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Employees on boards of directors: a presence that disturbs shareholders...

Haithem Nagati

Professor of Supply Chain and CSR

EM Lyon

Amal Boukadhaba

Associate researcher at ARGUMans laboratory

Le Mans University

Mehdi Nekhili* (photo)

University Professor

Le Mans University

*Faculty member of the Business Science Institute.


Article originally published on The Conversation France.

With the emergence of socially responsible investment, companies are placing increasing emphasis on extra-financial criteria, also known as ESG (environmental, social and governance) criteria, in their investment and growth strategies. These criteria are now an integral part of all management policies.

Without claiming to be exhaustive, previous research shows that companies with a good extra-financial performance are more likely to make profits, to attract the most talented employees, and to establish a good social climate that guarantees the company's sustainability.

Governance increasingly based on partnership

As far as governance criteria are concerned, the regulation of the board of directors' mode of operation has not ceased to evolve in recent years. This requires companies to have a greater diversity of board members, including more and more employees. The average rate of employee representation on the board of directors of non-financial companies in the SBF 120 has thus evolved from 4.95% in 2007 to 9.17% in 2017.

A significant increase has been observed since 2014. This can be explained by the law n° 2013-504 of June 14, 2013 relating to the securing of employment, which makes it compulsory for companies with boards of directors of more than 12 directors to have at least two employee representatives, and at least one representative for the others.

This reflects the desire to move towards a partnership-based governance (stakeholders), which is opposed, in its main principles, to shareholder-based governance (shareholders).

However, the presence of employees on boards of directors is generally viewed negatively by shareholders. This is the conclusion of our research article published in 2019 in the International Journal of Human Resource Management under the title ESG Performance and Market Value: the Moderating Role of Employee Board Representation.

This study focuses on a sample of large French non-financial companies in the SBF 120 index during the 2007-2017 period.

Through the assessment of the stock market performance of companies, the results of our estimations show that, while the financial market reacts positively to non-financial performance, it nevertheless remains reluctant to employee board representation.

Indeed, the average value of stock market performance, measured by Tobin's Q (ratio between the sum of market capitalization and the value of debt, on the one hand, and total balance sheet assets, on the other), is 1.142 for companies with at least one employee director, compared to 1.271 for companies without employee directors.

Conflicts of interest

Clearly, shareholders are sensitive to the achievement of good non-financial performance for which they alone bear the related costs. However, shareholders may also see the achievement of good non-financial performance as a strategy for management to gain a foothold by playing the card of other stakeholders, mainly employees, whose interests do not necessarily coincide with their own.

For shareholders, giving employees voting rights on the board of directors can therefore counterbalance their power, putting an end to their supremacy, however relative, in the decision-making process.

Based on the idea that there is a relationship, often fostered by common interests, between managers and employees, previous research suggests that managers may increase societal investments for the less laudable purpose of gaining the support and trust of employees in order to remove themselves from the sometimes excessive power of shareholders.

Moreover, achieving a high level of non-financial performance coupled with the appointment of employee directors to the board of directors can only reinforce shareholders' sense of caution about management's strategic choices in the area of societal development.

The same results are also found when considering the different pillars of extra-financial performance (environmental, social and governance) individually. Our findings support the idea that there are major conflicts of interest between shareholders and employees regarding issues related to societal development.

In sum, our results question the way in which employee participation in decision-making is conceived and presented to financial investors. These lessons should encourage companies to strengthen their training and communication efforts to advocate for the adoption of a board of directors open to different stakeholders.

Article translated from French with


Read also...

Mehdi Nekhili's articles on The Conversation France.

Mehdi Nekhili's articles & books via CAIRN.Info.


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