%

Non-parityParity



All employees White collar

-15%

-10%

-5%

0%

5%

Non-parityParity



All employees White collar Blue collar

-15%

-10%

-5%

0%

5%

Non-parityParity



All employees White collar Blue collar Unskilled blue collar

Firms with parity codetermination pay on average lower

wages.

Hypothesis 2

Do employees pay an insurance premium?

Dependent variable Median wage of unskilled employees

Median wage of skilled employees

Median wage of highly skilled employees

(2) (3) (5) (6) (8) (9)

Parity -0.0560 -0.0570 -0.0120 -0.0130 -0.0310 -0.0300(-1.66) (-1.69) (-0.64) (-0.68) (-2.03) (-2.03)

LogPlantAge -0.0010 0.0000 -0.0160 -0.0160 0.0020 0.0020(-0.06) (-0.04) (-1.90) (-1.88) (0.66) (0.74)

LogSales 0.0140 0.0140 0.0130 0.0130 0.0480 0.0480(0.80) (0.81) (1.18) (1.17) (4.42) (4.36)

LogMedianEmpAge 0.1680 0.1660 0.1370 0.1380 0.1400 0.1400(5.35) (5.32) (4.46) (4.49) (7.16) (7.06)

adj. R² 0.812 0.813 0.894 0.895 0.832 0.833Observations 84,751 84,751 233,396 233,396 81,817 81,817Year F.E. Yes No Yes No Yes NoIndustry F.E. No No No No No NoEstablishment F.E. Yes Yes Yes Yes Yes YesState F.E. Yes No Yes No Yes NoCounty F.E. No Yes No Yes No Yes

Is there any wage compression?

Dependent variable 3rd - 1st quartile wage scaled bymedian wage of all full-time employees

(1) (2) (3)Parity -0.0050 -0.0050 -0.0050

(-0.71) (-0.74) (-0.73)LogPlantAge 0.0250 0.0240

(2.56) (2.52)LogSales 0.0180 0.0180

(2.18) (2.15)LogMedianEmpAge -0.1060 -0.1040

(-4.15) (-4.11)adj. R² 0.743 0.749 0.75Observations 53,909 53,909 53,909Year F.E. Yes Yes NoIndustry F.E. Yes No NoEstablishment F.E. Yes Yes YesState F.E. Yes Yes NoCounty F.E. No No Yes

Parity-codetermined firms suffer larger reductions of

profitability after adverse shocks than non-parity firms.

Hypothesis 3

Performance of codetermined firms (1)

Dependent variable: ROA

(1) (2) (3) (4)

FirmShock × Parity -0.0300 -0.0310 -0.0320 -0.0320

(-2.22) (-2.27) (-2.34) (-2.41)

FirmShock -0.0130 -0.0260 -0.0140 -0.0260

(-1.07) (-2.13) (-1.15) (-2.14)

Parity -0.0110 -0.0140 -0.0080 -0.0110

(-1.32) (-1.75) (-0.95) (-1.42)adj. R² 0.488 0.501 0.493 0.512Observations 1,815 1,815 1,815 1,815

Firm F.E. Yes Yes Yes Yes

All linear conrols Yes Yes Yes Yes

Squared controls No No Yes YesYear F.E. No Yes No Yes


Dependent variable: Log TobinsQ

(1) (2) (3) (4)

FirmShock × Parity -0.1380 -0.1290 -0.1090 -0.0920

(-2.62) (-2.47) (-2.10) (-1.80)

FirmShock -0.0740 -0.1010 -0.0660 -0.0750

(-1.62) (-2.24) (-1.48) (-1.70)

Parity 0.0450 0.0340 0.0460 0.0310adj. R² 0.645 0.666 0.658 0.682Observations 1,885 1,885 1,885 1,885





Dependent variable: CAPM Beta

(1) (2) (3) (4)

FirmShock × Parity 0.2830 0.2120 0.2750 0.2530

(2.13) (1.86) (2.06) (2.21)

FirmShock 0.0140 -0.1270 0.0110 -0.1540

(0.12) (-1.27) (0.09) (-1.54)

Parity 0.0740 0.0470 0.0670 0.0330

(1.47) (1.11) (1.32) (0.78)adj. R² 0.406 0.58 0.408 0.584Observations 1,675 1,675 1,675 1,675




Conclusion

Employees of parity-codetermined firms receive substantially more employment insurance Only skilled blue-collar and white-collar workers benefit Unskilled workers receive no protection

Only highly-qualified employees pay an insurance premium Skilled blue-collar employees enjoy insurance without paying a premium

Parity-codetermined firms have significantly larger operating leverage Larger declines in ROA and Tobin‘s q, increase in CAPM beta

labor representation in governance as an insurance mechanism e. han kim, ernst maug and christoph...

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